I recently wrote a post for InvestmentZen that contains useful, actionable information (a rarity for me!) It’s about self-directed solo 401(k)s, an incredibly useful investing account. Read why I opened this account below or click over to InvestmentZen to get to the good parts.
I like diversification. However, until very recently, all of my money was in the stock market. And this didn’t make me happy.
I’ve always liked real estate, but have been wildly unsuccessful in picking up any properties. There are two problems:
- The local market is far too expensive. There is 4-plex near us that wasn’t in great condition. It was bringing in about $5,000 per month in rent. The owner listed it for $800,000, but a bidding war broke out and he received $960,000 for it. Those numbers are batshit crazy. No thanks.
- I don’t have a lot of cash. To buy a property, I’d have to sell post-tax investments and get nailed for capital gains taxes. No thanks to that either.
I considered my options and eventually put $3,000 into Fundrise as an experiment, but that was a drop in the bucket. I wanted more.
Mrs. 1500 and I have a friend who needed a loan to fund his own real estate deals. We liked the terms and the numbers; we’d be in first position on the lien, the loan to value ratio was healthy and we’d earn an easy return of 10%.
However, our small cash pile prevented us from helping him. Then, I found a solution.
Self-Directed Solo 401(k) to the Rescue
I’ve had a solo 401(k) ever since I started earning money as a small business at the start of 2015. It’s a fantastic savings tool. We’ve saved almost $150,000 in beautiful, pretax income in tax years 2015, 2016 and 2017 ($36,000 in personal contributions for Mrs. 1500 and I plus the match from the business).
Last fall, I learned about the self-directed (SD) solo 401(k). This is similar to a solo 401(k), but allows for more options including:
- Real estate
- Syndication
- Private lending
- Tax liens
- Stocks and bonds (including the Vanguard funds you already know and love)
I immediately established a SD solo 401(k) and funded it with an old rollover IRA. Then we started doing deals:
- Hard money loan #1: $95,000
- Hard money loan #2: $100,000
- Syndication deal: $50,000
- Hard money loan #3: $60,000
All interest earned from these deals goes right back into the 401(k) account. It won’t be taxed until I start taking distributions, just like any other 401(k).
Over on InvestmentZen I devoted an entire article to these accounts including how to set one up. If you have income from a side-gig, I highly recommend you consider a SD solo 401(k).
Awesome post! I had never heard of the SD solo 401k before. Guess I’ll be looking into it as I have three side businesses that I’d love to do something like that with!
It is very instructional to see how you are investing your money at the best opportunities at the moment. I find your style to be more flexible than other investors ( myself included), and more focused on expected ROI regardless of what you are investing in. It is very likely that your real estate investments earnings 8% – 10%/year will do better than many index fund portfolios over the next decade or so..
The flexibility is similar to what the old man in Omaha does.. Lucky for you, you have 40 years to catch up 😉
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Thanks DGI for the kind comment. I just go where the money is; I don’t care how I earn it as long as I’m not screwing anyone.
“I find your style to be more flexible than other investors ( myself included),’
Don’t underestimate yourself. You’re doing the same thing, but finding opportunity within a specific segment.
“It is very likely that your real estate investments earnings 8% – 10%/year will do better than many index fund portfolios over the next decade or so.”
Exactly. If we had a downturn in the markets of 30%, I’d immediately start investment my returns back into the markets. Until then, I’m hunting for my next deal.
That’s really cool – I like hearing about creative ideas on using tax-advantaged investment accounts like this to handle the dirty work.
Was this something someone like a CPA recommended or was this a solution you and Mrs. 1500 brainstormed?
— Jim
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My wife heard about it through her job!
I heard about this, but haven’t really consider it. It seems risky to me, but I guess it’s not worse than the stock market.
Ah, quite timely! Mr. Picky Pincher and I have been doing the math between paying off our house vs. investing.
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I’m also a real estate investor, and I would never buy a 4-plex for that amount! That’s insane. Even if the ‘numbers’ worked, I wouldn’t be able to wrap my head around that price. With only 4 units, a couple of vacancies or evictions could make for some serious risk.
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I know. The numbers here are crazy. Investors are banking on appreciation. If they all keep competing with each other, prices may still have some room to run, but beware when reality sets in!
If an investment fails for $50k, do you have to put $50k back in? Or you just simply lost $50k as if your stock mutual fund dropped 100%?
I hope it works out. I have $55k in a rental real estate partnership. That is plenty for me to go with our paid of home mortgage ($420k). No mo real estate needed.
Thanks for the post.
Nope, it’s a loss, just like in the stock market.
Very cool process Mr 1500. I am trying to start my own side businesses with my wife so I don’t have to go to a “real job” either. All of the self-employment accounts seem to take on an additional set of rules than the ones setup for big business. Thanks for the insight. Can you use this while you are also employed and covered under a 401k?
Interesting. I’ve never heard of the SD 401K. Definitely something to think about. Nice post
The market is really crazy now, it was another reason in addition to a raise why we delayed our relocation.
Regarding solo 401(k), are there any early withdrawal tricks?
Thanks
Yep, same as a normal 401(k): http://www.madfientist.com/how-to-access-retirement-funds-early/
Top notch stuff. I’m self employed and had no idea this option existed! Another handy wrench in the investing toolbelt – thanks!
Why the SD 401K vs a SD IRA? Is it because you plan on making enough from your “work” that the higher contribution limit makes more sense? Just curious.
Exactly.
Since I run a small hedge fund, I have no need to put money into an investment account on the side. I’ve been looking to diversify a little, but can’t seem to find attractive opportunities. Bond yields are ridiculously low and real estate prices are overvalued.
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I enjoyed the article over at InvestmentZen Mr. 1500. Very interesting stuff. If I ever make any money from my side-gig, I’m definitely going to create one.
For now, a few dollars a month doesn’t seem worth it.
Good stuff!
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Fundrise sounds interesting, how long have you been in it and how has it been doing?