BiggerPockets

really curious to know what your response is.
i'm a NOVICE investor. i just purchased my second home last monday and rehab starts this week. i made a cash purchase and will also pay the rehab cash. then i intend to refi.

should i decide to cash in my 401k (i'm in my 40's), i'm doing so in a down market where my next egg has already lost 35% of it's value. still, with penalties and tax consequences, i'll have about $140 in liquid.

what would you do?

thanks...

Debbie - thanks so much....yes, $140K will be what i get to keep if i cash it in.

i don't think i can take my employer sponsored 401k and convert it. wouldn't i still need to pull it from my account with my employer?

i guess i've never heard of that.

but yes, i'll do a search on BP to find out more. or i can call our plan administrator as well.

again, thanks for responding.

i'm in houston. i see you and yours are fellow Texans.

hey, i'll take your $.02......

the other ways of raisin' $$ is good, but as a beginner i'm not savvy in flippin' or wholesalin'. i do have a job i enjoy but i won't provide me with blocs of cash to plunk down on houses.

i bought a house for $40k
rehab is $20k
so i'll refi and hope to get a chunk of it out and do it again. but each time i do, i'll have less and less capital. so that's where i got the idea of cashin' in the 401k.

see that's what i mean Deb....the only method for me to have access to my 401k is to either:
1) quit
2) get fired
3) go thru a layoff

other than that, i can't access it at all other than to cash it in.

i've lost faith the the stock market and as i'm learning real estate, i'm thinking that's my best way to go. if i can get about 10 houses that can cash flow $300 each (and with these two i can), i'll be able to leave corporate america if i so choose.

fortunately, i do enjoy my job. but the extra and ADDED comfort that i can pull in the same salary from real estate, well guess which route i'd take.....

RV,

Be patient. Since you say you are a novice, don't rush in just yet. Get the two deals you have now settled, (refi, leased, sold). Roll that profit into the next deal. I know that LU (Lifestyles Unlimited) would not necessarily agree, but I suggest you become more experienced and educated before cashing out the 401K. You may consider funding a self directed IRA rather than your 401K. However, if your employer is matching your contributions, you would need to consider the impact. Just be patient! Especially since we've already suffered the big crash. I don't think we're going to see a spike in housing prices, or a slowdown in buying opportunities any time soon.

man!! i'm glad i found BP....

yeah, you're right Tod. it's that i'm seeing quick and early successes so i'm thinking it's ALWAYS going to be like this!! but in truth, i've yet to see any hurricanes or mishaps that i need to prep for.

i guess i'm caught up in the excitement that things are really looking up. and ANY good financial news in this recession is welcome.

i don't think LU is going to agree/disagree. obviously, their big push is real estate so they'll always tout it. still with the success i've seen with some of the members, the numbers don't lie.

LOL you're right again about the buying opportunities....i have this sense of urgency of "quick! they're runnin' out of houses!!"

but the houston market IS competitive.

Unless your 401k is a rare one, your administrator won't let you put into a self directed account. As you say, you'll have to leave the company.

Debbie, you may still be able to move that money out of your new employeers plan. They should track that money as "rollover" money separately from other funds in the account.

I don't think Sterling offers checkbook IRA LLC plans. I have an account with them, and I'm not aware they offer such an option. I ended up moving most of my money out of Sterling because of slow responses on closing out a loan a while back, and into a IRA LLC set up by Guidant Financial.

RV, if you do try to invest in real estate with IRA funds, be sure you're fully aware of the rules. There are ways to trip yourself up and create a prohibited transaction. If you do, the entire IRA is considered immediately distributed, and subject to taxes and penalties. No worse than what you're considering, but if you have all the cash tied up in property, you would be in a hurt to pay the taxes.

I have moved quite a bit of my money out of stocks and into real estate in various forums with IRA funds. However, I still have a 401k, and still have another chunk of change in stocks and bonds. Diversification is key. I'm also very dismayed by the market, and I am not convinced its a good long term investment. I'm prepared to be surprised, but I'd be very surprised if we see the "10% long term gains" in stocks over the next 20 years. Too many boomers who will need money and will be drawing down their savings. Stocks are just another product, in many ways, and subject to supply and demand like anything else. No demand, lots of supply, and prices drop.

Also, do some reading in the Rental Property forum, especially the sticky threads about expenses. Some previous posts by LU members have indicated a, shall we say, optimistic view of rental property expenses. A more realistic view will help you avoid getting over your head.

Originally posted by Jon Holdman

No worse than what you're considering, but if you have all the cash tied up in property, you would be in a hurt to pay the taxes.

Stocks are just another product, in many ways, and subject to supply and demand like anything else. No demand, lots of supply, and prices drop.

Some previous posts by LU members have indicated a, shall we say, optimistic view of rental property expenses. A more realistic view will help you avoid getting over your head.

Jon -

EXCELLENT points....!!

yes, my liquid would be $140K left for me to invest AFTER i have paid the penalty and held money in an account to pay taxes next year. i spoke with my CPA about it. so this is why i'm in a self-imposed "quandry" if you will. take the lumps now and just go for broke. that's of course after a wait and see approach with these two houses i bought.

much like you, i'm not too keen in thinking stocks will hold it's 10% ROI in the long run. you're right. they're just "another product" and i didn't know better. i would just blindly put $$ in and not bother to look at it thinking "ah, it'll be there when i retire."

for whatever reason, LU is viewed upon quite (to put it mildly) negatively. yes, i was in the forum where Del Walmsley was discussed. in fact that was my baptism with BP, and it turned out to be a 5th grade catfight!! people can't remove the 10g glare from their eyes. truth be told, you do NOT have to pay 10g's to be a member. all i can tell you is what it's done for me. and i'm VERY happy to learn from a great group of people.

so i don't know if folks here are just negative with mentoring groups in general or just LU.

i bought a house for $40k
rehab is $20k
so i'll refi and hope to get a chunk of it out and do it again. but each time i do, i'll have less and less capital. so that's where i got the idea of cashin' in the 401k.

You are limiting yourself. If you can be all in for $60k (and assuming you bought a a great discount in an area that you can re-sell), why not sell some of those, rathere than keeping all of them ! The profits gained could build up your nest egg to purchase more rather than digging into your 401k.

That said, this question of taking the "penalty" and paying the taxes on early withdrawls for retirement accounts has been discussed before and IF an investor is savvy enough, it is quite possible to eat those penalties and use those funds to make some immediate profits far above and beyond the costs.
Then again, it is quite possible to not succeed at that. SO really the answer lies within you. I don't usually rcommend anyone paying that price and touching their retirement funds.
I do encourage investors to look at their options for retirement in the self-directed world (I feel Equity Trust Comapny is the best) but as Jon pointed out, there are several rules and guidelines you MUST adhere to. They can be quite confusing but I did a workshop where one of the topics went over these gudielines in easy to understand detail.

so i don't know if folks here are just negative with mentoring groups in general or just LU.

I am not familiar with LU but I can say that I and many BP Nation members here are disgusted with the "guru" tactics used by the majority of educators. They make far out promises of easy wealth creation and teach in theries and generalizations. Most gurus and their porgrams are not wrth the time, let alone the large sumes of money they demand.

Will,

I'm going to invest in a limited partnership that will aquire and own properties. We're looking to buy bulk REO's requiring rehab then lease and hold 5-10 years. I'm actually not sure if I need checkbook control for this or not. I'm still trying to wade through the all the information.