Would you liquidate your 401k to purchase your first property?
Rental Property Investor · Milwaukee, WI · Member since 2019 · 46 posts · 63 votes
Hello my name is Justin Reyes and I’m 30 years old. I been working for a company for only 3 years and have about $30k vested in my 401k. I want to take it out and buy my first property to possibly hack or 1031 exchange. I know it’s risky because I don’t have a lot of experience or don’t have anyone to teach me tricks besides listening to Bigger pockets podcast but I’m willing to take that risk. I have a good paying job also that can help with the process. I just want to one day create passive income and be able to spend more time with my new daughter. Does anyone have advice for me?
Many 401k plans allow you to borrow up to 50% or $50k of the vested balance, whichever is less. I did that to fund the rehab for my first flip to generate some seed capital.
I really like @Anthony Wick answer... in my experience, I have borrowed from my 401K and put it down as a down payment for a property. Obviously, you have to do the math and make sure you are still cash flowing after you are paying the loan from the 401k, but if you buy right then you will. The good thing is that this will force you to buy a good deal... But don't rush don't make an emotional decision.
It would be a BIG MISTAKE...will social social security be around 32 years from now? Also, you'll take a big
hit on TAXES and that 10% early withdrawal...OUCH!
@Justin Reyes. Start saving money to invest and educate yourself. You might consider reducing your 401K contribution and saving it for REI. Make sure you contribute enough to max out employer match.
Don’t know if you own a house now or not. If you don’t you could consider house hacking and down payment required would be small. If you own a house you’ll need to save more.
Flipping is not passive and would not help you spend more time with your daughter. So I assume you want to buy and hold. Start looking at properties online and doing financial analysis. Determine your financial criteria and your business model. Figure out which neighborhoods you want to own in. Don’t be in a hurry to buy, prices are high and good deals are hard to find. Lessons aren’t cheap, don’t learn the hard way.
Hello my name is Justin Reyes and I’m 30 years old. I been working for a company for only 3 years and have about $30k vested in my 401k. I want to take it out and buy my first property to possibly hack or 1031 exchange. I know it’s risky because I don’t have a lot of experience or don’t have anyone to teach me tricks besides listening to Bigger pockets podcast but I’m willing to take that risk. I have a good paying job also that can help with the process. I just want to one day create passive income and be able to spend more time with my new daughter. Does anyone have advice for me?
Agree with checking with your 401k administrator. I do know that withdrawals can happen if buying your first home and living in it, potential for a house hack, but you would need to check. Also, you are only 30 years old and have 35 years to save for retirement, I am def on the more risky side than my wife who is very risk adverse. Having that much time to save I would invest in real estate but not all of it. Only borrow some of it. You pay yourself back through payroll deductions and you pay yourself interest when repaying the 401k loan. Don't take it all as you need to get the first one under your belt and use it as a learning experience, just when you thought you thought of everything, something pops up. The first one is always the toughest, but you can learn so much that will prepare you for the second, third, fourth......ones. You def want a reserve, so your actual savings account needs to be solid as well for those potential hiccups.
Plus you mention a new daughter, my family is #1, no matter what happens in my life, so as long as you are jeopardizing anything related to family and you are educating yourself, I would say grab the loan and make sure real estate is the right venture for you! Good luck, not an easy decision, but your in the right place and frame of mind!
Hello my name is Justin Reyes and I’m 30 years old. I been working for a company for only 3 years and have about $30k vested in my 401k. I want to take it out and buy my first property to possibly hack or 1031 exchange. I know it’s risky because I don’t have a lot of experience or don’t have anyone to teach me tricks besides listening to Bigger pockets podcast but I’m willing to take that risk. I have a good paying job also that can help with the process. I just want to one day create passive income and be able to spend more time with my new daughter. Does anyone have advice for me?
Def meant NOT jeopardizing your family!!!
@Aaron K. I am another no vote and here is why. The tax penalty is bad, but also I like thinking of the $401k as a good reserves. I think you should get to a level you feel comfortable with and then if there is an emergency you can borrow from it. Keep in mind you only can borrow up until a certain amount, so calculate that and go from there.
My employer does a match of my salary until 8%, that’s free money.
If I was in your shoes, actually, we are in similar situations, I would find a side hustle to earn more money to build your capital faster. The side hustle can be overtime, Uber/lyft, door dash, etc.
