Would you liquidate your 401k to purchase your first property?

Rehabbing & House Flipping
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Would you liquidate your 401k to purchase your first property?

Justin Reyes
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?

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Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
7y

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.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    7y
    Originally posted by @Justin Reyes:

    @Abel Pacheco TEACH ME! Put me under your wing your doing EVERYTHING I dream about. 

    it is very common for those who change jobs that in between jobs they roll their old 401k into a self directed one.

    there are many companies in this business and many consultants one of the best Is Brian Eastman.. 

    but in essence you are in charge and you have a check book IRA.. since I have been self employed my entire live I have always had a self directed IRA my number at entrust was something like number 451.. LOL..

    but those can cost you in maintenance fee's the check book one is the one to go for .. then you simply make your own investments you have to follow the rules though very closely as now your retirement funds are sitting in an account you write the checks for.. so it takes some self discipline.. although I don't really recommend buy rentals in your IRA when you only have 30 or so in it.. your not going to get very far with one rental making 100 a month IRA money is best use for making big checks like in flipping since its tax differed you can really scale up when you are deferring taxs.. I also like debt in an IRA.. that's passive rentals are not passive no matter what anyone tells you..

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    1Reply
  • Melody Kushi
    Princeton, NJ · Member since 2019 · 45 posts · 114 votes
    7y

    @Justin Reyes look at it this way...if the stock market crashes once again, you’ll lose most of your “retirement” overnight. It’s like a credit score, once it tanks, it will take years, if not decades to see it return. But, if you invest in real estate, you will always have a retirement nest egg.

    You just have to do your diligent homework and invest smart.

    1Reply
  • Cramer GuzaldoPro Member
    Chicago, IL · Member since 2017 · 17 posts · 8 votes
    7y

    Lol everyone in here giving you "advice" when they've never done it. I liquidated the **** out of my 401k, paid the prepayment penalty, then invested that money into multi family. 5 years later, 9 buildings, 62 units. I would say do it and don't look back. Best Luck

    5Reply
  • Jeffrey Coleman
    middletown, NY · Member since 2017 · 21 posts · 6 votes
    7y

    @Justin Reyes I took out $17,000 out of my 403b and I was taxed 10% but I was able to find me a property owner occupied so to me the risk was worth it I'm much older than you and I'm looking to get my next property next year I want to borrow from my 403b again

    1Reply
  • Jassen Bowman
    Rental Property Investor · Port Townsend, WA · Member since 2015 · 30 posts · 36 votes
    7y

    @Justin Reyes Absolutely not. As already mentioned, it’s not worth the tax hit, nor is it worth the long-term hit to your retirement nest egg.

    Just go buy a house 0-5% down, get a roommate or two, live in it for one year, then convert it to a rental and buy another house and repeat.

    This is Nomad + house hacking. One of the absolute best mathematical models for building wealth.

    3Reply
  • Carlos Gonzalez
    Investor · Phoenix, AZ · Member since 2015 · 346 posts · 170 votes
    7y

    @Justin Reyes

    My man, do what I did to get started.

    If you haven't already bought a property but one via FHA with 3.5 downpayment. You could buy a single home or a Multifamily residential up to four units (I used the FHA for a four unit property). Live there for one year and during that year you can improve or fix the property units.

    For the second year do what I did: I refinanced the FHA property into a conventional putting down 25% (appreciation of the property helped me here a lot, I live in Phoenix and during the last two years appreciation of properties has been substantial. In order to refinance into a conventional, I took out a loan against my 401k (your 401k has money and money is just simply a tool and should be used as such, don't let anyone else how to use your own money/tools)

    Yes I own that loan towards the 401k but I own that 401k so I’m paying myself with interest which is even better.

    After you have refinanced your property then you have available again your FHA so you can use it to buy another Multifamily property or a single home property, up to you my man.

    My savings from the cash flow (because now I have 2 Fourplexes) have been substantial that now I am in the position to buy another one by putting down 25%. If you do this you’ll have equity in your first property which you can liquidate in order to buy your third one (if that’s the router you want to take) I didnt take that one because I don’t want to kill my cash flow in order to but another one.

    You mentioned that you are listening to podcasts left and right so now use that knowledge and put it to a good use my man.

    Good luck brotha!

    0Reply
  • Sherwin Griffith
    Member since 2019 · 2 posts · 1 vote
    7y

    I actually went through with that and ended up with a $22000 bill to the IRS. Big mistake not something I would repeat ever again.

