Is using a loan from my 401(k) to purchase a property a No No?

2 Replies

Is using a loan from my 401(k) to purchase a property a No No? And how would I structure a deal if I have no money in the deal?

A close friend has learned of what I am doing (purchased 4 Single Family Homes this year with great cash flow) and wants to do the same. However, he has no cash. After chatting with him a bit I remembered that he has $100k plus in his 401(k). I proposed that he get a loan from is 401(k). Purchase property with that loan and pay back the loan, at 4%, just as if he was paying a mortgage. This works great for him as he plans to be with his company for 15+ more years therefore avoiding the loan paid in full if not repaid upon leaving the job. Plus the company match is nice. FREE MONEY. Furthermore these homes are in the $35k price range and would be purchased outright, no loan, so the loan from the 401(k) isn't a down-payment on another loan, possibly overextending leverage. 

Questions:

1. What are the pros and cons of this 401(k) loan strategy?

2. My friend also wants to partner with me as he wants to be more hands-off. Yet he would be coming in with all the cash on this next deal. How can I structure the deal so I make money as well as my friend? (Understanding he would make the bulk as his money is in the deal) I have heard of the following structure....Thoughts?

- I receive 2% of the acquisition right off the bat as I am able to obtain these deals

- I receive 2% of the monthly rent (not much in this example, but I like the idea as I scale)

- Partner receives 8% of his investment 

- Partner & I then split the remaining 

- Example: $100k home cash flowing $1000 net per month

- Partner receives the following monthly: $667, 8% on investment + half of remaining (($1000-$667-$20)/2)=$156 for a total of $823

- I receive $2000 off the bat, 2% of acquisition (possibly paid out in installments) Plus the following monthly: $20, 2% of rent + half of the remaining (($1000-$667-$20)/2)=$156 for a total of $176

***Sorry to get nerdy algebra on ya***

I know the net would go up and down due to larger expenses, new A/C, etc. And in the event our net is below the 8% to my partner, I would make the investor whole by making it up the next month(s), thus my remaining payout would be zero. 

@Mark Wurtemberg

I personally have come to view a 401K as a sort of trap. Your money is stuck there for 20+ years and you are unable to touch it. This makes money managers and corporations extremely wealthy off your money. Meanwhile by the time you retire, you will be lucky if you have $1,000,000 saved up. At that point they encourage you to buy an annuity so they can continue to use your hard earned money until you die. Sounds like a scam to me.

I do have a TSP, but I no longer contribute to it. I have used a loan from my TSP (401K equivalent) to purchase real estate multiple times. The reason for me was simple. I am able to achieve a far greater return with real estate than I would with the stock market. I do miss the tax advantages, but they come at the cost of having far less of your own money available for investment.

@Mark Wurtemberg ,I've used 401(k) loans to fund the down payment on a property. I haven't used them to buy a house outright, I don't have houses that inexpensive in my area. 

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