Should I use a 401k loan to get started?

Question

We're just starting out, and I'm considering using a 401k loan to help buy BRRRR properties. We'd be paying it back within a few months once we refinance. There's obviously some risk. And we'd bringing some of our own cash as well to the deal.

Have any of you used a 401k loan to buy rental properties? What'd you think? Would you recommend it?

Thanks!

Have any of you used a 401k loan to buy rental properties? What'd you think? Would you recommend it?

Thanks!

Adam Williams · Answer

@George Blower thanks for the detailed info!

George Blower · Answer

Regarding taking a 401k loan:

• You would have to confirm that your 401k plan allows for a 401k participant loan (and that you have not had an outstanding loan in the last 12 months).
• If yes, you can borrow up to 50% of the balance not to exceed $50,000.
• The repayment terms are equal monthly/quarterly payments (as you prefer) of principal and interest (e.g. prime + 1%) spread over a 5 year term (or longer if you will use the loan to purchase your primary residence). There are no prepayment penalties and no restrictions on what you can do with the proceeds of the 401k loan. Please note that you are obligated to pay back their 401k (regardless of the performance of your real estate investment).
• Per the loan offset rules that went into effect with the 2018 Tax and Job Act: if you leave your job and the loan is current at the time you leave your job but then the loan goes into default because you left your job, you will have until your tax return deadline (including any timely filed extension) to make the loan current by depositing the outstanding balance into an IRA (and thereby avoid the taxes and penalties that would otherwise apply).
• If you are self-employed with no full-time employees & you can rollover the funds, you could set up a Solo 401k, rollover the funds and take a 401k loan from the Solo 401k.

Carlos M. · Answer

@Adam Williams, As long As it’s a “loan” there are no real tax penalties for borrowing the money. If you “cash out” your 401k that’s a different story.... but go for it man. It’s like being your own hard money lender , and you keep the interest! We used 401k loans on two of our deals... we now have 61 units with a market value of about 6 million...

Adam Williams · Answer

@Carlos Medina thank you! I love how you positioned it as me being my own hard money lender. And yes, it would definitely be a loan rather than a disbursement.