@Eric Ferrer, I'm of the opinion that REI can perform better than a 401k and I hate the fact that you have to pay a penalty fee for withdrawing 401k money early. For people that can't control themselves enough to keep from spending their retirement before they retire, they probably need those legal guard rails but I'd rather take my chances. So maybe before you cash-out your 401k, see if you can control yourself enough to save up half of the down payment. If you can do that you're probably safe to play with your money as you see fit. I've also heard of something called a "solo 401k" where you can decide how and where to invest the money. It might be worth investigating.
All that being said, I also think that you should have a diverse portfolio, so keep some money in your 401k (or other, non-real estate market) to hedge your bets against another real estate market downturn.
Hope that helps!
Brian - Eric is talking about taking a loan against the 401K and not necessarily to withdraw the funds. Taking a loan against the 401K is not subject to penalties.
Rental Property Investor · Parkland, FL · Member since 2018 · 2 posts · 2 votes
7y
@Justin Robert you are right. I should've provided more context. My apologies. To answer you questions, I'm most interested in buy & hold strategies with multifamily and SFRs.
My current situation is I currently live in Parkland, FL in a one story, zero lot, 3/2 SFR that I bought in a short sale in 2013 for $235k (comps around my area are between $400-450k today). In 2013 when I bought it, I didn't know about REI so I didn't realize what I had at first (Parkland is one of the most desirable areas for families in FL). I ended up refinancing twice since 2013 and took a $44k HELOC on the property as well. Currently my total debt on the property is $357k, 30 yr fixed 3.99% rate on the 1st mortgage and 6.5% fixed rate on the HELOC on a 20 yr term. Most of the equity I took out was put back in to rehab the property and redid that backyard/patio deck,refinished the pool, new roof, new driveway, paint, landscaping, resurfaced kitchen cabinets, etc. My total monthly expenses on this property are $3047 ($1554/m P&I, $206/m HOA, $408/m taxes, $445/m home insurance, $60/m pool maintenance, $36/m pest control (backyard is adjacent to a preserve), $12.5/m AC maintenance).
Also, I have about $130k in my employer's 401k (don't match) and can loan out approximately $35-40k or so on a 5 or 10 year term depending on what I use the funds for. I currently have a loan on my 401k of $9800 that I used to purchase the house referenced above in 2013.
the options I have been considering to purchase my next property are the following:
1. buy another SFR as my primary residence and rent my current home (rents for my type of property are anywhere from $3000-$4000/month).
2. stay in my current home, use $401k funds to purchase a multi family (a plex to start out potentially), pay down the HELOC and build up cash to invest in RE.
3. stay in my current home, use $401k funds to partner up with someone, pay down the HELOC and build up cash to invest in RE.
Sorry for the long response. These are some of the options I have been thinking through but I'm sure there are other options and things I'm not thinking about given my experience.
Rental Property Investor · Coral Springs, FL · Member since 2017 · 2 posts · 1 vote
7y
@Eric Ferrer, I'm of the opinion that REI can perform better than a 401k and I hate the fact that you have to pay a penalty fee for withdrawing 401k money early. For people that can't control themselves enough to keep from spending their retirement before they retire, they probably need those legal guard rails but I'd rather take my chances. So maybe before you cash-out your 401k, see if you can control yourself enough to save up half of the down payment. If you can do that you're probably safe to play with your money as you see fit. I've also heard of something called a "solo 401k" where you can decide how and where to invest the money. It might be worth investigating.
All that being said, I also think that you should have a diverse portfolio, so keep some money in your 401k (or other, non-real estate market) to hedge your bets against another real estate market downturn.
To me, a 401k is an investment vehicle and not an asset. So the common "real estate vs 401k" argument is a bit misguided. The Solo 401k (as you mentioned) is a vehicle that can combine the benefits of real estate as an asset with the tax advantages of a qualified plan. While this can be a savvy way to increase the returns within a retirement account, it does not create income immediately for the participant. For this reason, I think it's a great strategy in addition to (not as a replacement for) your own investing outside of retirement funds.
@Eric Ferrer, I'm of the opinion that REI can perform better than a 401k and I hate the fact that you have to pay a penalty fee for withdrawing 401k money early. For people that can't control themselves enough to keep from spending their retirement before they retire, they probably need those legal guard rails but I'd rather take my chances. So maybe before you cash-out your 401k, see if you can control yourself enough to save up half of the down payment. If you can do that you're probably safe to play with your money as you see fit. I've also heard of something called a "solo 401k" where you can decide how and where to invest the money. It might be worth investigating.
All that being said, I also think that you should have a diverse portfolio, so keep some money in your 401k (or other, non-real estate market) to hedge your bets against another real estate market downturn.
Hope that helps!
Brian - Eric is talking about taking a loan against the 401K and not necessarily to withdraw the funds. Taking a loan against the 401K is not subject to penalties.
Investor · Fontana, CA · Member since 2017 · 95 posts · 59 votes
7y
@Eric Ferrer I borrowed $50K from my 401K to buy an investment home. I’m surprised more ppl aren’t doing it.
50K over 5 years, payments are about $440 per paycheck. I used to contribute 15-20% of my paycheck to my 401K, after taking out the loan I bumped it down to 3% so my take home pay is about the same.
With me kicking in a little bit money saved, I bought a SFR in Ohio for $62K and now it's paid off. It rents for $975/month. After taxes and insurance, I save every dime so I can purchase another property. It worked so well, we did the same thing for my wife's 401K. Now we have 2 homes in Ohio paid off, saving every dime for a few months and now we are in position to put a healthy down payment on another home.
Rental Property Investor · Sioux Falls · Member since 2018 · 11 posts · 1 vote
7y
I also took out a 401k loan to buy 2 single family homes. I only recommend doing this if you feel you are safe with your current employment situation. thanks,
Real Estate Investor · Burlington, VT · Member since 2010 · 2k+ posts · 1k+ votes
7y
@Eric Ferrer Yes, as James mentioned above, be careful about employment and have a Plan B.
If you lose your job, you have to pay the loan back within 60 days or else it's taxable income. I had it happen to a friend and not only did he owe money for that, the increase in taxable income bumped him up into a higher tax bracket. So a higher tax rate percentage on everything else, and ended up owing the IRS about $15k, unfortunately.
