Anyone use 401k to purchase investment properties?

Question

Has anyone used their 401k savings to purchase investment properties or is the penalties and being taxed twice just too much?  Thanks in advance.

Mariano Medrano · Answer

I took a loan out against my 401K to buy a courthouse auctioned house. I utilized the BRRRR strategy to do it a few more times until I could repay the 401K loan off. Now I don’t need to barrow from my 401K and I have 9 rental properties. I took like 4 BRRRR’s before I decided to pay off my 401K loan and by that time I was able to fully fund the next projects from just using the BRRRR strategy. In my opinion it’s ok to use your 401K as a loan option but I’d only take an early distribution if you’re planning on going hard and full time real estate investing. Happy investing.

Dmitriy Fomichenko · Answer

@Paul Kennedy, if you are considering taking early distribution from your 401k to invest in rental properties you would have to pay taxes in penalties on the amount you pull out from your 401k, that means you could end up losing as much as 40% or more, depending on your tax bracket. I don't think that is a good idea because you can invest in alternative assets inside of an IRA or 401k. You just need to convert to self-directed IRA. Now you can invest into single-family rentals, multi-family syndications, private lending, note funds, etc. etc.

Brian M Sweeney · Answer

@Paul Kennedy don’t do it..stay diversified. Keep the money that’s invested in the market, invested in the market. Use other funds for real estate investments or other peoples money. Stay disciplined. Real estate investors are always chasing cash.

Tom S. · Answer

@Paul Kennedy  I would never do it as a distribution, as posted above it can be a 40% tax hurdle to overcome.

I have used 401k loans short term before.  For example, I was able to get a loan for 75% of the purchase price and used seller financing for the other 25%.  I had to have the 25% up front however, so used my loan for that, and then at closing, executed the seller financed 2nd mortgage that essentially reimbursed me and the 401k loan.

So I was able to get nearly 100% financing and the 401k loan was just a $100 admin fee.

Carl Fischer · Answer

@Paul Kennedy

Yes and it’s great.

George Blower · Answer

@Mariano Medrano

• If you are self-employed (i.e. active self-employment earned income separate from your w-2 income) with no full-time w-2 employees, you can set up a Solo 401k and then rollover your 401k funds once you leave your current job.
• You could then take a loan of up to 50% of the balance not to exceed $50,000.  Please be sure to select a Solo 401k plan provider which allows you to take a loan and will prepare the required 401k loan documents.
• The repayment terms are equal monthly/quarterly payments (as you prefer) of principal and interest (e.g. prime + 1%) spread over a 5 year term (or longer if you will use the loan to purchase your primary residence).
• There are no prepayment penalties and no restrictions on what you can do with the proceeds of the 401k loan.
• Please note that you are obligated to pay back their 401k (regardless of the performance of your real estate investment).

Justin Windham · Answer

@Paul Kennedy

Do you want to create income for yourself, for your retirement account, or both? There are prohibited transaction rules that will generally get in the way of you using your retirement account to generate income for yourself in the short term. That said, self-directed IRAs and 401ks can be great tools to create retirement growth for your benefit later on. This can be a pretty fantastic supplement to your own investing. You'll just need to be clearly identify your goals and then evaluate your options for achieving them.

George Blower · Answer

@Paul Kennedy

• If you are self-employed (i.e. active self-employment earned income separate from your w-2 income) with no full-time w-2 employees, you can set up a Solo 401k and then rollover your 401k funds once you leave your current job.
• You could then take a loan of up to 50% of the balance not to exceed $50,000.  Please be sure to select a Solo 401k plan provider which allows you to take a loan and will prepare the required 401k loan documents.
• The repayment terms are equal monthly/quarterly payments (as you prefer) of principal and interest (e.g. prime + 1%) spread over a 5 year term (or longer if you will use the loan to purchase your primary residence).
• There are no prepayment penalties and no restrictions on what you can do with the proceeds of the 401k loan.
• Please note that you are obligated to pay back their 401k (regardless of the performance of your real estate investment).
• As an alternative to taking the loan, you could even purchase the investment property directly using funds in your Solo 401k (assuming you select a Solo 401k plan provider which allows you to invest in real estate).  If you don't have enough Solo 401k funds to purchase the property as an all-cash deal, you can combine your Solo 401k funds with non-recourse debt to purchase the investment property.  Learn more about non-recourse lenders here: https://www.biggerpockets.com/member-blogs/9552/70408-ira-and-solo-401k-non-recourse-lenders

Anthony Wick · Answer

@Paul Kennedy

Cashing out a 401k is a horrible idea. Maybe it could have worked in 2009 when the market was low. But now? Huge taxes (although I don’t know what you mean by being taxed twice). If you can, look into a 401k loan. Those numbers might work.

Anyone use 401k to purchase investment properties?

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