Many of the BP members here will totally disagree with me but I say "You are young, go for it." The rant and raves from BP members will be "But you will be paying pre-tax dollar with after tax dollars blah blah blah blah." Whatever.
Listen, you and I don't have a crystal ball to say how the economy will be like when it comes time for us to retire. Do you remember the recession of 2008? People who had left their money in 401K plans lost hundreds of thousands of dollars just around the time they were looking forward to retire. Who is to say that will not happen to us when it is time for us.
You can only control things in the here and now. Besides the money you borrowed, is yours. So in essence you are paying yourself back with interest. Don't see anything wrong with, do you? And while you are paying yourself back, you are collecting rent money, you can use some of the cash flow from your rent to pay off the loan even faster. WIN WIN.
Due to your age, I would say you can take out the loan, pay it off and take out another loan to invest with again. You can keep doing this to build your portfolio. I would say otherwise if you are in your 50's or 60's.
I took a loan from my 401K to purchase my first rental and I don't regret it.
I am allowed 2 loans from my 401 during the lifetime of the plan. One choice is a loan for a primary residence, payable over 30 yrs- 50k max. The second is a personal loan, 50k max and payable over 5 years. There are no penalties since this is a loan and not a withdraw. If you don’t end up paying it back, then You are hit with penalties.
I figured I might as well use it to invest in alternative retirement assets.
Originally posted by @Gabriel Benavidez :
Im so iffy about borrowing money from my 401k and use it to invest in more properties. What do you guys think is it worth it or just dont touch it?
If it's the cheapest form of financing you can get I'd go for it.
It may also be the fastest and most convenient form of financing and if that matters thats another reason.
I took a loan from my 401k in May 2017 to buy my 3rd rental. We came across a really good deal on a property and didn't want to wait to build up our savings. We pay the loan back with interest. There is some opportunity lost because I made 25% return on my 401k this year but I think in the long run it won't make much of a difference. I'm in my 50's and I took out $35k to buy the house. I'm paying it back at around $500 a month but we're making $570 a month on the house. I feel the opportunity gain (home prices continue to climb and buying now vs waiting another year) outweighed any opportunity lost by the gains that money might have made if I left in in my 401K. If we were only making $400 a month on the property it would have been a much harder choice to make.
Really appreciate the advice! Most likely i will be borrowing from my 401k! I rather be in control over my money than having someone else gamble with it.
@Gabriel Benavidez I used a 401k loan. I didn't have the capital and wanted the deal to happen. Was it worth it? I think so. Was there risk? Yes. The 401k loan is amortized over 5 years, which means you will most likely be paying back more per month on your loan than your property is bringing in from cash flow. Do not try to fool yourself that Rent - PITI = Cash Flow... add in the expenses that exist.
If you can sustain the lost income from the 401k loan, it is a cheap way to get into a property without needing a bunch of connections or a store of capital. Just make sure you still have reserves in case that furnace goes out the first winter.
hi! Agree with everything stated above... I think it depends on your situation and personal goals, as well. I am in my late 30s and I work a traditional job and I contribute the IRS max to my 401k to reduce my taxable income. Based on my personal financial goals, my financial advisor told me last week that I am more than fine to meet those goals with where my 401k stands now, so I pulled some cash out for a new project.
As someone above mentioned, its your money, and for me, it was quicker than tapping into other sources of funds I have. My rule of thumb for myself is never to pull out more than 10% and pay it back over 2 years (I think my plan allows me to pay back in 5 but I just want it repaid in case I leave my job). Hope that helps - I don't necessarily think its a bad way to tap funds, as long as you understand possibly penalties for non-repayment and make a point to repay.
Very similar to @Alan Pederson , I took out a $35k 401k loan in 2016 to purchase my third rental property. I left the company and was lucky that my 401k plan allows you to pay back the loan even after leaving the company. I don't regret my decision to use the 401k loan. Whether I have a a 401k or a rental or any other asset that can generate income as my form of retirement makes no difference. There's no hard rule that 401k is the only method for retirement. I worked for a company that was in the retirement space. Our funds had high fees and I watched many of our participants retire with no more than 200k pretax dollars in the account, with some who fell on hard times and was charged a 10% penalty (free dollars of your hard earned money to the government) to access their own money prior to hitting their retirement age (set and changeable by the government). Do what you feel is best to secure your future and know 401k is not the only method.
Look at your current rate of return. If that number is less than what you think you can do with a deal, then go for it. If not (Which in my case right now the return coming in off the 401K is nice and I want to ride that up as long as it will hold). If it was stagnant or low number percentages coming in (like 2 years ago)then I would say do it. But today the record breaking numbers coming in make me want to have as much as possible in there gaining money on all of it. I can't do a deal right now that would be pulling in 18.8% returns.
