Using a 401k loan to buy sfh rental property outright,then doing a refi to pay off 401k laon. Anybody have experience with this strategy?

21 Replies

I want to buy a sfh rental using my 401k. Essentially I want to be my own private lender by loaning myself funds out of my 401k to buy the property free and clear and then do a refi 6 or so months down the road in order to pay back the 401k loan in full. If you have done something like this or have any experience with this sort of strategy please chime in. Also if you can think of any pitfalls by doing this feel free to share that as well. I know about the dangers of 401k loans such as losing your job and having the loan due in full within a short time frame after losing your job. Also I'm aware of the other drawbacks of 401k loans so I'm more interested in any potential pit falls of this strategy on the real estate side. One thing I'm especailly concerned with is doing this deal and then not being able to get a refi and being stuck with the 401k loan for 5 yrs. So anyway, please if you have any experience with this method chime in and let me know your take. Thanks

You generally have to make payments during the first year before you re-finance out.

My husband and I did something similar - we took a withdrawal from an IRA, which had to be paid back in 60 days to avoid the penalty and tax hit. We planned to do a cash-out refi on a property we bought with the IRA funds, and started that process a couple of months before we even identified a property to buy. We were approved and ready to go as soon as we found a property.

So basically, we took the IRA withdrawal, paid cash for the property, and within days closed the loan for the cash-out refi, then wired the money right back to the IRA.

Pitfalls would have been a last minute rejection for the loan for whatever reason; that the appraisal of the new property might have come in lower than we needed to pay back the IRA, that the loan might have been held up longer than the 60 days, etc.

It was a risk but it worked out well because all our ducks were in a row for the loan before we even found a property.

Aly NA  Good to hear your strategy!  We are looking at the best way to utilize our 401k dollars.  

Thanks for the thread:)

Originally posted by Aly NA:

My husband and I did something similar - we took a withdrawal from an IRA, which had to be paid back in 60 days to avoid the penalty and tax hit. We planned to do a cash-out refi on a property we bought with the IRA funds, and started that process a couple of months before we even identified a property to buy. We were approved and ready to go as soon as we found a property.

So basically, we took the IRA withdrawal, paid cash for the property, and within days closed the loan for the cash-out refi, then wired the money right back to the IRA.

Pitfalls would have been a last minute rejection for the loan for whatever reason; that the appraisal of the new property might have come in lower than we needed to pay back the IRA, that the loan might have been held up longer than the 60 days, etc.

It was a risk but it worked out well because all our ducks were in a row for the loan before we even found a property.

So if you purchase with cash, even from a retirement vehicle, you avoid the seasoning requirement and can refi right away?

@Stephanie Cabral , we didn't have to wait 6 months, but the refi was based on the purchase price when we closed. Had we waited 6 months for seasoning (and we couldn't) it would have been based on the value. Which definitely went up.

You're welcome @Robin Secord , good luck!

If your buy the property with your 401k funds and then own the property free and clear and worried about paying back your 401k, just make sure your rent covers your payment back to your 401k plan?  Another option to consider is if the property is free of any liens on it which means technically it has lots of equity, then you can always get a refi through a private lender and pull some money out to cover expenses and several months of interest payments back to the private lender. This is not a long term solution but would give you a couple of years by which you could refi with a traditional bank and get much better rates and pay back your 401k and hopefully improve your cashflow from the property. We provide such refinancing on investment properties. Feel free to contact me for more info. Good luck!

Could you elaborate? I'm not sure I understand what you're saying.

Sorry @Dominique Alexis , I wasn't responding to you. I was responding to someone above you. I'm new to the BP forums and haven't quite got a feel for how everything is set up. I understood what you were saying and I appreciate the response.

I am actually in doing this now. I got a 401K loan, and put it in my bank account, so I would be able to show POF when I make cash offers on properties. I plan to just make the payments over 5 years, and consider it a quick way to get a 50K chunk of money out of my 401K. Sure I'm paying interest on the money, but that interest is going directly back into my 401K, so I'm basically giving myself a 4.5% interest loan.

I'm sure some tax or accounting pros will have all kinds of reasons why this is bad,  but it makes sense to me.  

