Best way to use 401k to finance a property

26 Replies

I own a fully leased 8 unit multi-family and am looking to purchase a 12+ multi-family in 2018. I estimate in my geography I can find what I'm looking for for around $750,000 or less.

My bank is hard and fast on requiring 20% down-payment. And I figure I'll need an additional $10k for 'transition/closing costs'.

20% of $760,000 is $150,000.

I currently have $25k in my Roth IRA and $100k in my 401k and will soon have (if I stay on track) the remaining $25k in savings.

Selling my 8-unit is not an option (not enough equity). Finding private financing is always an option, but unlikely (I don't know many people with that kind of money to spare). So leveraging my Roth IRA and 401k seem to be my most feasible option.

What is the best way to do this:

1) Cash out my 401k (worry about tax penalty in 2019)

2) Borrow against my 401k?

3) Can I 1031 exchange my 401k?

4) Some other option?

I appreciate any advice/insight/recommendations....

@Ali Hashemi Easiest way is that you can invest through a self-directed IRA. Although there are some pitfalls to this, most people find it an easy way to tap their existing pools of liquidity. If you want to get a deeper answer, you should give us some #s around your deals, so other posters can provide more insightful commentary.

Thanks for your reply @OmarKhan . What are the general steps to doing this? Have ou or someone you’ve known gone this route? What other numbers are needed for deeper insights, I’m happy to provide? 

@Ali Hashemi

I vote to borrow against your 401K.
You can borrow up-to the lesser of $50,000 or 1/2 your 401K balance(if your plan offers this feature).

If you cash-out your 401K - you would have to worry about mandatory withholding, state withholding and penalties. You may also have to see if your 401K allows you to withdraw from it while still being employed.

Are you able to pull out any equity in your 8 unit multi family?

i vote for #2. but there are limits. why dont you do an FHA LOAN instead? and you only need as little as 3.5 you can do more like 10%.

Thanks @Basit Siddiqi I wasn't aware of some of those restrictions. It seems I need to have a conversation about what my 401k will and won't allow.

I have around $85,000 in equity in my 8-unit

@Taoufik K. it's my understanding FHA only applies to residential (4 units and less) and therefore wouldn't be possible for this property.

@Taoufik K.
He can't do an FHA since this is more than 4 Units.
He will likely require a portfolio/commercial loan for this property.

I would counsel either waiting to buy another property until you have the down payment and additional cash reserves or partner with a deeper pocket investor. Buying a commercial property through an IRA has several downsides. First any mortgage interest you pay is subject to Unrelated Business Tax which is very complicated, financing has to be non recourse which is almost impossible to acquire on a commercial property and depreciation is not deductible. Also you are not allowed to self manage as that would be considered a violation of the IRS rules governing the IRA taxability. Borrowing against a 401(k) really ramps up the risk profile of a riskier property purchase. If your company downsizes or lays you off you will have to pay back the loan or have a big tax bill which will drain your cash reserves.

@Ali Hashemi

If you can get access to the 401k $$, there may be a way to do this. On an early distribution, your 401k is going to get a significant haircut for income tax and early withdrawal penalties (subject to withholding). You could explore rolling it over to a a Checkbook 401k/IRA - which could buy a multi-family - but if you're still employed by your 401k plan sponsor and under 59 you probably won't have the option to do so.

Thank you @Bernard Reisz for your insight! I'll look into and ask about the Checkbook 401k/IRA

I am no longer with the same company that my 401k was with.

A financial planner can better advise on this, but why not look into converting your 401k to a self directed IRA. Then purchase the investment as the IRA being the buyer. You will not be able to put the profits in your pocket without penalty as you would need to put all the funds back into the IRA at the end of the deal but it is a nice way to build a retirement nest egg without paying the penanlties and still differing the taxes.

@Robert Adams I like the sound of that. Two potential issues I'd need to resolve...my 401k/IRA wouldn't be enough by itself to purchase the property and there are IRA contribution limits.

2) I don't really like the idea of not taking the profits but I could always refinance later? Certainly like you're suggesting, it would be better than straight losing the profits to tax penalties.

Thank you very much for your input!

