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Carlos Silva
  • Argyle, TX
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should i cash in 401k money to buy real estate

Carlos Silva
  • Argyle, TX
Posted Dec 19 2022, 11:26

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?

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Garrett Christensen
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  • Orem, UT
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Garrett Christensen
  • Real Estate Agent
  • Orem, UT
Replied Dec 19 2022, 11:34

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and taking money out of them early can have serious consequences, including incurring a 10% penalty on the amount withdrawn.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.

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Ray Johnson
  • Irvine, CA
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Ray Johnson
  • Irvine, CA
Replied Dec 19 2022, 12:07

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.

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Dmitriy Fomichenko
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Dmitriy Fomichenko
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Replied Dec 19 2022, 12:19
Quote from @Ray Johnson:

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.

You can't use 401k as a collateral, prohibited by the IRS. 

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Carlos Silva
  • Argyle, TX
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Carlos Silva
  • Argyle, TX
Replied Dec 19 2022, 12:35

I thoughts are the 401k money is stagnant and not appreciating much.  We will be losing money due to fees over the long run.  I figure we will lose 45k in penalty.  However if the 2million dollar appreciates at .03 it will be 60k in appreciation. would offset the penalty over the long run.

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Basit Siddiqi
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Basit Siddiqi
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Replied Dec 19 2022, 19:28

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.

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Carlos Silva
  • Argyle, TX
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Carlos Silva
  • Argyle, TX
Replied Dec 19 2022, 19:58
Quote from @Basit Siddiqi:

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.


 This is what I’m thinking.  to have control now rather than 15-20 years from now

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Moe Khan
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Moe Khan
  • Rental Property Investor
  • Fremont, CA
Replied Dec 19 2022, 20:12
Quote from @Carlos Silva:

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?

@Ray Johnson there are two options for you. 

1) You can take a loan from 401K and pay 6% interest. That interest is paid back to you. Please check how much you can withdraw on your account. I have bought a property by taking a loan this way. Return on property is way better than boring 401K. 

2) Self-Directed IRA - Heard about it but didn't get the chance to explore it.

https://www.forbes.com/advisor...

All the best...

@Ray Johnsonundefined

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Randy Bloch
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Randy Bloch
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  • Minneapolis
Replied Dec 20 2022, 02:54
Can you elaborate on the comment 401k money is stagnant?  Do you mean for the year 2022?  The past ten years S&P (including dividend reinvestment) returned 232% and 12.7% annually so far from stagnant and it is 100% passive and offers some diversification with you real estate portfolio.  If you are worried about fees have you considered rolling it to IRA so invest in low cost ETF?

My understanding of fast food franchise is the operating margins are quite thin and you need multiple locations to be able to afford a FT restaurant manager.  In many cases you are buying second job.

   



Quote from @Carlos Silva:

I thoughts are the 401k money is stagnant and not appreciating much.  We will be losing money due to fees over the long run.  I figure we will lose 45k in penalty.  However if the 2million dollar appreciates at .03 it will be 60k in appreciation. would offset the penalty over the long run.


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Scott E.
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Scott E.
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Replied Dec 20 2022, 07:49
Quote from @Carlos Silva:

I thoughts are the 401k money is stagnant and not appreciating much.  We will be losing money due to fees over the long run.  I figure we will lose 45k in penalty.  However if the 2million dollar appreciates at .03 it will be 60k in appreciation. would offset the penalty over the long run.


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.

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Carlos Silva
  • Argyle, TX
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Carlos Silva
  • Argyle, TX
Replied Dec 20 2022, 11:29
Quote from @Randy Bloch:
Can you elaborate on the comment 401k money is stagnant?  Do you mean for the year 2022?  The past ten years S&P (including dividend reinvestment) returned 232% and 12.7% annually so far from stagnant and it is 100% passive and offers some diversification with you real estate portfolio.  If you are worried about fees have you considered rolling it to IRA so invest in low cost ETF?

My understanding of fast food franchise is the operating margins are quite thin and you need multiple locations to be able to afford a FT restaurant manager.  In many cases you are buying second job.

   



Quote from @Carlos Silva:

I thoughts are the 401k money is stagnant and not appreciating much.  We will be losing money due to fees over the long run.  I figure we will lose 45k in penalty.  However if the 2million dollar appreciates at .03 it will be 60k in appreciation. would offset the penalty over the long run.


I’m just saying in my situation it has taken me 17 years to build 500k in 401kretirement.  In that same time i’ve bought 2.7 million in real estate, cash flow 30k a year and have net value of 1.5 million plus in real estate alone.

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Zach Wain
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Zach Wain
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  • Scottsdale, AZ
Replied Dec 20 2022, 12:48
Quote from @Carlos Silva:
Quote from @Basit Siddiqi:

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.


 This is what I’m thinking.  to have control now rather than 15-20 years from now


 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

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Zach Wain
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Zach Wain
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Replied Dec 20 2022, 12:50
Quote from @Scott E.:
Quote from @Carlos Silva:

I thoughts are the 401k money is stagnant and not appreciating much.  We will be losing money due to fees over the long run.  I figure we will lose 45k in penalty.  However if the 2million dollar appreciates at .03 it will be 60k in appreciation. would offset the penalty over the long run.


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.


 What Scott said!  Diversification is the right play IMO

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Adah N.
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Adah N.
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Replied Dec 20 2022, 19:33

@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.

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Basit Siddiqi
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Basit Siddiqi
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Replied Dec 21 2022, 09:48
Quote from @Zach Wain:
Quote from @Carlos Silva:
Quote from @Basit Siddiqi:

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.


 This is what I’m thinking.  to have control now rather than 15-20 years from now


 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

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.

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Zach Wain
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Zach Wain
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Replied Dec 21 2022, 10:22

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.  

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