Borrow from 401k for 9.5% Return on Rental?

[Felix Sharpe]

Hello, 

I am a relatively new investor looking to get Door No. 2 under my belt.  

I am considering a SF new construction (3/2) that would produce a cash on cash return between 7%-9.5% with 20% down.

I have 50% of the down payment. I could theoretically borrow the other 50% from my 401k, which I could pay back in a year. 

Thoughts? Would you do this deal and borrow 50% from your retirement?

Thanks for any input!

-Felix

[Melissa Justice]

@Felix Sharpe hey!

Congrats on being so close to Door No. 2 — that’s a big step forward! Based on what you’ve shared, a few thoughts:

A 7%–9.5% cash-on-cash return on new construction is quite solid, especially in today’s interest rate environment. New builds generally mean:
Lower maintenance costs

Fewer surprises

Attracts quality tenants

Better depreciation/tax benefits (especially if cost segregation is done early)

So from a deal standpoint, it sounds like you’ve found something worth considering — particularly if it’s in a landlord-friendly, high-demand market.

On Borrowing from the 401(k)- This can be a smart short-term play if you’re disciplined. 
Pros:
You’re paying yourself back with interest.

You avoid taking on high-interest debt from banks.

You’re leveraging money that might otherwise be idle or underperforming.

If you repay within the timeline, there’s no tax hit or early withdrawal penalty.

Cons:
You’re taking that money out of the market temporarily (opportunity cost).

If you leave your W-2 job for any reason, that loan may become due faster.

It's important to factor in the repayment plan and ensure the rental cash flow doesn’t get too tight.

If this property is through a turnkey provider that includes property management, rehab, and tenant placement — like us at Rent To Retirement — you’re mitigating a lot of the risk of surprises. That adds a safety net when using funds like your 401(k).

Since you plan to repay the loan in a year, and the property cash flows with a strong return, I’d personally lean toward yes — as long as you're confident in the stability of your W-2 and the market fundamentals of where you're investing.

Wishing you much success!

Melissa Justice

Investment Strategist