401(k) loan to fund real estate purchase

5 Replies

Wanted to start thread on pros/cons on using a 401(k) loan to finance real estate purchase.  From the research I've done (links below) sounds like a bad idea but curious if anyone has different perspective.

Research links:

https://www.fidelity.com/viewpoints/retirement/be-cautious-about-401k-loans

http://www.bankrate.com/finance/retirement/4-reasons-to-take-out-a-401k-loan-1.aspx

http://www.marketwatch.com/story/avoid-the-temptation-of-dipping-into-your-401k-2015-06-04

Online calculator to analyze cost of 401k loan: 

http://www.marketwatch.com/story/avoid-the-temptation-of-dipping-into-your-401k-2015-06-04

Thanks all!
-Charlie

Non-recourse financing can be a great way to fund real estate purchases, of course there's a good and bad way to do it. You will need to know the rules and cost specific to your own 401k, each company or accommodator is a little different. As an agent I have helped a friend buy a fix-n-flip through his self directed IRA and I know we have had a few investor clients use their 401k's to but long term rentals. My friend bought for $155k, rehabbed for $40k, and sold it for $237k. All the money had to go back into his IRA and he could not touch the property, so I'd count on having a property manager or project manager.

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@Charlie Gruber this is a bit of a tangent, but have you considered just investing in notes in order to achieve a similar goal? What I mean is instead of investing in a property with leverage, what if you could buy the note for 50% of what the property is worth, and work towards an exit strategy from there? 

I like the ability to create either cash flow, capital gain, a rental, or seller financing to make a new loan as exits in the note business. If you decide you don't like the consequences of taking a loan out from your 401(k) to finance a property, I know of a company that helps beginners get into the note business with limited risk. 

Kevin

Many people are confused between 401k loan and a non-recourse loan.

What @Charlie Gruber wants to discuss was the pros and cons of borrowing from a 401k to buy real estate. You borrow the money and then use it to buy the property, so the title can be under your name, not the 401k. The upside is that you can access the 401k fund while still working for the employer, without paying tax and penalty. The downside is that the loan has to pay back within 5 years, there is a maximum limit, and if you leave the job, the loan will become due in full. 

What others mentioned was a non-recourse loan for self-directed IRA/401k. This usually happens when a person has already rolled over an old 401k into a self- directed plan. In this case, you can invest directly in properties, which is held by the IRA/401k plan. If you need to get additional financing, then a non-recourse loan would be a great help. But in this case, it's not a loan from the retirement plan to you, but rather a loan from another lender to your IRA/401k. If Charlie, for example, has money in a 401k with his current employer, he may not be able to rollover the money into a self directed account yet, and isn't able to use this strategy. For those who have money in an old 401k, then it can be a great way to invest.