    0Reply
  • Michael Cole
    Member since 2019 · 19 posts · 1 vote
    7y

    I took money out of my 401k and bought a duplex and did really well with it. Although I had 7-8 years RE experience under my belt by then. As a newby I wouldn’t make the same move.

    0Reply
  • Account Closed
    Rental Property Investor · Twin Cities, MN · Member since 2019 · 122 posts · 150 votes
    7y

    @Justin Reyes if your program allows a loan against the balance, it might be worth it.

    Mine does at 2.125 % 10 year payment plan, no fees. I use it to do flips - every - year !!

    Have one going currently, funded by my retirement account.

    Just pay it off at the end of the project, rinse and repeat!

    Respectfully

    Larkin

    0Reply
  • Trevor Demel
    Member since 2019 · 3 posts · 0 votes
    7y

    I would pull it out of the 401k and use it. Ultimately which investment will generate a higher return is how I look at it.

    0Reply
  • Kenneth Liz
    Yonkers, NY · Member since 2018 · 46 posts · 6 votes
    7y

    @Justin Reyes check your 401k they may offer a no penalty withdraw to buy a home if I’m not mistaken since you want to hack If not. You can borrow half at 3-4% and use that money to get started. If you get a good deal. You should make your money back to pay back 401k and some and now your in the game.

    0Reply
  • Jabari Long
    Real Estate Broker · Detroit, MI · Member since 2014 · 384 posts · 149 votes
    7y

    @Justin Reyes Although I don’t think taking money from your 401k is a bad idea I do think there are many many alternatives. Finding an equity partner or a seller financed deal are two options that come to mind. If I were you I would be hyper focused on finding deals! There is never a shortage of money for good deals.

    0Reply
  • Bernard PearsonPro Member
    Teaneck, NJ · Member since 2017 · 21 posts · 10 votes
    7y

    @Justin Reyes many have said it already man but I know it’s important to hear it multiple times sometimes...

    I say YES leverage your 401K to get rolling. I did...

    A few options:

    1. Take a loan from the general pool of the 401k

    1a then take a loan from the other side of the 401k

    (Most 401ks have a personal loan and a general purpose loan) (most 401ks let you pull up to $10,000 for first time home buyers with no tax penalty

    1b. Take those funds and go house hack a fixer upper take a hard money loan to fix the property up to drive equity into the house

    1c. refi, pull your cash out, sell home or rent (if cash flow if there) pay your loans back (if you choose) and keep rolling.

    2. Roll your 401k into a Self Directed IRA

    Some Self directed IRAs allow you to purchase reveal estate within them as a means for long term investment.

    2a you can pull money from your Self Directed IRA and if you can get that money back in less than 60 days there's no penalty

    2a1. You can find a sweet deal pull your money out, by the property with cash (makes your offer much sexier to seller) then do a refi (specifically "Delayed Financing" loan) to pull tour money back out and out your money back into your IRA. You will need to Keep some money in the home (most lenders will lend 75-80% of the appraised value on a delayed financing loan)

    Speak with a tax pro/cpa before you make a move so you know what your loopholes and pitfalls may be but I leveraged all options above to get into the Real Estate game. Good luck, get going, fail forward...

    0Reply
  • William Ford
    Member since 2019 · 10 posts · 2 votes
    7y

    @Justin Reyes

    I am sure I will get corrected here, but I'm pretty sure you can roll over your 401k into an IRA with no penalties or paying tax fee. Then, you can invest the money from the IRA in real estate as an investment, but this would be better for a buy and hold.

    Then maybe in a few years you can take out a HELOC on the equity in your home to do flips.

    My two cents.

    0Reply
  • Christian R Estrada
    Rental Property Investor · Whittier, CA · Member since 2018 · 8 posts · 0 votes
    7y

    @Justin Reyes I recently was on the same exact boat as you, good paying w2 job and been with the company 3 years, and accumulated 30k in my 401k. I pulled 15k from my 401k which was 50% at the time to do renovations on my first property. This was March of this year 2019, November I plan on a refinance payout, where I will get my money back and can then payoff my 401k loan, or dump that capital into another property and keep the real estate investing going .

