Rental Property Investor · Appleton, WI · Member since 2017 · 15 posts · 3 votes
My wife and I have recently committed ourselves to taking the plunge into real estate investing, focusing on buy and hold rental units with the goal of generating monthly cash flow (flipping, hacking, wholesaling not an interest... right now). In preparation for this move we have taken a financial audit of our circumstances and see that our 401k (I have the only account now, just shy of $100k @ 40 and my wife has just begun to contribute to her own this year at 33) will not get us where we want to be in 25-30 years. Are we better off leveraging these funds to start our real estate venture immediately on a solid footing, assuming that in the long run (10, 15, 25 years) we will be able to compound and leverage our gains to build wealth far faster than we would waiting 5 years to save for an adequate down payment for our first property?
@Matthew Krickeberg, this is exactly what I did in 2013. I stilled owned the first house I ever purchased and hadn't save up funds for another down payment but I saw a deal I wanted and saw that my market (Oakland, California) was on the up and up.
So, I got a 5% conventional loan through the amazing mortgage broker I now always work with and took a withdrawal and took the awful penalty (not a loan, because due to prior loans the available loan funds wasn't going to be enough). I didn't even have money to pay the penalty, so I put it on my credit card when tax season came. The condo was purchased for $320k and now is worth $575-$600k. Well worth the risk, and I made much more than I would have allowing that money to sit in my 401k.
Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
8y
Probably not, there may be fees associated with this if you take out a loan with this as collateral, normally you should be able to qualify for a conventional mortgage based off of your income. If you cannot qualify this way or if the down payment is an issue, the slow accumulation of wealth through a rental might not be the right strategy at this point in time.
Savannah, GA · Member since 2016 · 58 posts · 108 votes
8y
I have done this. Not a bad idea at all in my opinion. Watch out for the fees. in my case it was just a one time processing fee of less than $100. There will be interest but it goes back into your account since its your money anyway. Be sure to use a loan though and not a withdrawal.
Rental Property Investor · Appleton, WI · Member since 2017 · 15 posts · 3 votes
8y
Thank you, Aaron, our "cash on hand/savings" situation is actually pretty good and we have a great relationship with our local credit union through which we have our current mortgage. The idea here was to maintain our cash situation (we have two kids, maybe another on the way soon, and a 170 year old house) and yet enter the rental market in good position. Id like an immediate wall of separation between our current state and our future acquisitions.
I guess I'm not sure how to weigh the penalties and fees of a 401k loan/disbursement against the accumulation of future cash flowing assets (with the ability to refinance). I'm thinking of the BRRRR strategy in particular.
@Matthew Krickeberg, this is exactly what I did in 2013. I stilled owned the first house I ever purchased and hadn't save up funds for another down payment but I saw a deal I wanted and saw that my market (Oakland, California) was on the up and up.
So, I got a 5% conventional loan through the amazing mortgage broker I now always work with and took a withdrawal and took the awful penalty (not a loan, because due to prior loans the available loan funds wasn't going to be enough). I didn't even have money to pay the penalty, so I put it on my credit card when tax season came. The condo was purchased for $320k and now is worth $575-$600k. Well worth the risk, and I made much more than I would have allowing that money to sit in my 401k.
Rental Property Investor · San Francisco, CA · Member since 2015 · 236 posts · 156 votes
8y
@Matthew Krickeberg, what great thread to start! I've been contemplating the same thing about taking a loan out of my 401k to invest in real estate. I've also been thinking about not contributing to my 401k anymore and instead use those funds towards investing.
@Jannah M., what a cool story! What you did is similar to what I want to do. When I see a good deal, I'd like to use a 401k loan for the down payment instead of my savings. In hindsight, I should of done this when I purchased my home in Oakland. I, too, was able to get a 5% conventional loan but used my savings for the down payment. Since then, I added an additional bathroom, increased its value, was able to do a cash out refi and pulled out my down payment. Had I used a 401k loan instead, I wouldn't have used any of my savings and can just recycle my 401k money.
It would be great to hear any pros/ cons regarding this strategy.