Good luck in whatever you decide.
Diversification. Does your employer provide matching contributions to the 401K? If you don't have enough money to invest in real estate and your 401K I would advise against it. Why don't you lower your 401K contribution and start saving for the real estate, that way you don't have to touch the funds.
Know the rules for borrowing against your 401K. Usually employers will limit you to only the vest balance, and almost always 50% of the total balance up to $50K. Usually the terms are maxed at 5 years, so your payment will be higher than if amortized over 30 years.
Keep in mind that if you lose your job (quit, get fired, etc), that money will become immediately due, OR taken as a withdrawal, which will incur 20% tax rate (standard) and a 10% penalty.
As long as you know the risks, and the terms of borrowing, your 401K is a great resource! It's the best financing source that offers a great interest rate that you pay yourself! So, I am a big fan. We use this regularly for rehab, down payment, etc. It is a great short term loan option with little to no fees (small admin fees).
LOL, nothing like starting the New Year by lobbing a hand grenade topic into the forums ;-).
I personally wouldn't do it, but then I have sufficient cash flow (and equity on existing properties against which I can secure loans) that I don't need to do it.
If I was younger (less than 35), then I probably would borrow against my 401k if I saw the right house and REALLY believed in that local market and that specific property. Like REALLY believed in them.
@Gabriel Benavidez - I don't see a problem with it. Its not like you were cashing it in to buy a speed boat, or a vacation home. Your are using your money to invest in you. That is how i see it. I changed jobs a couple years ago and decided to cash in a small $7k 401k (i took the penalties) and used that money as part of a down payment on my 2nd rental. Sure, i lost some in penalties, but i also have a property that cash flows $350 per month and has some descent equity. Money well spent!
Good luck to you.
Agree 100% with @Cara Lonsdale
It is crucial to know the risks and the payback terms.
I borrowed the max amount from mine in July 2017, purchased 3 properties and had to reduce my contribution % to account for the amount withdrawn from my account. I was fully in the know so it wasnt a shock. Consider this method diversification.
Hi Gabriel, I agree--borrowing from the 401k is a good idea because you are borrowing from yourself essentially. Most financial advisers think this a bad idea because most people end up not paying the loan back and then have to pay a big tax penalty, AND, as the person above advised, you could be missing out some big returns when/if the stock market is doing well.
If you're going to do this: One thing to check ---make sure you know if you have to pay the loan back if/when you change jobs. Some 401k plans require you pay the loan back in full pretty much right away if you leave your job. Some don't. Just a good thing to be aware of.
I did a loan from my 401K in 2016 for our 3rd house, and it was the easiest, and cheapest financing you can get! Also, since it comes directly from my paycheck, I never even have to think about it! If it's not your primary residence, you can only do 50% of your vested balance, and it's 5 yrs vs. 10 yrs for primary residence. Also, with mine you can only have 1 loan outstanding at a time, so just be aware of that when you are picking an amount.
Be smart though, and make sure it's a good logical investment.. some people will say no, don't touch retirement.. but if you put it within your retirement plan, I think it's just another way to leverage yourself.
@Paul Camuto has the right idea here. I'd say NOT to take the 401(k) loan. Manage your future contributions instead. When you take a 401(k) loan, you're paying that loan back with AFTER TAX dollars. When you then make a withdrawal from that pre-tax 401(k) in retirement, guess what? You're PAYING TAXES AGAIN. Why volunteer for double taxation? If you're in your 50s and you don't have $35K saved up to buy a property, there are probably many other poor financial decisions made leading to this outcome and the 401(k) loan is likely the least of your worries. It seems like many people are treating their 401(k) like a piggy bank. For a once in a lifetime deal, is it worth it? MAYBE. But for those making a habit of it, it just doesn't seem to make much sense IMO.
I would hope that anyone that works for an employer that provides matching contributions would put in at least enough to get all of the contribution. My job offers a 5.5% match so I put in 6%. I was putting in 17% up till 2 years ago. That's when I realized I could make more money in real-estate than in my 401k.So I lowered my 401K contribution to 6%, I started putting in $6,500 a year in a Roth IRA, and save the rest for investing. I wish I would have done the Roth years ago. At some point I figure I will be making more in retirement than I do now and the Roth will give me some tax deferred income. My 401K made 25% in 2017 but it has averaged about 14% since 1999. I don't regret taking a 401K loan because I know my rental property will bring in more money than my 401K over time.
Just make sure you can make the 401k loan payments as a loan default will result in taxes.
The following IRS website also sheds light on the 401k loan rules.
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