Using a self directed 401k loan as a down payment - best way to exit?

6 Replies

Hi all. I'm going over my options to purchase a buy and hold investment property. I don't want to purchase the property inside my self-directed solo 401k, so I'm considering taking out a loan from the 401k and pairing that with conventional financing. I've searched the forums and read a lot of the pros and cons of using 401k loans as down payments. 

Assuming I pursue this idea, I can't find in the forums where anyone has mentioned the following:

1. Since a 401k loan is required to be paid off in 5 years, the payments are pretty high despite the low interest rate. Therefore, it's been extremely difficult for me to find a property that can even break even with this scenario, let alone cashflow after all expenses. I'm a newbie, so maybe I'm missing something here. To those who have had or are using 401k loans as down payments, how are you cashflowing with two loans on a property?

2. Is your exit strategy based on refinancing the property as soon as it has seasoned in order to pay back the 401k loan? I just can't see having this extra 401k loan on a property any longer than necessary since it's such a huge hit to any cashflow.

Thanks for any wisdom you can offer.

1. Tough to cashflow.

2. Yes, you want to get the property seasoned, refi it and cashflow.  

Look for the post about the "truth about lending" by the guy that's been in the mortgage business a long time.  (link it please someone)  

The seasoning requirements vary a lot by lender.  If you find the right lender you can refi in a month or two.

Thanks @Dana Whicker. I've kept hearing that season periods are 6 months or a year, so this quicker 1-2 month turnaround could make this 401k loan doable, especially if I can rehab/add value to the property in order to meet refi requirements (70% LTV?). Thanks much.

Yeah that's the article I was thinking of.  That guy is providing some great information for the community.

@Tom Waddell

If you must borrow from your solo 401k, it is always best to borrow from your Roth solo 401k funds over pretax solo 401k funds.

Thanks @Mark Nolan . Yes, I'm trying to figure out how to take a massive tax hit and move my funds from the pre-tax side to the Roth side this year.

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