401k vs Hard Money?

Question

My company's 401k will allow me to take loans of up to 50% of my balance.  I believe the rate would be around 5% and all the interest goes back into my 401k.  On the other hand a hard money lender collects the interest...and likely above the 5% on my 401k.

So the question is under what conditions would the hard money be preferred over paying myself the holding costs on a 401k?

Anyone out there hitting their 401k who can relate any personal experience?

Thanks all...

Mike & Nancy Allen

NestProps...

Mark Nolan · Answer

@Nancy Allen

If you can, borrow from a third party, do so and later borrow from the 401k if necessary (e.g., you have trouble making the payments).  This way you can keep investing your 401k.

George P. · Answer

not sure if you can take up to 50% of the balance. i think you are thinking up to 50K, not %.

i took out 50k for a house last year. at 3.25%. the only drawback is that the 50k i took is NOT working for me in that account.

it was a great move and i am happy i did it. i'd do it again in a second.

Angel Rosado · Answer

@Nancy Allen This is a great questions as I myself am inquiring about using a 401(k) loan to begin my investing career.

I posted a post here here but it was 401k vs ira.  One thing that you have to make sure you consider is that you will be paying back the loan with after tax dollars and when you withdraw in retirement you will be taxed again.  So although a hard money lender might be more expensive %age wise you have to take taxes into consideration.

Kirk Chisholm · Answer

I'm not clear on the question. Are you asking about comparing borrowing from your 401k to borrowing from a hard money lender?

Simple... risk.

If you borrow from yourself ( via a 401k loan) you are risking your own money. if you borrow from someone else they are taking on the risk in exchange for higher interest rate. You have to run the calculations about what is best for you, but I think most people would prefer to borrow hard money than use their own.

I hope this helps.

Erik Livas · Answer

You can take 50% of your vested balance from your 401K up to 50K. I believe the longest loan term you can choose is 5yrs and there is no tax penalty as long as the loan is paid in full and you are still employed by the company. There aren't usually any fees associated with the loan but that varies by plan administrator I would only recommend this is you are ahead in saving for retirement, unless you believe you can get a 3-6% return a year on the money you will invest in buying a property.

Edward Stephens · Answer

When you borrow from a HML and you pay him back on time, then you may have a business partner for life.  Plus, he may not charge you as much as he did the first time you borrowed.  Relationships are worth a lot.

Verify that your 10% penalty applies to a 401(k) loan and not a 401(k) hardship withdrawal.  With a hardship withdrawal, you aren't required to pay the money back.

Nancy Allen · Answer

Kirk...thanks for the response.  So what is the basis for risk analysis when determining the use of my capital vs an HML?  Desired ROI?

Nancy Allen · Answer

As far as losing the gains in my 401k with a $50k loan, it seems to me if my 401k is returning 8% (very hopeful at best) and the flip is 90 days, then I lose $1000.  Any flip "properly assessed" should more than cover the $1000...I believe Josh or Brandon as well as numerous other including Kiyosaki have posts and books on why real estate out performs stocks.

George P. · Answer

that's a steep penalty..

btw,  i dont follow every thread on here, so either do what Brian did, quote me or tag me for me to see the thread.

good luck.

Nancy Allen · Answer

Hey George...you are correct...I went back and looked at the conditions...I can take a loan of up to $50k or an in service withdrawal of around 50%...but with a 10% penalty.

401k vs Hard Money?

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