Cashing Out 401k experience?

Question

I bought my first rental last year by taking a loan on my 401k as a down payment.

everything is going great, and I'll be rising the rent from $1400 to $2000 in March.

i cannot refinance because my rental and main residence is in Europe.

Now I'm looking at a 4-plex turnkey for $699k in Texas. It's already rented in 3 units in a B+ neighborhood. I need about $140k for a 20% down payment.

My goal is to retire in 2033.

Kevin Sobilo · Answer

@Christina Giaretta, without knowing many more details I can give only a couple thoughts:

1. Everyone here is excited about investing in real estate! However, as an investor we know there are risks and that we should not put "all our eggs in one basket".

Having a 401k invested in things other than real estate is GREAT for keeping our wealth diverse. So that we have less risk when bad things happen and THEY WILL HAPPEN.

2. As real estate investors, we really enjoy some nice tax benefits. The idea of paying not only the income tax on a 401k withdrawal but also a 10% penalty on top should make you cringe! Think of the cost, both real cost and opportunity cost that you need to recoup in order to just get back to break-even on this investment if you use this move to bring the deal together.

3. If you cash out your 401k entirely you also likely trigger your 401k loan to be considered a withdrawal and subject to taxes and the 10% penalty. You may wish to investigate that.

4. I would look at all the other ways you can grow your portfolio. For example, what about a subject-to deal?  There are lots of creative ways to acquire property with less money out of pocket. People who have money that needs to be deployed often focus on buying rent-ready properties at retail prices, but those of us who don't have excess money laying around acquire properties other ways. It might be off-market, tax sale, foreclosure, value-add, subject-to, etc... Lots of ways to acquire properties for less because we have less laying around and still want to grow.

Dennis Bamford · Answer

Instead of cashing out and incurring the penalties, you can do a rollover into a Self-Directed IRA and get the benefit of not paying the penalty.

There are a couple of different ways you can structure the SDIRA's. But if you go that route the funds in that account are only for that account and you can't personally benefit from it, meaning that money has to go back into the SDIRA account not into your pocket.

Ashish Acharya · Answer

Hi @Christina Giaretta,

Thanks for sharing, and congrats on getting your first rental off the ground! You’ve already gotten some great insights from the community.

The first thing I’d do is make sure everything you’re doing from a tax perspective is solid, this sets the foundation for when you start scaling. You want to make sure your strategy is optimized and works well with your current income and situation. While we don’t work with foreign investors directly, here in the US, rental real estate is often used to offset taxes especially if you are a high W2 income earner or business owner, and understanding how passive vs non-passive income interacts with your other income is key.

As far as the up front investment, using a 401(k) for investments, like you mentioned, can work, but sometimes it’s not the most efficient path compared to using tax savings strategically.

As others have mentioned, definitely explore creative financing options like DSCR loans to make this deal happen. There are a lot of lenders on here who should be able to help you explore those options and make sure you have a clear plan for managing the properties and the tax side of things.

From a tax perspective, once your property is actively operating, you can deduct expenses like management fees, utilities, repairs, and mortgage interest. Actively participating may allow you to offset non-passive income, and you can also take depreciation, potentially accelerated through a cost segregation study, to optimize your returns and save so you can really scale.

Building a local team that you trust can make scaling much easier and less stressful too. You're in the right place by being on here. Happy to connect.

Clare Pitcher · Answer

I would not suggest taking funds from your 401k. Not only are you incurring a penalty, you are losing out on compounding which could really cost you in the long run. You would have to assume real estate is going to significantly outperform the years of tax-deffered compounding. If you have a loan from your 401k, yes, you are paying interest back to yourself, but the real estate returns aren't guaranteed at the same level of the diversified funds will over years of compounding. I would consider saving for a down payment outside of your retirement account or partner for capital. Pulling from a self-directed IRA is an option, but still risky.

Nick DiSanza · Answer

Hi Christina, we work with DSCR lenders that do foreign nationals refinances. Let me know if your interested

Frank Pyle · Answer

Nice job getting your first one stabilized and that rent bump is a big jump so I would double check you have real comps at 2k and a clean lease plan for March.

On the 401k cash out piece, the big risk is the taxes and penalties plus losing the compounding, so I usually treat it like borrowing at a really high rate unless the deal is an absolute home run and I have no other path. With a 699k fourplex, I would underwrite it like a business and make sure it still cash flows after a real debt payment, taxes, insurance, repairs, capex, vacancy, and property management since you are overseas.

Have you talked to lenders that will do DSCR or investor loans for US property even if you live in Europe, and do you have the current rents for all 4 units plus what the all in payment would be at todays rates.

Cashing Out 401k experience?

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