Borrow from 401k for 9.5% Return on Rental?

Question

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 · Answer

@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

Chris Seveney · Answer

How conservative were you in calculating that return? If it was aggressive just recognize that and if it's conservative then that's great but find it hard to see where new construction yields 9% CoC

Drew Sygit · Answer

You may want to share the numbers behind your calculations, so experienced investors here can point out any flaws!

Felix Sharpe · Answer

Thanks so much for your feedback @Melissa Justice!

Jaycee Greene · Answer

Hey @Felix Sharpe! I'm curious what lead you to decide to do new construction for your 2nd property rather than buying a turnkey or a light value add property?

Jaycee Greene · Answer

@Felix Sharpe Got it. If you've got 50% of the funds (I'm assuming you're talking about cash), I'd lean towards the rest of it coming from a traditional loan rather than from your 401k. If the deal goes south, they can take your 401k and you'll pretty much lose everything in it. So, my recommendation is based on asset protection rather than cost of capital. Just my 3 cents!

Sastry Srini · Answer

I'm curious, how much do you plan to borrow from your 401(k)? The maximum loan amount allowed is $50,000.

I understand the convenience of borrowing from your 401(k) since it doesn't require extra paperwork. However, have you considered some credit card offers that provide 0% interest for a year (with a 3% transaction fee)? This could be another option if you're confident you can repay the 401(k) loan within a year. It's something to think about.

Felix Sharpe · Answer

@Chris Seveney thanks for your feedback. I double checked my numbers also to make sure. But i learned after posting my question that the home was a habitat home with income ceiling limitations and more purchase restrictions than usual. Anyway, I couldn't qualify for the purchase. So, I am back out looking everyday.

Jules Aton · Answer

I suspect I'm in the minority here but I'm not a fan of taking money out of retirement funds.

Felix Sharpe · Answer

Hi Jaycee - I wasn’t choosing new construction per se, but this deal just happened to be in my buy box as far as price range, square footage bed/baths.

I did a full gut rehab with my first purchase, and I’m sure I’ll do more in the future. But I like the idea of something that’s move in ready where I don’t have to consider a bunch of capital expenditures.

Borrow from 401k for 9.5% Return on Rental?

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