The Self Employment 401k and Real Estate Investment
The self employment 401k, or Solo 401k, is a powerful investment vehicle. By setting up a self employment 401k with checkbook control, you can invest your retirement funds in real estate properties, liens, and trust deeds.
Investing through a self employment 401k
This 401k requires a form of self employment. Sole proprietors, LLCs, and corporations can adopt the plan, as long as the structure represents an individual’s self employment. You, and potentially, a spouse, must be the only full-time employees of that structure. If you have this type of structure, you may be eligible for this IRS-approved plan.
Once your plan is established, you can rollover funds from almost any other retirement account, except the Roth IRA, according to IRS rules. You can contribute to the plan from your business earnings with some of the highest contribution limits of all available retirement plans. And once your plan is funded, you can invest those funds into various real estate investments.
Investing through the 401k is as simple as writing a check. All titling will be in the name of the 401k, and you sign and direct the funds of your 401k as trustee of your 401k.
Investing personally
Of course, another route for real estate investing is through personal investing. When you invest personally, as an individual, your credit score will be an important factor in getting approved for loans. Lenders will assess your creditworthiness and qualifications by looking at your credit history. Your credit score will determine whether you are considered high risk.
If you go this route, make sure your credit report is accurate. The recent economic downturn has resulted in ripple effects on the mortgage landscape. And this can make obtaining a home loan even more dependent on your credit score.
Be aware of the following:
Payment history comprises 35% of the total score
Your frequency and habit carry the most weight in your credit report. Your FICO score can lower due to late payment of credit card dues, automobile loans, or any other types of credit. To improve your FICO score, pay your bills as per the agreed upon schedule.
Credit utilization comprises 30% of the total score
This percentage is determined by calculating the ratio of the current/active outstanding debts to the overall available revolving credit. Simply put, this is the ratio of debt to credit limit. In order to increase your credit score, pay off debts to lower your utilization ratio.
Boosting your credit score is essential to qualify for a home loan. But the self employment 401k offers another option. The plan has a 401k loan option. You can borrow from your 401k, repaying your 401k over time. From the standpoint of your 401k, this loan is an investment. And once you have the loan proceeds, you can use those funds for personal real estate investment or any other purpose.