Hey BP first post here. I've been looking to buy my first home/investment for some time now. I've been researching into using my 401k to invest in my first house. I would use the money as a down payment on FHA loan, in a 3 family house. I would live in one and rent the two others out. Anyone have any experience in doing this or know of anyone that has done it?
@Adam Nelson I have clients who have done this. Awesome idea. Just check with your lender first to make sure you do everything the correct way in the proper sequence. There is more red tape when dealing with FHA and also a 401k retirement account.
Adam, while it is possible to convert your 401k into self-directed IRA and then use that to purchase real estate, it has to be investment property. You CAN NOT buy a property with your retirement account and live in it. If your 401k allows for a loan then it would be possible to take a loan from your 401k and use that as a down payment on a property just like you are proposing. But keep in mind that you must make payments on the loan from the 401k and this will in essence will be 100% financed purchase. You have to run your numbers to make sure that you are not over extending yourself. You also must have sufficient reserves if you have a vacancy or major repair. I understand your ambition to buy your first property but it is better to wait until you are in the position financially that you can truly afford it.
You cant roll over the 401k into and sel-directed IRA if you still work at the same W2 job thought correct?
I am planning to use a 401k loan for a down payment also. To pay it back I was going to lower the contribution from 10% to say 3%, to make it easier. Will this work
Adam, usually if you have a 401k at your current employer they restrict your access to the funds. Typically you can't rollover those funds into an IRA until you are either no longer employed there or reach a retirement age (which can vary from plan to plan). If that is the case I suggest you contact your employer HR department or your 401k plan administrator and inquire if they will allow you to do "in-services distribution".
Who do you have your 401k with? From my understanding, you can take a loan on the money in your 401k that is less than half of the current balance up to $50k whichever is less. You can still be with your current employer and they have options (at least Fidelity does) regardless if it is an investment or personal residence. As Dmitriy said you will pay interest on the amount you take out as a "loan" from your 401k so ensure you factor in those points as well.
My 401k is with Fidelity and I have briefly looked into this option and it seems pretty straightforward. I'd speak with the company that you have your 401k with and understand how they structure their loans and what fees may be associated. I believe the Fidelity plan I have it is a small $100 or $150 one-time fee and rates are about 5.25% payback from your after tax earnings back to your 401k in addition to your mortgage.
@Alex Deacon did your clients take a loan out of their 401k , roll it over into an IRA or withdraw it?
They Borrow against the 401k. I think it may have to be your personal residence.