That is why I am a no vote, I hope this helps.
Hello my name is Justin Reyes and I’m 30 years old. I been working for a company for only 3 years and have about $30k vested in my 401k. I want to take it out and buy my first property to possibly hack or 1031 exchange. I know it’s risky because I don’t have a lot of experience or don’t have anyone to teach me tricks besides listening to Bigger pockets podcast but I’m willing to take that risk. I have a good paying job also that can help with the process. I just want to one day create passive income and be able to spend more time with my new daughter. Does anyone have advice for me?
Instead of cashing out have you considered taking a loan against it. 401K differ between companies so you may want to look at your options.
Typically the interest you pay is to yourself and their is no tax hit or penalties. You just want to make sure that when you take out a loan that the market is high , because they have to sell your stocks to give you the loan. This can be a good option if you time the selling and buy back properly.
If you are cashing out then as others have said ,you will at minimum take a 10% early withdraw penalty right of the bat. Also depending on your current tax bracket that could also hit you pretty hard come April.
I'm not so against doing either one and depending on the market and timing it can be a great investment.
However. make sure you understand the pros and cons and the best timing to do it, before pulling the trigger. Also make sure the property/investment is worth it and don't waste it on non investment type expenses.
@John Palley did you attend CESLA by chance?
LOL! I'll PM you. -John
I think this all depends on the individual. If you are extremely confident in your skill sets I think it can be a good idea. Personally, I did this and it definitely worked out well. It worked out well for me for a few reasons:
1. I come from a finance background and was able to thoroughly analyze the risk reward of all my options (including retaining my 401K)
2. In addition to having a finance background, I spent about 1 year studying real estate specific content.
3. I spent the better part of a year networking and developing a rock star team to help me achieve my goals.
4. The numbers made sense. Meaning, the profits produced by the deal I was underwriting compensated for the taxes and fees associated with liquidating the 401k.
If you are not 100% confident in yourself, or your deal. Wait and do more due diligence. When in doubt, a CPA will be a great person to discuss this decision with. Especially if you lack the finance acumen to properly analyze the situation.
@Justin Reyes Here's a thought:
Let's say you are able to grab the 401k money from loan or cashing out. Let's assume you walk with $20k after fees/expenses.
In Milwaukee, you can use that $20k to put towards a 10% down payment on a $150k home and have $5k for closing and reserves. I just looked on Realtor dot com and found a few 4 bed options in the $100k-$150k price range.
Save up for a month or two and furnish the house and the 3 other bedrooms. Rent the other bedrooms for $400 each and charge $50 a month for utilities. That's $1,350 a month in income. All of your expenses will be covered. Whatever you are paying in rent drops to $0 on your personal balance sheet. So the cash from 401k has now created a $16,000 yearly income stream. In 18 months, you'll recoup the 401k position.
Of course this is ignoring the long term benefits of a 401k, but when has 401k money put food on your plate? When has 401k money helped you TODAY and not in 30 years? The answer is never. 401k is for the long term.
But you're talking about today. House hack a small multi family or a 4+ bed house and your income will trump any kind of return the 401k will get you. And most importantly, it puts money in your pocket today.
@Mike Dymski. That’s what I plan to do.
@Dillon Y. Concur
@Justin Reyes
I’ve contemplated the same. Like some have mentioned my 401k allows me take out a portion as a loan with a 6.5% interest rate. Not going to find a better interest rate than that with other banks or private money. Additionally, the interest I would pay on the loan just goes back into my 401k. If your 401k does not have the loan opportunity, I would look for other sources of funding before taking the tax penalty, but that’s just me. Good luck with whatever decision you make.
There’s allot of great opinions from experience in investors, I would definitely look at the pros and cons of liquidating your 401k
Educate first, take action.
Perhaps a Vtb or joint venture would be better to get started with low money down
Hey @JustinReyes I get your desire to have passive income to spend more time with your daughter man, however, the answer to your questions really depends on only one person; you. Hear everyone's opinion out, but really think about and research what is best for you and your family.
There are several things that you should consider such as the tax hit, what you will invest in, your age and many more. If you take out $30,000 there will be an early withdrawal penalty of about 10% plus regular income taxes depending on your tax bracket. If you are in the 24% bracket, the total tax would be around 34%(with the penalty) and your net will be $19,800.
