Purchasing property via 401k loan?

Question

Hello! I’m looking into investing in RE but having difficulties with hard money loans. Have any of you purchased property via 401k loan? What are your thoughts on this ? I invite any and all comments and recommendations. Thank you in advance!

Mike S. · Answer

I've done it couple times. Easy, use it to buy and rehab.  Cash out refi after 6 months and pay back the loan.

Michael Craig · Answer

@Sydnee Gross

Yes, each property had value add opportunity. This allowed me to pull most (if not all) of the money out to pay back the 401k loan and repeat the process.

Anthony Wick · Answer

@Sydnee Gross

Another thing is, make sure that taking out a 401k loan does not come with rules about halting your contributions. You do not want to miss out on any matching contributions. When I did this in the past, I continued to also max out my 401k contributions. So, I was contributing the max PLUS the payback on the loan every 2 weeks.

I used it for a long term buy and hold multi family, so there wasn’t any cashing out quickly to repay the loan in full. However, I did pay extra on the loan to pay it off quicker than anticipated.

Anthony Wick · Answer

@Sydnee Gross. I have done this as well. Like Michael said, it's extremely important to know how secure your employment is. More than likely, it's not about if the loan is "due" if you lose your job, but the fact if you do not pay the loan in full, it becomes a distribution, which comes with a 10% early withdrawal penalty on top of the taxes. Also, you need to run all the numbers to determine if it is worth it. Not just the interest you pay back to yourself on the loan, but the missed gains that you could have possibly gotten on your 401k. Of course, only the future will tell if you actually would have gotten larger gains, or losses, on that 401k.

Michael Craig · Answer

Hi @Sydnee Gross,

I purchased each of my properties utilizing a 401k loan and recommend it to all investors - assuming the 401k loan terms are favorable. Not all 401k loan terms are the same and vary dramatically so it is important that you become very familiar with the terms and fees/penalties of your loan. Also, I would be cautious if the loan is due if you were to lose your job or no longer work with the employer the 401k is set up with.

It is possible to invest with a 401k loan and is a creative/beneficial way to finance when the terms are favorable!

Cal Dunagan · Answer

@Sydnee GrossThere's some good advice here in the thread. Don't forget to make sure you keep up with your compliance when investing with your 401(k) plan funds. Here's a great article that I think can point you in the right direction. Hope this helps!Best of luck,Cal

Avram Shabanyan · Answer

@Sydnee Gross

As some mentioned that if you have a self-directed IRA or Solo 401K it can be leverage to buy real estate. Investors in real estate are using leverage to finance real estate with a non-recourse loan with their Solo 401K or Self-Directed IRA. There are couple of lenders that specialize in non-recourse lending and usually the terms and condition are very similar. Normally, a non-recourse loan are max 60-65% loan to value, rate estimate between 5.25-6.5%, minimum loans are $50,000 and require a positive cash flow for rental income. Many lenders look at property cash flow, condition, location, price, and etc. Due to being a non-recourse loan (no personal guarantee) the loan-to-value is lower and rate is higher for banks to mitigate their risk

Send me a private message and we can go over different loan programs more in details to purchase real estate within self-directed Solo 401K and IRA.

Looking forward to hearing from you!

George Blower · Answer

@Sydnee Gross

1) Here are the general considerations regarding 401k loans.

• If your 401k plan allows for 401k participant loans, the maximum loan amount is equal to 50% of the balance up to $50k. The repayment terms for a 401k participant loan are equal monthly/quarterly payments of principal and interest (typically prime plus 1%) over a 5 year term (longer if used to acquire your principal residence).
• Please note that if you take a full $50,000 and then pay back the loan, you can't take another $50,000 until 12 months after the first loan was fully paid back.
• Per the loan offset rules that went into effect with the 2018 Tax and Job Act: if you leave your job and the loan is current at the time you leave your job but then the loan goes into default because you left your job, you will have until your tax return deadline (including any timely filed extension) to make the loan current by depositing the outstanding balance into an IRA (and thereby avoid the taxes and penalties that would otherwise apply).

401k Participant Loans

• If your 401k plan allows for 401k participant loans, the maximum loan amount is equal to 50% of the balance up to $50k. The repayment terms for a 401k participant loan are equal monthly/quarterly payments of principal and interest (typically prime plus 1%) over a 5 year term (longer if used to acquire your principal residence).
• Please note that if you take a full $50,000 and then pay back the loan, you can't take another $50,000 until 12 months after the first loan was fully paid back.
• Per the loan offset rules that went into effect with the 2018 Tax and Job Act: if you leave your job and the loan is current at the time you leave your job but then the loan goes into default because you left your job, you will have until your tax return deadline (including any timely filed extension) to make the loan current by depositing the outstanding balance into an IRA (and thereby avoid the taxes and penalties that would otherwise apply).

Please keep in mind the multiple loan rules:Under those rules, the sum of the balances of a participant's outstanding 401k loans under a single 401k plan (using the highest outstanding balance of each loan over the last 12 months) can't exceed 50% or $50,000 whichever is less. Thus, if you took a $50,000 loan and paid it back within 6 months, you would need to wait another 6 months before you could take another $50,000 loan.

2) Keep in mind that in order to take a distribution under the CARES Act you must have been impacted by the virus in one of the enumerated ways & your current account provider must allow you to take a CARES Act distribution. The IRS recently provided guidance regarding eligibility under the CARES Act and specified that a qualified individual includes an individual who has a reduction in pay (or self-employment income) due to COVID-19.Note: It is too late to take a loan under the CARES Act.

Distributions:

If so, you can take a penalty-free distribution (as well as waive the 20% withholding requirement) from your 401k (assuming that the employer allows it) anytime between 1/1/2020 and 12/31/2020. You may avoid the taxes if you deposit the funds in an eligible retirement plan (which includes anIRA) within "3 years and a day" of the date of the COVID-19 distribution (note: compare to a 60-day rollover). Please note that the account into which the funds are deposited must be the same type of account from which the funds were first withdrawn (e.g. withdrawal of pre-tax funds from a 401k could be deposited in a pre-tax IRA but not a Roth IRA - "like to like").

3) If you are self-employed (i.e. active self-employment earned income separate from your w-2 income) with no full-time w-2 employees, you can set up a Solo 401k and then rollover your 401k funds from your former employer 401k and/or non-Roth IRA.

• You could then take a loan of up to 50% of the balance not to exceed $50,000. Please be sure to select a Solo 401k plan provider which allows you to take a loan and will prepare the required 401k loan documents.
• The repayment terms are equal monthly/quarterly payments (as you prefer) of principal and interest (e.g. prime + 1%) spread over a 5 year term (or longer if you will use the loan to purchase your primary residence).
• There are no prepayment penalties and no restrictions on what you can do with the proceeds of the 401k loan.
• Please note that you are obligated to pay back their 401k (regardless of the performance of your real estate investment).
• As an alternative to taking the loan, you could even purchase the investment property directly using funds in your Solo 401k (assuming you select a Solo 401k plan provider which allows you to invest in real estate). If you don't have enough Solo 401k funds to purchase the property as an all-cash deal, you can combine your Solo 401k funds with non-recourse debt to purchase the investment property. Learn more about non-recourse lenders here: https://www.biggerpockets.com/member-blogs/9552/70408-ira-and-solo-401k-non-recourse-lenders

Sydnee Gross · Answer

@Mike S. Thank you!

Sydnee Gross · Answer

@Anthony Wick thank you!!!!!

Purchasing property via 401k loan?

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