A friend at my "day job" asked me a question this week regarding cashing in his 401k to fund purchasing more rental properties, when he learned that I was in the rental property business. He's a mid-forties corporate type with a couple of duplexes and four SFH's. He was considering cashing in his 401k, taking the Fed tax hit of 10% and the immediate income tax hit on the early distribution. He indicated he had over a half a million dollars in his 401k. He recognized he would net only approximately $300k after taxes and penalty. His plan was to buy rentals and figured he could more than make up the penalty and out perform the lost compounded interest of the 401k. His reasoning was to achieve early retirement. The 401k would not allow him access to income until 59 1/2 yrs old (not withstanding a 72t option). He was looking to leave the corporate world in his early 50's using the residual income from his rentals. His further rationale was fear of a potential downturn in the stock market given the weak economy, and his poor average returns in the stock market over the past decade. His rental experience led him to believe he could make 10% to 15% on rental investments verses his conservative estimates of 5-6% returns in the stock market for the same period. He seems to be completely averse to the stock market based on his recent losses. This guy has owned rentals for over ten years, so he has a pretty good sense for the local rental business. He has reserve funds of six months for his rentals, so he has a pretty solid foundation financially.

I am curious what the opinions are for this type of move. Is he committing financial suicide or making a smart financial decision? I found his logic persuasive myself, but it would concern me to have so many eggs in one basket when conventional wisdom tells us to have financial diversification. I'm hesitant to provide financial advice on this one, so I suggested posting the discussion on BP in hopes of getting a variety of opinions to help him in his decision. I know this is limited information to do a full analysis on his specific situation, but hoping to generate some useful discussion points to share with him...