401K for first real estate investment

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401K for first real estate investment

Liam Martin
Boston, MA · Member since 2020 · 14 posts · 4 votes

Hey BP,

I am in the process of buying my first rental property. I live just outside of Boston, MA and plan to buy a property within 30 minutes of my current residence using FHA financing. I found a couple of deals that could make sense and have confirmed my analysis with a fellow investor to ensure my numbers are correct. This area is loaded with rental properties, but most are on the expensive side.

I have a good amount of cash saved up for the down payment, however, some properties that are just slightly out of my price range have even better potential for ROI.

I wanted to hear some thoughts on taking an early withdrawal from ones 401k to fund part of a real estate investment. Since I am 24, live with my parents, and have very few expenses, I’ve contributed rather aggressively to my 401k for the past 1.5 years and have plenty of money in it. I am aware of the penalties and taxes associated with an early withdrawal but feel that leveraging this money to contribute to a buy and hold rental is worth it in the long run.

Based on the above, does this sound like a reasonable decision or is it short sighted? All responses are greatly appreciated!!!

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Aaron Montague
Rental Property Investor · Brookline, MA · Member since 2013 · 1k+ posts · 777 votes
5y

@Liam Martin

Don't do an early withdrawal, take a loan:

https://www.investopedia.com/a...

As long as you don't plan on leaving your job soon, the 401k loan is a solid way to add a bit more cash to the deal.

Focus on paying the loan back so it isn't hanging over your head and then you will be back on track.

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  • Remone R.
    Auburn, WA · Member since 2017 · 305 posts · 88 votes
    5y
    @Liam Martin so before I tell you what my wife I did to get our properties I have to say first that all of this depends on who your 401k is with and what they allow because they’re not all the same. Also my cpa just told me they have extended the 401k covid loan until the end of March so you won’t have be hit with an early withdrawal fee and the amount you take can be spread out over three years as income. And if you pay it back within 3 years any tax you paid you’ll get back. So I guess that’s kind of like a loan. So our first property we used a loan off my 401k and my servicer allowed us to use a home loan so instead of the max 4 years to pay back we got 10 years so it made our payment smaller. The payments also come out of my paycheck and the lender didn’t factor that into our loan for dti. Our second property I used a withdrawal. Now at the time I didn’t know that with the fees that amount would also count as income on our taxes, so it looks like we made even more money even that amount went to purchase a property. So we owed more taxes for the year. Sucked But if I had to do it again I would because the propert has appreciated 100k in over a year. I agree with most folks here on doing a loan instead of withdrawal as you save on fees, but it’s all circumstantial. You can take the money and pay it back or take the money and don’t pay it back but pay a penalty. Oh and the other downside to a withdrawal is your account may be suspended for 6 months, so you can’t contribute to your account or anything for that time period. So you’d probably have to factor in the potential money loss for that as well. Again if I had to do it again I would do the same thing and most will tell me I’m stupid but it’s worked out for us. At the end of the day the decision and consequence is on you
    0Reply
  • Austin G.
    Investor · DFW/LAX/PHX · Member since 2017 · 49 posts · 28 votes
    5y

    @Tim S.

    Thanks Tim! I need to do this with my old 401k

    0Reply
  • Remone R.
    Auburn, WA · Member since 2017 · 305 posts · 88 votes
    5y
    @Liam Martin the benefits too
    0Reply
  • Keola Nishikawa
    New to Real Estate · Oahu, HI · Member since 2021 · 8 posts · 8 votes
    5y

    @Remone R. @Zachary Beach @Jenning Y.

    I am more in the lines with Remone, Zach, and Jenning. I'm the the side as them and saying withdrawing might not be a bad option. I withdrew $100k from my 401k via the CARES Act last month. The best thing about it is that you're actually able to do a withdrawal from the 401k. My employer says that I have to show proof of negative cash flow, or being in debt for months, or provide medical bills that you need help paying for to make a withdrawal. So actually being able to withdraw the money isn't easily always an option. The CARES Act makes it possible to withdraw it for now. The second best thing is that the 10% early withdrawal fee is waived. And like Remone said normally with a withdrawal you aren't able to recontribute to your 401k for 6 months. By using the CARES Act withdrawal you can still contribute, and if you really wanted to, you could also take a loan out from your 401k later on if you wanted to. 

    But a loan is still a great option as my 401k has rates at around 0.75%. 

    I'm really surprised that a lot of people are against withdrawing from your 401k when this is a real estate forum. Even though everyone does have valid points. I've followed other forums here where people are more so 50/50 on withdrawing or taking a loan. Don't get me wrong, I still like the sock market. I still have about $200k in my 401k and I also have a Vanguard account on the side. I just wanted the liquid cash from the withdrawal I did. I'll eat the taxes.

    Another option would be rolling over your withdrawal into a self directed IRA that you can use to invest in properties. You avoid the taxes and are more flexible with what you can invest your money in. Good luck on your decision! Hope this helps!

    2Reply
  • Liam Martin
    OP
    Boston, MA · Member since 2020 · 14 posts · 4 votes
    5y

    @Liam Martin thank you all so much for the guidance on this. I now have a much better idea of the pros and cons of withdrawing/borrowing from my 401k!

    0Reply
  • Kris Miranda
    Member since 2020 · 7 posts · 1 vote
    5y

    If your company allows you to take a hardship withdrawal for the CARES Act (which was recently extended beyond 12/31/20) with no questions asked for up to $100k, you might try that. I just did this with Fidelity and it was literally a 2 minute phone call and the money was in my account 3 days later. Most of the penalties are waived, although there is some penalty...maybe 10%? But you have the option of repaying it within 3 years (I believe--double check your plan) without any penalty. For me, it was the fastest/easiest/cheapest/no documentation method for getting some quick cash, but it's not as cheap as a good loan, if you can qualify and want to make monthly payments.

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