Thoughts on 401K loans
Member since 2023 · 23 posts · 8 votes
Thoughts on 401K loans
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Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes
1y@Josh Duncan, a few thoughts:
1. In terms of maximizing your returns you want to compare the interest to an alternative. For example is a personal loan from a bank is 7.5 % that you could use as a down payment (after its seasoned), and your 401k loan is 4.5% but the 401k is expected to return 7.5% per year the money you save on one end you miss out on the other end basically and if your 401k returns are 20%, then you lose out significantly.
2. Reserves! You didn't mention having other money available. So, if you don't have reserves you NEED them. The more rentals you have the more risk there is to having a bad situation crop up.
Right now, even if you have no reserve money saved, if a bad situation came up you could tap that 401k to cover the situation.
3. Changing jobs! I believe if you change jobs or leave that job, you have to pay that loan back or else it counts as a distribution. So, it would then potentially cost you a penalty for early withdrawl and also income tax owed on it.
Note: This could happen NOT by your choice with a layoff. So, it is something to be wary of with the liklihood of choppy financial waters ahead.
4. If you are doing a live-in flip why not use that equity for a down payment with a refi or HELOC?
5. If your goal is to grow faster, buying rent ready properties isn't the usual way to do that if you have limited funds to start with. Many investors in that situation look for value-add opportunities. That is why BRRRR (Buy Rehab Rent Refinance Repeat) is so popular.
10 Replies
- Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes1y
@Josh Duncan, a few thoughts:
1. In terms of maximizing your returns you want to compare the interest to an alternative. For example is a personal loan from a bank is 7.5 % that you could use as a down payment (after its seasoned), and your 401k loan is 4.5% but the 401k is expected to return 7.5% per year the money you save on one end you miss out on the other end basically and if your 401k returns are 20%, then you lose out significantly.
2. Reserves! You didn't mention having other money available. So, if you don't have reserves you NEED them. The more rentals you have the more risk there is to having a bad situation crop up.
Right now, even if you have no reserve money saved, if a bad situation came up you could tap that 401k to cover the situation.
3. Changing jobs! I believe if you change jobs or leave that job, you have to pay that loan back or else it counts as a distribution. So, it would then potentially cost you a penalty for early withdrawl and also income tax owed on it.
Note: This could happen NOT by your choice with a layoff. So, it is something to be wary of with the liklihood of choppy financial waters ahead.
4. If you are doing a live-in flip why not use that equity for a down payment with a refi or HELOC?
5. If your goal is to grow faster, buying rent ready properties isn't the usual way to do that if you have limited funds to start with. Many investors in that situation look for value-add opportunities. That is why BRRRR (Buy Rehab Rent Refinance Repeat) is so popular.
- Financial Advisor · FL · Member since 2024 · 442 posts · 99 votes1y
When thinking about using a 401(k) loan for real estate, view it not just as an access point for funds, but as a strategic part of your overall financial plan. While it’s tempting to see the low-interest, self-repayment setup as a win, the key question to ask is whether the opportunity cost justifies the move. You’re pulling money from a long-term compounding vehicle to fund a potentially higher-risk asset. Can your real estate investment outperform the long-term returns of your 401(k), net of taxes and penalties if something goes sideways?
Another angle to consider is liquidity and flexibility. Real estate investing often demands reserves for unforeseen expenses. Using a 401(k) loan reduces your emergency liquidity, which could make the investment riskier if unexpected costs arise. Instead of tying up your retirement funds, tapping into financing specifically designed for real estate investors can keep your portfolio diversified and your retirement intact.
Leveraging your 401(k) is your personal decision, but framing it within the broader context of balancing risk, liquidity, and opportunity cost can clarify whether it’s the best tool for your goals.
Best regards, Stevan
- 1yRene HosmanPro MemberRental Property Investor · Denver, CO · Member since 2024 · 583 posts · 653 votes
Quote from @Josh Duncan:
Hello all, I'm working on trying to grow my rental business and looking at different avenues for funding. My situation currently is I have 1 SFH rental that is owned by my LLC and doing well, and also I'm doing a live-in flip on my primary residence. I'd like to add another SFH to the business in the near future with the main goal being grow the business as fast as possible. Been looking at hard money loans, and also looking at doing a 401K loan from my w-2 job. Anybody had any dealings with this?
Thanks!
Josh Duncan
I'm curious if you have any money in an IRA? If so, and you're looking at a purely rental property (not to live in at any point) you could consider opening a self-directed IRA to invest in the new property without having to pull money out and pay penalties? I met with Equity Trust at BPCON2024 and have been exploring this option myself as well! https://www.trustetc.com/
- Member since 2023 · 23 posts · 8 votes1y
Thanks for the reply! At this time I do not have any money in an IRA its in an account provided by my employer. It is flexible though, in that I can roll it into any IRA at any time. I've been looking into this very thing! I am unfamiliar with being able to roll it into an IRA and THEN be able to invest it into properties. Very interested in this!! That was my whole reason for the post, trying to figure out how to use my sizeable retirement account to my benefit to grow my business of owning/managing rentals.
- Member since 2023 · 23 posts · 8 votes1y
Did some research on these options and found some unfortunate news. My retirement system doesn't allow for me to roll anything over given that I'm still employed with the company and also under 59.5 years old. This is very frustrating given that I was under the impression that I could just roll the entire retirement balances over to a IRA and then have complete control to invest that money into properties.
