Newbie here and plan to start soon. Questions about 401k and equity.

11 Replies

Hello! My husband and I are learning how to invest our money into real estate. Right now we have about $5k in equity in our home, and $17k in 401k. Great credit, we have also been approved for an investment loan.
My first question is, What do you think about using our 401k or equity as part of a down payment? If so, how do we do it? Honestly, I'm not sure which steps to take first. There is a house we are interested in, to buy and hold and rent it out. The owners inherited it and is planning to sell very cheap, around $40,000. It's a nice little 3 bedroom house but needs work- electrical, hvac, windows, pipes, maybe roof. I feel like it can be a great opportunity to start with.

@Account Closed

You probably will not be able to access the $5K equity in the home, too little.

Is the 401k with the past employer? If so - then you can roll it over into self-directed IRA or 401k. Being small business owner you need to look into self-directed Solo 401k - this is a great vehicle to build wealth in a tax-free or tax-deferred environment. It also will help you minimize your tax liability now.

You can learn more about it in my BP blog where it's compared with SD IRA:

http://www.biggerpockets.com/blogs/2810/blog_posts...

Hope this helps.

Dmitriy Fomichenko, Broker
(949) 228-9393

Thank you for the advice! I never heard of a solo 401k for me. I will definitely look into it.  The 401k is actually my husband's under his current employer. Can he roll it over, or maybe take out a loan? We hardly have hard cash on us at the moment so this is a little frustrating. 

You can borrow against your 401k.  The limit for you is going to be half of the value ($8,500).  The max you can borrow--ever--is $50k.  So even if the value of the 401k is $300k, you won't be able to borrow more than $50k.  So you can take out $50k or half of the value--whichever is lower.  And we almost always borrow against ours.  The caveat is this: if your husband's company dismisses him or he leaves for any other reason, you need to be prepared to pay that amount back in full.  So keep that in mind.  Otherwise, you pay interest back to yourself--which is nice.

The other thing is that when you borrow against the 401k, you are then limited in your borrowing ability against the 401k going forward.  Because if you take the rule above about how much you can borrow total, you now have to subtract your highest balance in the past 12 months from that amount.

So if you were actually able to take out $50k and borrowed $30k but have now gotten a windfall 6mo later and paid that $30k off but wanted to take another loan against the 401k at the 9mo mark, the max you could take would be:  $50k - $30k (highest balance in the last 12 mo period) = $20k.

Originally posted by @Account Closed :

Thank you for the advice! I never heard of a solo 401k for me. I will definitely look into it.  The 401k is actually my husband's under his current employer. Can he roll it over, or maybe take out a loan? We hardly have hard cash on us at the moment so this is a little frustrating. 

Since the 401k is with the current employer - the chances are he will not be able to roll it over. Have him inquire if the offer 'in-service distribution' with HR department or his plan administrator. 

Dmitriy Fomichenko, Broker
(949) 228-9393

I am going to be taking money out of my 401k as well for a down payment.  The others are correct in saying that you can only take out half of your balance.  Although I would clarify that by saying you can only take out half of your VESTED balance, meaning if your husband is not fully vested (usually a 5 year employment period) and your husbands company has made contributions (matching/bonuses) then you will only be able to take 50% of your VESTED balance out up to $50,000.  

Also, like the others say, make sure he is planning on staying there during the life of the loan.  I would imagine that his 401k has a website that he can log onto and model a loan on.  My company uses Alerus and i can log on and simply model a loan and they tell you exactly how much you can take out.  I can take a loan out and pay back between 0 and 25 years for a residential loan, and like the others have said you pay the interest to yourself.  This is all tax free mind you.  Not that I would do that as I would be losing gains on my money in my 401k.  

Now...should you do it?  I guess, let me ask you this:  How much is he getting for a return on his money in his 401k?  I have been getting around 8% annualized on my portfolio which i think is average for most people.  With a buy and hold you should be doing well above that percentage if your doing it right...and that should even be your marker when you run the numbers on your property investment.  Is your money better off in a 401k or on the buy and hold property.  They are both investments, and typically you can make a better percentage on a property investment.  Not to mention you pay the money back to yourself over time anyway so its a double win.  

And your doing this with all pre-tax $$$.   

Can't see why you shouldn't.

When I say "not that I would do that"....I mean take out a 25 year loan.

@Account Closed said, the chances that your husbands current 401k administrator allows in service distributions is slim. He also has the option of taking a loan from his 401k for up to $50,000 or in your case 50% of the vested balance (whichever is less). There are a few good things about this loan, first, the 401k plan is much more likely to have a loan provision than an in service distribution provision. Second, the loan is a personal loan that you pay back to your 401k at prime rate +1% usually, so you can use it for whatever purpose you want, including a down payment on property. 

As Dmitriy mentioned, a solo 401k is the ultimate retirement tool, it allows you complete freedom for investing with minimal fees, and complete control. There are some requirements to setting one up, which is you must be self employed and your business can not employ any full time employees other than your spouse. Additionally the business must show income (can be a very small amount), and remember unless your business is making substantial income, this is not a good vehicle for contributions, as the limits will be set depending on your earnings. 

Adam

Thank you all for the advice. I just found out that my husband's employer does not allow 401k loan. Can they do that? Also, what about other options to have a down payment/cash, like hard money lenders? I'm already looking into the pro's a cons about it. Anyone started out that way?

Originally posted by @Account Closed :

Thank you all for the advice. I just found out that my husband's employer does not allow 401k loan. Can they do that? Also, what about other options to have a down payment/cash, like hard money lenders? I'm already looking into the pro's a cons about it. Anyone started out that way?

 Hey Constance,

It is not required that a 401k plan have a loan provision, but it is fairly common with most employer plans. It's unfortunate they don't allow for loans, you may want to check about in service distributions as well, but it is usually less likely to be offered than a loan provision. 

I can't really speak to other ways to get started, as I'm certainly not an RE pro, more of a retirement financial pro, but I am sure you will get some excellent ideas.

Adam

Thanks. I've also been getting advice from an old friend who's been doing this for 20+ years and says he bought his first house with a personal loan. I want to look into this and figure out other ways to help kickstart my RE investments.

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