Hi. My name is james and I'm trying to get started in my rental business. I have one house right now that I'm trying to get fixed up and rented out. And I Only have about $3000 saved up and was wondering what anyone thought about an early withdrawal from my 401k to get started. I have about $55000 in it. Thanks.
An early distribution from your 401k will incur taxes plus an early distribution penalty of 10%. While some RE investors might encourage you to take the hit to maximize your RE returns, it certainly comes at a cost and is counter to conventional financial wisdom.
You might be able to utilize a Solo 401k participant loan (and perhaps your existing 401k allows for loans) to get moving with your repairs and avoid to tax hit. Let us know if you have other questions about this.
You'll definitely take a hit (taxes and penalties) if you try to take out funds from your 401K plan. i used my 401K plan last year and took out a loan to help me purchase my primary residence, however, I could not use it for real estate investing. I've researched and learned that it's best to set-up either a self-directed or solo 401K plan in order to use it for rei only. BP has great resources on this. Good luck and much success!
If the 401k account is with your current employer, have you thought about taking out a loan (payable back through a payroll deduction). Often you can get a loan of 50% of the balance and you pay the interest back to yourself!
To learn about the 401k distribution rules including the triggering events, please see the following.
For the 401k loan rules see the following:
Thank you for all the replies. Theres a lot to think about for sure. I also have been thinking about doing a HELOC on my current house I'm trying to get fixed up and rented out. That might make more sense. Or the 401k loan and paying interest back to myself sounds like a pretty solid idea. Thanks again.