- 1yRene HosmanPro MemberRental Property Investor · Denver, CO · Member since 2024 · 583 posts · 653 votesAh dang! Yes if you're still employed with that company it can be difficult if not impossible to make 401k changes... You may have more ability if you have any previous 401k's from previous employers?
Quote from @Josh Duncan:
Did some research on these options and found some unfortunate news. My retirement system doesn't allow for me to roll anything over given that I'm still employed with the company and also under 59.5 years old. This is very frustrating given that I was under the impression that I could just roll the entire retirement balances over to a IRA and then have complete control to invest that money into properties.
I changed my strategy to only invest in my 401k up to matching and then put the rest of my savings into my IRA for that reason. At the point I made that decision, I didn't even know about self-directed IRAs, I just knew in general IRAs had a bit more flexibility. - Rental Property Investor · WI · Member since 2023 · 192 posts · 144 votes1y
Quote from @Josh Duncan:
Hello all, I'm working on trying to grow my rental business and looking at different avenues for funding. My situation currently is I have 1 SFH rental that is owned by my LLC and doing well, and also I'm doing a live-in flip on my primary residence. I'd like to add another SFH to the business in the near future with the main goal being grow the business as fast as possible. Been looking at hard money loans, and also looking at doing a 401K loan from my w-2 job. Anybody had any dealings with this?
Thanks!
Josh Duncan
Josh it depends on your comfortability level but I have been taking out 401K loans to fund my real estate and personally I love it. This has now become a part of my strategy going forward. When I use my HELOC I pay interest to the bank vs. my 401K loan where I pay back the interest to myself.
The opportunity cost comes from the money not growing while it's borrowed from the account. But this can work in two ways. Your money also won't go down in value if the market goes down while you have the money borrowed. Don't get me wrong the market goes up more over time then down but if you happened to take out the loan when the market was at a high point this would actually be a win for you. I am not trying in any way advising to time the market I am just making a point. I have also done the math and my account over the next 20 years will grow larger assuming a flat 7% return by taking loans then not. My other counter argument to the opportunity cost is that your money is going from one investment to another. Yes you are losing out on market gains but you are gaining appreciation on the property, cashflow from rents, tax benefits, etc..... My other positive is the money that is generated from taking out the loan can be used now vs. locked away until you are 59 1/2 years. Another draw back is short term your expenses will be higher because you are paying the mortgage plus paying back the loan but that is a short term draw back until the loan is paid back.
How it works: I have experience with my wife's company and mine, each is a little different. What I have learned is that you can borrow $50K or half your loan balance whichever is the small amount. For us we have pulled $50K each time. For my wife's account the total fees to do this was a one time $75 fee. For my account the fees are $10 per quarter while I have the money pulled out. The max loan terms we could do are 5 years. This equated out to around $480 to $500 coming out of our paychecks per bi weekly paycheck. The other thing that was nice is that you can pay the loan back as soon as possible but they didn't allow extra payments. If you wanted to pay the loan off early it had to be done as one lump sum payment. The next part that I learned, and this an IRS rule, is that you can only have an average balance of $50K out per calendar year. Meaning if you pay the loan back you can't turn around and borrow $50K again right away, you have to wait a year. How we have worked around this is by pulling $50K from my account this year, then $50K from my wifes the next year, and then repeating that cycle. That is assuming you pay the money back in the same year.
Prior to real estate my 401K was my golden goose and I would never consider touching it but now my views have changed. What's important to me is that your 401K isn't viewed as something you can just take money out of for personal use but if my 401K is there to fund my retirement and I borrow money against it to fund other retirement assets I don't see the issue.
If you have more questions let me know.
- Member since 2023 · 23 posts · 8 votes1y
@Paul Novak,
Thanks for the reply and your thoughts on this. My view is pretty much echoing what you have said. The 401k is a valuable asset but its my thought that I can use this asset to further increase my portfolio by putting that money to better use. Which gives me much more control of the money/asset management than just leaving it in the market for alot more years. I'm just 32 so quite a while before retirement. My plan would be use the 401k kind of like a hard money loan where I'd acquire the property, rehab it, then refinance long term, pay off the 401k loan and get it rented. I have bought 2 properties this calendar year and this feels like the right next step to further me along.
- Rental Property Investor · WI · Member since 2023 · 192 posts · 144 votes1y
Quote from @Josh Duncan:
@Paul Novak,
Thanks for the reply and your thoughts on this. My view is pretty much echoing what you have said. The 401k is a valuable asset but its my thought that I can use this asset to further increase my portfolio by putting that money to better use. Which gives me much more control of the money/asset management than just leaving it in the market for alot more years. I'm just 32 so quite a while before retirement. My plan would be use the 401k kind of like a hard money loan where I'd acquire the property, rehab it, then refinance long term, pay off the 401k loan and get it rented. I have bought 2 properties this calendar year and this feels like the right next step to further me along.
I don't disagree I think it's a great option and it also allows you to use the money that your employer has matched if you think about it. The only caution I give people is to make sure they have a solid income to where they won't feel the pain of the loan. The other key to me taking out the loan is that I have enough reserve cash that if I lost my job I could pay the money back right away. It's just not in places I want to borrow from. I would rather use my account as the bank vs. my reserve funds.
- TX · Member since 2014 · 151 posts · 23 votes1y
I just did one for like 28k, was a little short on a closing cash purchase. The loan is 12 months, pulls twice a month, the interest is minimal because I'm paying it off so fast. Prob not the smartest thing to do but will be gone in no time.
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