Using 401K for RE investing

8 Replies

@Enrique Rodriguez   Yes, short term only, I've used it for rehabs, funding down payments, items like that.  Short term as in under one year ideally, where I know I could repay the funds quickly.  

There are risks of course, largest one being that if you lose your job, the funds are due back within 60 days or it's a taxable event.  Also the opportunity cost of the current 401k investments.  Those are things you'll have to weigh in your decision.

Welcome to BP!

- Tom

@Enrique Rodriguez ,

I'm using my 401k to do both: own rental properties and being a private lender (my 401k acts as a bank lending money to other investors who own). Hundreds of my clients done this as well. 

Here is an older discussion on this topic that you may find very helpful:

And if you search the forum you will find many more... Hope this helps!

@Enrique Rodriguez a 401k loan only allows you 50% of the loan value; look into Rollover for Business Startup (ROBS). You can do this yourself if you are savvy about setting up companies and stock distribution, or have a company set this up for you. ROBS affords you access to all the money in your 401k without the risks of a 401k loan. 

A lot of clients I've worked with have used their 401k, IRA, and self directed accounts to fund their down payment requirements, used the accounts for "reserves," to meet loan requiresments to get to docs, or used the accounts short term loan options to fund their rehabs/etc.

Like others have mentioned, @Dmitriy Fomichenko you'll have the 60 day repay ability if you leave your job (in many cases) or if you make a withdrawal before the funds/loan become taxable.

These accounts can be great in real estate investment and planning. There are pitfalls of course as well so plan accordingly.

One major pitfall is the limited access or liquidity in larger accounts since loan parameters for solo 401k or SD 401k's are 50% or 50k whichever is lower. This leaves the retirement account owner to invest mostly within the plan (self directing) or to withdraw the funds to invest outside the plan.

If you have a good accounting professional at your side, there are ways to use REI purchases to help offset your 401k/IRA/retirement plan withdrawals thereby creating a "wash," so strategies like this can mitigate your tax impact.

I've worked on different cases where we've done rollovers from pre-tax to roth plans/withdraw while mitigating the tax impact of getting the funds out.

Lenders are for the most part still behind the times when it comes to self directed accounts. Underwriters still ask and are confused about self directed accounts often times. I find my self explaining to them the differences to keep files in tact and approved.

Best of luck on your use of retirement plans in REI and lending.

@Enrique Rodriguez

Yes, a lot of folks on Bigger Pockets use self-directed IRAs and 401ks to invest into real estate. If you're self-employed, the Solo 401k plan will likely work better for you.

A few Solo 401k benefits:

  • Compared to an IRA, Solo 401k contributions limits are roughly ten times higher.
  • There is no custodial requirement for the 401k.
  • The Solo 401k can allow you to borrow funds from the plan, unlike with IRAs
  • You don't need the additional expense and administration of an LLC to have checkbook control.
  • There is a built in-Roth component whereas IRAs are either traditional or Roth, not both.
  • A spouse can also participate in the same Solo 401k plan.
  • The Solo 401k has additional tax benefits over an IRA when investing into real estate using leverage.