Just starting out - should i invest $40k now or ...

10 Replies

Hello BP Community!

I'm just starting out and I'm looking for some opinions from experienced investors -

Q: I have $40k to invest (can pull out as a 401k loan), should I invest this now or wait a year when I'll have a total of $80k to invest with? 

Next June I will be selling my first rental investment, which should clear $40k or so after everything. Just for background, this home was one we lived in for a year (FHA loan) before moving across the country for work. It was a decent deal based on equity but does not cash flow very well and now that I'm learning more I know I can use the money better.

My goals are to purchase single family / multi-family buy and hold real estate in the mid-west and other good markets for the long term.

I appreciate any insight, thanks!


Depends on your goals and what type of property(ies) your trying to purchase. Are you looking to pay cash or leverage that $40K? If you want to jump into a single family home in the Midwest at cash then I would wait as you'll be buying a C-D class property at $40K. If you want to leverage and get into some properties now you can start, but begin by researching loan options first. 

@Jason Aurelius Sawicki I second those here who are skeptical about taking the loan. Remember that you will need to repay that loan within five years, using 'substantially equal' payments, at least quarterly. So let's assume your interest rate is around 4.25%, that means you'd need to be able to make quarterly payments of about $2649 in order to satisfy the terms of the loan. If you don't repay the loan in five years or less, it becomes a deemed distribution for which you will be taxed. So to even consider this option, you'd need to be absolutely sure, without a shadow of doubt, that you could make those payments without any problems. 

Of course, even if you could handle the payments, I generally advise new investors never to take money from retirement to fund their investments. Any investment is a gamble - not as risky as the craps table, but never guaranteed - and you shouldn't be gambling with your future. Plus, unless you're taking way way less than the allowable amount as a loan, you're cutting your retirement savings in half (the maximum amount you can take, or $50k, whichever is greater). 

I'd say wait until you sell the property, save up the quarterly payments you would be making to pay off your loan anyway (so in a year, about $10,600). Then you can leverage that money (approx $50k) to purchase solid properties with financing. You could get 2 solid B/B+ cash flow rentals in Birmingham with 20% down and have some cash left over as reserves. 

What i definitely would not advise doing is using the money to go all-in on a lower tier, sub-50k property just because that's what you can afford in cash. New investors are well-advised to steer clear of C/D properties - the turnover, evictions, and Section 8 red tape are a hassle even for more experienced investors and the returns are rarely as good in real life as they look on paper, especially if you have to pay for a PM to manage an out of state investment. This advice is doubly true if you're using your retirement savings to fund the investment. 

You're definitely not alone in feeling the itch to get started right now, but be patient, preserve your retirement savings, and use your money to purchase reliable investments in solid areas with a great PM/turnkey provider.

Best of luck!


Thanks everyone, i really appreciate the feedback. I have taken a couple 401k loans out over the past number of years to help fund real estate purchases, but only for primary homes and the amount has only been in the neighborhood of $10-15k. This type of loan would certainly be substantially different and it merits a hard look at whether or not the math supports the investment. 

@Clayton Mobley  solid advice. I'm already happy with my investment into bigger pockets for the education!

@Jason Aurelius Sawicki I’m also sckeptical and would advise against a 401k loan. Your 401k is a book safety net and the “at least you have something saved” Incase REI doesn’t work our. Contribute enough to get your company match then bank the rest to save as a down payment.
@Jason Aurelius Sawicki I have dIfferent advIse than most . I agree ,Don’t borrow from the retirement plan .i disagree about what to do with the 40 k you will get on the sale of that property . I’d take the 40k and buy a distressed multifamily wIth cash . Maybe a foreclosure or a place that was poorly managed . There’s deals to be had and fortunes to be made in c and d class neighborhoods if you have the fortitude and you are willing to step out of your comfort zone .dont sit on your laurels and think you need to wait 5 years and borrow 200grand to get ahead in real estate . You can actIally do a lot with 40k cash if you know what you are doing

Jason Aurelius Sawicki I borrowed from 401K to buy real estate and have zero regrets. I actually think it's under utilized. BUT I only borrowed 10K, which is a big difference. I never felt it as I made the payment on the 401k loan the same amount as my contribution, so I just continued making contributions or in this case, loan payments, and it was paid off pretty fast.

That house turned out to be my best of all time (thanks to Austin, Tx appreciation and a 15 yr mortgage) and I've since 1031'd it into a $1M commercial property. 

That said, I think @Clayton Mobley brings up some very good points to consider. (Although the 401K and real estate are both gambles to certain extents in my book.) But one other concern - isn't the 401K loan due immediately if you lose your employment? I remember that being my biggest concern. 

Just make sure you know what you're doing. 

Thanks for the feedback @Dennis M. and @Jason Carter - to be honest I've been surprised on the advice to not utilize the 401k - that's more of a gamble in my opinion than a good real estate deal, but I think it's really about the math and the necessity of using it. If it were the only way i could jump start into real estate then i think i would consider a $25k loan or something to put down on a $100k property - but since i'll have a little money to get going next year I'm going to be patient and for now just learn and pay off the little bit of debt i have. 

Do both.

Invest the 40k with an investor on a short term bridge loan and then invest 80 in 1 year

make some interest on your money now!