If I lose my job, the remaining balance that I can't pay off will be considered a disbursement.  I'll pay a 10% penalty on that amount.  It's risky, but a risk I'm willing to take.

I think I can earn way more on that 50K in real estate than the stock market.

@Alan K Auman

Do a Google search on Delayed Financing Exception (DFE).  This is a Fannie Mae rule on cash-out refinance that allows you to pay cash (even if funds are borrowed as long as no lien on the property) and do a cash-out refinance almost immediately.  This means you can pull together a 401k loan, refi your car, do a credit card cash advance, and get an unsecured loan from uncle Billy to buy a house and then start the refi process immediately - no seasoning.  In fact, the rule states you MUST close the refi no MORE than 6 months from purchase close.

I did 3 of these in the last 8 months. The catches are: funds must be sourced (ie - any funds not shown on your bank account for the last 60 days (2 statement cycles) need to be explained - a loan is OK as long as no lien on the property); most lenders don't offer all the things Fannie Mae allows, so you'll need to talk to mortgage brokers who work with investors or investor friendly banks until you find one - even fewer allow the funds to be borrowed (within the last 60 days/2 statement cycles before purchase); the refi loan cannot exceed the LTV limit specified for the number of properties you have or the purchase price plus closing costs - whichever is lower, so if you got a great deal but it has significant rehab, you may be better off using hard money so you can maximize your leverage - or wait 6-12 months to season for a regular cash-out if you are not in a hurry to get the cash back out (NOTE: after 4 properties you can't do a regular cash-out, but you can use the DFE through all 10 available Fannie Mae loans - though LTV limits may drop from 80-75-70 along the way).

The deals I used this for were good cash flow (1.2-1.3% rent/price) with relatively low equity capture after rehab and financing (0-10k) and rehab in the range of 8-20k.  ARVs were 95-115k with purchase prices from 72-81k.  

PM me for more details if you want. 

@Stephanie Cabral

See my reply above about Delayed Financing Exception. A nice tool for a certain range of price+rehab to ARV deals.

Hi! I realize this thread is older but I am thinking about taking out a 401k loan to buy a >50k property for all-cash. The only issue I see with this is that the loan must be paid back within 5 years which means the monthly payments would be sky-high. How can I refinance this loan and repay the 401k quicker than the 5 years? Will the banks still take into consideration our DTI? What were you guys saying about source of funds being in your bank account for 2 months? Does that mean you have to take the loan out and wait 2 months before purchase or wait 2 months after purchase? I'm really trying to figure this out so I can use these underutilized funds to go after more deals. Thank you for your help!!

@Jackie Botham  

The 401k participant loan can be paid back early without prepayment penalties.

@Jackie Botham   don't think the loan has to be fully amortizing.. it could be interest only.. maybe I am wrong.. but interest only with a balloon just need to make sure you have the balloon covered but if you refinancing in a year or two this should be no issue

Interesting thread! Does this have to be a self directed IRA or can it be any variety?

@Erik Stewart

You can't borrow from a SD IRA, you can "withdrawal" from one with potential penalties.

@Jackie Botham ,

You mentioned a greater than $50K ("> 50K") property.

Remember that your limits on 401(k) loans are 50% of the vested amount or $50K, which ever is less.

Oops! I meant a less-than 50k property. We were going to buy one for 45k recently but the payments would have put us into negative cash flow. I'm waiting for the leases to expire on my other 2 rentals so I can get those rents up to market and be able to cover the 401k loan payments with some of that cash. As far as I know, the only way to get a payback term longer than 5 years is if you are purchasing an OO home. So, stuck with 5 year amortization if I want to utilize the 401k loan route for an investment property.

@Jackie Botham  

I'm in the process of doing exactly what you are talking about. I purchase my SFH inverstment with money I borrowed from a 401K and I am in the process of doing a cash out refi. I did have to wait the 6 months seasoning to recover my rehab cost and this is on a sub 50K property. I have not crossed the finish line yet but if all goes well my loan will close at or very near to the 6 month day which will be November 6th.

The max term on the loan from the 401k is 5 years (unless used to purchase primary residence) and the payment must be amortized, can't be interest only with balloon on the back. 

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