should i cash in 401k money to buy real estate

Question

My wife and I currently have  2.5 million in single family real estate.  we are wanting to buy the land, build the building, and open a fast food franchise.

My question is should we use our old 401k plans.  is taking the penalty of 10% worth it.  we currently have 450k in 401ks.  we can offset the income with our FFE purchase.

Thoughts?

Basit Siddiqi · Answer

I took out all the money from my 401K 5 years ago to start my real estate investments.I have zero regrets.The appreciation and cash flow over these 5 years is more than the 10% penalty + whatever appreciation that I would have seen.Plus, now the money has no restrictions and I can do whatever I want with it.Plus, it allowed me to invest in real estate sooner allowing my real estate knowledge to be much greater now.

Scott E. · Answer

You will not be losing money due to the fees over the long run.

The average return for the last 30 years for the S&P500 was 9.89%. Your 401k hopefully is invested in a similar pool of stocks. Meaning if you let that money sit, it will absolutely grow over time.

I'm all about diversification, so my vote is don't touch that 401k with a 10 foot pole.

Imagine getting to retirement with your $2.5M in real estate, your fast food franchise, some other real estate you buy along the way, your 401k, a Roth IRA, some dividend paying stocks, and a little pile of gold and silver. It's good to be diversified.

Zach Wain · Answer

What Scott said!  Diversification is the right play IMO

Garrett Christensen · Answer

It's generally not advisable to use retirement savings, such as 401(k) plans, to fund a business venture. These types of accounts are intended to provide income during retirement, and taking money out of them early can have serious consequences, including incurring a 10% penalty on the amount withdrawn.

That being said, every situation is different and it's important to carefully consider all of your options before making a decision. One thing to consider is the return you'll make on the franchise and just count the 10% penalty as an additional expense. If it's still a solid return then it might be a good option.

Ray Johnson · Answer

I'm not sure what the $2.5 million in SFR real estate equates to, If you're in certain parts of California, it could be one or two properties leaving no room for alternative plans, however if it's in the Mid-West it could be 10-15 properties with room to sell a few and do your project. I would not recommend using your 401K to cash-out for the project. try using your 401K as collateral/leverage for any new loans to do the project and save yourself the 10% penalty, and tax hit.

Zach Wain · Answer

To each their own.  I am a proponent of basic diversification in asset classes to reduce inherent risk.  Or, put all your chips into one bucket and hope that its the right one.  I prefer to spread risk.

Basit Siddiqi · Answer

I am not sure timing matters too much.in 2005-2009, the overall market tanked, meaning that investments inside and outside of a 401K would have tanked.Many people saw their 401k balances decrease significantly from 2005 and the few years after.Also starting your own business, that is a risk that everyone faces when starting your own business.Business can go up 0% or to 1000%. Obviously not for everyone as there are a lot of skills that go into starting your own business(which is normally not taught) but I would 100% bet on yourself than to put your money into a bunch of other companies.

Adah N. · Answer

@Zach Wain

I think they would still be up/fine if they made the move in 2005 but did not sell when everything tanked and do not need to sell right now.

Zach Wain · Answer

This is extremely risky!  I am glad it paid off for Basit, but that is good timing.  Ask someone who made that same move in 2005 instead of 2017 and see what their thoughts are.  I have seen people blow their entire 401k on a business idea and then they are ruined later in life.  401k should not be touched in my opinion.  Too risky.  Beg and borrow before you touch your 401k

should i cash in 401k money to buy real estate

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