Borrow from 401k to invest in real estate

[Narinder Gill]

Is it good idea to use funds from 401K to buy a cash flowing SFR? I have about 105k in 401k. Minimum payment will come out of my biweekly paycheck to pay off the borrowed money.

What are the pros/cons of doing this? I I understand that I will lose out on any potential on borrowed money if I were to leave enact.

I’ve heard about paying interest back to myself when I’m paying the loan back, little confused on this concept.

Thank you for the help

[Scott MacDonald]

Hi Narinder,

Congratulations on getting resourceful in REI. It separates a lot of the wannabe investors and the investors on their path to their goals. I have borrowed from my 401k, cashed out IRA's, borrowed from non-term life insurance policies to name a few in my conquest to obtain more real estate and reach my goals. I think its a good option purely because I trust myself to make more cash and equity in REI than I trust Fidelity to grow my 401K.

I typically follow a BRRRR strategy where I buy the property, rehab it, rent it, refinance it and repeat the process. The refinance typically cashes me out all my funds invested and I repeat the process. So when I have borrowed from a 401k previously I typically look to repay it within a year. MY understanding, During that time when you have the loan out you are paying interest to yourself to keep your 401k on track. So lets say you borrowed $100k out of your 401k, bought a property, held it a year doing some renovations and then refinanced your cash out you would be making loan payments to the 401k. Lets say you have an 8% interest agreement it means that if you held it a year you would pay $8k interest over that year, so your $100k 401k will be worth $108k with the interest you paid. Plus you will hopefully have built equity in the property and made cashflow.

I am sure others will chime in with their opinions but I find myself leveraging as much resources as possible to accelerate me to my goals.