401(K) Loan To Buy Into Syndication or Equity Fund

6 Replies

Hello Hivemind!

I'm hoping someone can lend me a hand on this math problem...

HYPOTHETICAL: I have a $100,000 401(k) account. I can take a loan for $50,000, with a payback period of 5 years and interest rate +1 point above prime lending rates. (So about 4.25%) **NOTE: Anything paid back will be deposited straight back into my 401(k), including interest**

Scenario: I would like to leverage this loan and invest into a 1) Syndication deal like a MultiFamily Apartment or 2) A Equity Fund that buys Commercials Multi Family RE. 

Let's pretend both 1 & 2 have industry average returns of 7% (Cash on Cash) and Preferred Return of 14% over 5 years. 

A $50K Investment would provide:

  • $3,500/Annual CoC, $291/Mo CoC
  • $17,500 return in 5 years through CoC alone
  • $4,000 + return of capital ($50,000) year 5
  • Total Return is $71,500

A $50K Loan would cost:

  • $868.41 Monthly installment taken out of paycheck over 60 months
  • $10,421 Annual payback
  • I will need to stay employed for the next 5 years at the same job

My thoughts: 

Obviously, the cash flow from the investment will not cover the loan installments. But the cash flow would be added to the balance sheet. I would be paying money out of my W-2 paycheck to re-pay my loan to myself in my 401(k), thereby adding to the balance sheet. 

At the end of 5 years, I would technically be $21,500 'richer' on the balance sheet due to the investment, as well as $50,000 added additionally to the balance sheet from repayment of the loan from my W-2.

I'm literally taking money out of a tax-advantaged account that I can't touch until retirement, without fee's and penalties, and using it to invest in cash flow assets that I will get back at the end of the investment period. 

My question is:

What am I missing? I'm sure there are tax advantages which are a given, but I can't help think this is something I should avoid doing. Technically, from a loan perspective, my cashflow would pay almost half the loan at $21,500, and my W2 would pick up the remainder. So the actual 'cost' to me is $577.41/mo & $34,644.6/total repayment after 5 years.

What are the disadvantages? 

Is my thinking/numbers correct? 

Anyone ever try something like this?

Looking forward to what others think. 



Personally, I would find another way to fund this investment. Can you transfer to a Solo 401k or SDIRA?

The negative cash flow is really what sinks it for me. Plus, remember that this deal may not meet its projections (because that is always a possibility). In which case you'll still have to work to pay off the loan.

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I wouldn't do it.

1.  You have to stay at your job for 5 years??  Risky.  I wouldn't want to be locked in (and what if you get laid off?)

2.  From personal experience, you cannot guarantee the timeline (or return projections) of syndications.... things change all the time.

Transfer the funds into a self directed or solo401(k). You can then passively invest with no tax consequences

i would say if you were GP on this hypothetical deal, then go ahead and do it. you could do a few more deals after this one and pay off the loan faster. if you are simply a LP, its risky since you have no control on how the deal goes. i did a similar strategy with buying a duplex but i have full control of the asset and how it is run. if you are going to be passive i would try the solo 401K route.   

I assuming this is a trad 401K that you can not roll over or withdraw w/o penalty, and therefore the elaborate scheme.  

Honestly, I don't see the benefit of earning what could be Cap Gain money, but put it in a deferred account to someday pay earned income rates on it.  If it is Roth, maybe, but that does not avoid the job change risk.

I know you want it now, but I think you need to redirect excess 401K deposits (above match) and delegate the would be payments to saving for a real money investment.