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Account Closed You are absolutely justified in your statement. I justify it to myself several ways. But the real reason is the typical immigrant story. My dad worked hard his whole life with little financially to show for it. Only growing up an immigrant's kid can you understand the feeling of obligation to carry your parents journey (non-immigrant kids have their own issue too I'm sure, but this is my burden). I have the rest of my life to slave away if this doesn't work out. Crossing my fingers social security is still around if I fall on my face!

side note: look at all the people who have gone bankrupt and come out clean the other side. Some notable names in today's politics I won't mention.

@Kyle K. with the IRA being self directed you choose how agressive or conservative you want your invesmtent to be. Right now I don't see nay factors pointing to a slow down and for that reason I am confident in using self directed IRA funds for real estate. Should the market shift I would also shift my IRA investments to a more conservative investment.

It is definitely a personal decision and everyone has their own comfort levels.

@Ali Hashemi I would be more inclined to purchase a property with out financing if I am using the funds from an IRA. As leveraging the IRA with a loan will increase risk. I would be more inclined to leverage other funds instead of my retirement funds. However, buying a buy and hold property for $100k - $125k with the retirement funds and no debt service in a highly appreciating market like Vegas is very appealing to me right now.

Happy Holidays and Happy Investing everyone!

I'll second getting a self directed IRA/401k. Depends on your end goals. I couldn't figure out how to add a file here but you can check it out at the fileplace to see the differences side by side of a self directed 401k vs IRA. The crazy things with the SD401k, which is what I got, is that I can borrow against it up to 50k (not much) for 5 years. This allows me to fund my mobile home business where homes are generally rehabbed and purchased all under 10k.

Quite often you cannot take a loan out of your 401K if you have left the employer.  I've tried with Vanguard in the past it wasn't allowed.

One must meet (and maintain) the eligibility requirements in order to do a self-directed Solo 401k plan, while anyone can have SD IRA (Solo K is not for everyone). However, if you are eligible for the Solo K it offers superior benefits to SD IRA.

Consult with an expert (or two) to help you determine which option would be best for you.

@Ali Hashemi I have a self-directed IRA which I use to invest in Real Estate. The problem with going that way is you can't easily use it as a down-payment on a large property and leverage it like you're proposing.

If you want to do that you probably should pull it out and pay the taxes and penalties on it.

But, if you're ok buying something smaller all in cash and slowly building your retirement account (which you cant access until retirement) then the self-directed account works pretty well.

Other possibilities are to partner with some other self-directed investors through a partnership or syndication.

@Ali Hashemi - also look at a RollOver to Business Startup 401k (ROBS 401K).

One additional problem with borrowing against your 401k is that you have to pay the funds back within 5 years.  That would add an approximate $900/mo payment that can really bite into your cash flow.  Unless you are doing a rehab/refinance type deal with the new property in which case a 401k loan might be a good source for short term money.

This is all really good information. Thank you all for your input.

Quick summary for anyone reading the thread in the future:

Options for using retirement account to finance purchase (in no particular order):

1. RollOver to Business Startup 401k (ROBS 401K).

2. borrow against your 401K. You can borrow up-to the lesser of $50,000 or 1/2 your 401K balance. have to pay the funds back within 5 years.

3. portfolio/commercial loan

4. You could explore rolling it over to a a Checkbook 401k/IRA - which could buy a multi-family

5. Self Directed IRA

6. self-directed Solo 401k plan. The problem with going that way is you can't easily use it as a down-payment on a large property and leverage it like you're proposing.


Cautions:

1. Buying a commercial property through an IRA has several downsides. First any mortgage interest you pay is subject to Unrelated Business Tax which is very complicated, financing has to be non recourse which is almost impossible to acquire on a commercial property and depreciation is not deductible. Also you are not allowed to self manage as that would be considered a violation of the IRS rules governing the IRA taxability. Borrowing against a 401(k) really ramps up the risk profile of a riskier property purchase. If your company downsizes or lays you off you will have to pay back the loan or have a big tax bill which will drain your cash reserves.

Time to go consult a couple financial advisors

Lend the money in the retirement accounts.  There are people in your position that need down payment money.

Find a lender to a new LLC from someone else's retirement

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