    Something to consider is that you must payback the loan before quitting your job, or they will request payment of the full balance after you quit. One of the few terms of the loan I received. Hope this helps

    0Reply
  • Christopher Fusco
    CT · Member since 2019 · 4 posts · 1 vote
    7y

    @Justin Reyes

    I did just that. I also have 2 pensions for retirement.

    So I purchased a bank owned home 20% down for 157k. I am doing the updates myself using 0% options on credit cards. Other comparable properties in the area go for 225-250k.

    I have a 125k mortgage if the home sells at the 225k that's 95k minus the 40k I pulled, 15k in repairs I'm at 40k.

    When I do a heloc loan on this property I plan on grabbing the 80% equity and go for another.

    I'll let you know how it works out.

    Good luck!

    0Reply
  • Vincent Harris
    Member since 2019 · 3 posts · 0 votes
    7y

    @Justin Reyes. Listen to the daily podcast at DaveRamsey.com for a month, then decide.

    0Reply
  • Matt Mulvihill
    Real Estate Agent · Charlotte, NC · Member since 2019 · 73 posts · 37 votes
    7y

    @Mike Dymski that is a great point, unfortunately having worked with many 401k plans, it’s not uncommon for individuals to take a loan from their employer plan and then struggle with paying the loan back which either leads to them taking another loan or turning the loan into a distribution and having to pay the penalty plus a large source of additional income for the year that might alter their tax bracket.

    0Reply
  • Albert Ng
    Rental Property Investor · San Jose, CA · Member since 2015 · 401 posts · 221 votes
    7y

    @Justin Reyes

    Don’t withdraw. Tax & penalty will eat a big part of it. Borrow from your own 401K instead. Buying a house is a valid reason to borrow.

    0Reply
  • Naji SabaPro Member
    Investor · Austin, TX · Member since 2017 · 21 posts · 18 votes
    7y

    @Justin Reyes

    I’m in the same boat is you buddy! Rich Dad and his wife both speak out vehemently against 401(k)s. Their personal CPA and tax advisor Tom Wheelwright speaks out against 401(k)s and also suggests cashing out. I had a local CPA tell me to cash out my 401(k) last week.

    I am amazed at the Feedback here and it certainly gives a lot of perspective and no definite answers...

    The one over arching response seems to be to do your research, get to know your market, and find the deal that determines if it’s worth it - Keeping in mind that having multiple streams of income is a huge secret of financial success.

    0Reply
  • Hamid Sedaghat
    Lender · Raleigh, NC · Member since 2019 · 36 posts · 19 votes
    7y

    @Mike Dymski Hi Mike, thanks for the insight. Are there any downsides, as long as you are able to pay yourself back (with interest)? Also, are you familiar with borrowing from your own IRA in a similar manner?

    1Reply
  • Ty Head
    Member since 2018 · 4 posts · 3 votes
    7y

    The year the scam started....invest in real asset(s).


    1978: Congress passed the Revenue Act of 1978, including a provision — Section 401(k) — that gave employees a tax-free way to defer compensation from bonuses or stock options. The law went into effect on January 1, 1980.

    Even the “father of the 401(k),” Ted Benna, tells The Journal with some regret that he “helped open the door for Wall Street to make even more money than they were already making.”

    0Reply
  • Brian Shreeves
    Member since 2019 · 2 posts · 0 votes
    7y

    @Dillon Y. @Justin Reyes

    Dillon is right. You need to weigh the value. Keeping in mind that cashing out a 401k is COSTLY.

    For instance, I had a very small separate 401k with only 9k in it that wasn’t apart of my regular 401k. After being taxed on it I got a little more than 4K from it.

    A hint over 50%.

    Take the time to understand this before taking action.

    I’ve been living in squalor for the last 6 years to save up and am very close to being ready.

    0Reply
  • Jeffrey Townsend
    Charleston, SC · Member since 2016 · 32 posts · 7 votes
    7y

    I would not advise taking a loan out of your 401k for your first property. You could find a multifamily like a duplex, put down 3% and live in one side as your primary. 

    1Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    7y
    Originally posted by @Hamid Sedaghat:

    @Mike Dymski Hi Mike, thanks for the insight. Are there any downsides, as long as you are able to pay yourself back (with interest)? Also, are you familiar with borrowing from your own IRA in a similar manner?

    Many plans require you to pay back the loan in full upon termination of employment. Incidentally, mine did not.

    I doubt that you can borrow from an SDIRA...that would be self-dealing. I will leave that question to the experts though.

    2Reply
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