Investing with a 401K loan for startup money.

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Investing with a 401K loan for startup money.

R D Wally
Augusta, GA · Member since 2015 · 3 posts · 0 votes

Having watched from the sidelines for the past ten years or so, I have finally decided to jump in and buy a few properties.  The only problem is all my money is tied up in a 401k. 

I had hoped to borrow 50K to use towards BRRR, or 80/20 loans. I am beginning to realize that I will have inadequate cash flow to pay back the 401K loan ($921/month), and build enough property volume to put me in the black.

I'm looking at 42K to buy and remodel a house, rent it, refinance it and repeat.  I'm afraid that the remaining 8K will get used up making 401K payments before I can get houses 2 and 3 bought repaired and rented out.

Am I needing to look at this in a completely different way? Am I missing something obvious?  Or is this a time that the money's not right and I need to back up and rethink.

I appreciate any help that you might give!

Thanks,

RD

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  • Mark Nolan
    Professional · Carlsbad, CA · Member since 2012 · 12k+ posts · 1k+ votes
    9y

    @R D Wally

    Good question. It is good that you are planning regarding making sure you have enough funds to pay the loan back. The loan payback grace period is also helpful. 

     401k Loan grace period for late payment

    Effective January 1, 2002, Treas.Reg.1.72 (p)-1, Q&A 10, provides for a cure period that allows a loan participant to avoid an immediate deemed distribution following a missed payment. The cure period may not extend beyond the last day of the calendar quarter following the calendar quarter in which the required payment was due.

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  • R D Wally
    OP
    Augusta, GA · Member since 2015 · 3 posts · 0 votes
    9y

    Thank you Mark!

    I didn't know that they even allowed a grace period!  But, I don't want finances to be so tight that I have to use a grace period.  I know that messing up my 401K loan could lead to big tax issues that I don't want to deal with.

    I appreciate your insights!

    RD

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  • James Dishongh
    Real Estate Broker · Vancouver, WA · Member since 2015 · 26 posts · 17 votes
    9y

    Hi RD. Have you considered living in the property so you could qualify for a lower down payment, thus reducing the amount you borrow from your 401k? Then you could rent your current residence to gain cash flow (possibly). There's plenty of info here on BP regarding live-in rehabbing. I combined a small amount from my 401k with saved cash to purchase an FHA live-in duplex and it's cash flowing nicely. As for the repayment, I redirected half of my normal 401k contribution amount from my paycheck toward the loan, which kept my paycheck the same but made regular loan payments. It worked out well.

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  • John Thedford
    Real Estate Broker · Naples, FL · Member since 2013 · 9k+ posts · 6k+ votes
    9y

    Here is a different option: doing HML with the 401K if permitted. Returns can be higher than many RE investments. I use mine for lending. I do not borrow from the 401K, but rather originate 1st lien mortgage notes using the 401K. The money is loaned from the 401K, and payments are made to the 401K. What I have is a self directed styled 401K. Yours may be different. If so, you might want to explore and see if you can do the same if this interests you.

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  • R D Wally
    OP
    Augusta, GA · Member since 2015 · 3 posts · 0 votes
    9y

    Thank you James and John,

    Very good information. I think there is still a lot for me to learn!  I appreciate all the responses!

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