What can you invest in with $19,800 that would make it worth it?
Can you buy rentals for $100,000 in your area and put 20% down that generate $500 per month? Is that enough to start building passive cash flow to give you what you want? Probably not.
Maybe you can start with fix and flips. A private lender or hard money lender may be necessary as $19,800 won't be enough to buy a house outright, but you will have some funds to use to put skin in the game in case your lender requires it. If you follow this route maybe you can look for properties and liquidate once you find a deal that works. If you find a lender that will loan you all the money you won't even need to tap into your 401k.
How about investing in apartment buildings. It requires a bit more specialized education, but will generate more cash flow than the rental house and you can partner with investors. I bought a 24 unit multifamily property with investors that nets me $4000 per month. This amount of cash flow may be enough to either quit your job or work part time depending on your lifestyle. The key would be finding the investors that are willing to invest with you. The $19,800 would be your skin in the game that the investors would require.
Age is something to consider when making this decision. If you are older it will take longer to recover, but if you are young maybe it is a risk to take. Regarding 1031 exchanges, they only work when selling real estate and buying real estate so there is no way around the tax responsibility.
A cool way to tap into the money is by doing an in service distribution if it is allowed by your company. In this case you would transfer it to a self directed 401k which you can use to buy deals with and there would be no tax penalty. Only thing is the cash flows would go back into the 401k so, it would not solve your cash flow concern. It could be a great way to use your money in real estate investing if you want out of the stock market as it is at the top and there may be a drop soon.
Make sure to leave an update with what you decided to do and how it went. Good luck!
I wouldn't suggest withdrawing but there are other ways to use money in your retirement to buy properties and business. There are also companies that will help you set this up and give you access to these possibilities. Look into opportunities to use your retirement as a 401k account or a self directed account to buy properties.
@Justin Reyes
I personally would try and go in and partner with someone. Sounds like you don’t have a lot of room for mistakes currently and the first few flips, unexpected expenditures will definitely arise.
See if there is a skill that you excel at, and could offer when partnering with someone who excels in contracting (using that as an example), or something of that nature.
@Justin Reyes Do your analysis and trust the numbers. I did an early 401K withdrawal of about the same amount earlier this year to purchase a property. Some of the 401K providers have calculators on their website to see how much an early withdrawal is impacting your retirement savings so I used that to determine my decision.
One thing to keep in mind that I think many aggressively assume with their 401K that they'll automatically be taxed at a lower rate. You very well might still be in the same tax bracket or higher in retirement. There's advanced strategies like capital gains harvesting or IRA conversion ladders that become available to you but I think these often get overlooked.
In summary (using some rounding here), an early withdrawal of $25K would've cost me $185K at the retirement age of 65 assuming a constant 6.5% return and I was hit with the 10% early withdrawal penalty (ouch). BUT I used that money to purchase an undervalued property that ultimately appraised for $175K. By doing so I was able to purchase a property worth $175K that will most likely meet or exceed a sale price of $185K at retirement age in addition to ~360 payments of hopefully positive cash flow. From there some of that cash flow is then continually placed in a Roth IRA to buy ETFs and bonds to generate tax free capital gains, interest, and dividens that is continually reinvested along with positive cash flow. Even with the 10% penalty this was still the more favorable option with my numbers.
This is an enormous time horizon and many things can change so only time will tell if that was the right decision. Not saying I'll do this every time but given my time horizon I thought it was a good idea to take a more aggressive strategy instead of a more conversative one. I wish you well, good luck!
This weekend, I learned a bit about utilizing a self-directed account to use your 401K money to buy investment properties without any penalties. Based on what I learned, I believe it is possible to do it, but you need to look more into it because I believe there are fees involved when opening a self-directed account. Make sure you do your homework before you make any drastic moves like this, and look for a company in your area that handles self-directed accounts to learn more.
Not only would I, I did liquidate my 401k on my second deal. It ended up being a good plan, I bought after the 2008 crash so my deal worked out well.
Now I would not recommend all folks do it fact would say very few should do it.
You need diversification in the stock market, with the rest buying real state in the right market.
@Justin Reyes i would say talk to a CPA about the plan, if you can get bonus depreciation (30%) the first year, and you plan on holding the property more than 7 years, see if the depreciation balances the penalty for taking it out early. If the plan allows it and the numbers make sense, you can make it work...