401K loan as partial down payment?

[Eric Rohver]

I just found out that I can borrow up to $10,000 @ 3.25% from my 401K, but it gets paid back via payroll deductions. The only way to make larger payment on the loan is by paying the balance in full.

I'm an owner/occupant in a duplex with zero equity, my wife and I bought it as our primary residence using my VA eligibility with no money down. It's cheaper than our previous rent was by $400 mo. plus we can write off mortgage interest, so I'm trying not to beat myself up over it.

I'd like to buy another property that we can use as a 'stepping stone' towards growing a real estate portfolio, but our lack of equity is making it tricky. What would you do in this situation if you had 10k in savings and another 10k available at 3.25%?

[Dawn Anastasi]

Typically you can borrow either 50% or $50,000 (whichever is lesser) from your 401(k). Since it's your money, you don't need a credit check to get it unlike a mortgage. But keep in mind that this money is now out of your 401k not growing, and if you quit working at your employer, then you have to pay back the balance within X days (I think 60 days).

This is my understanding on Roth 401ks -- If you take money from a Roth 401k, you can take the contributions out tax-free, but if you take any earnings out, you have to pay taxes on those. The actual % is determined by what you have in your account. So if you have 75% contributions and 25% earnings, then 25% of the distribution is taxable even if the amount you take out is less than the amount you contributed.

One option to consider is that if you can get "cheap" money -- you don't necessarily have to buy more real estate. If you have to pay 3.25% for the money but can lend it out at 10% (or higher), you get to keep the spread -- no tenant requests, no property taxes to pay, etc. There are several ways to make your money work for you!