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?

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Mike Dymski

Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes

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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Tom Carmichael
Member since 2019 · 1 post · 0 votes
7y
Be aware that if you take a 401k loan and your employment ends for voluntary or involuntary reasons, you will be required to pay it back usually within 60 to 90 days otherwise taxes and penalties will then apply. Not that it's a bad idea if you have a good opportunity, just be aware of your plan's rules.
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Jeffrey McKeePro Member
Real Estate Agent · Plano, TX · Member since 2013 · 479 posts · 91 votes
7y
@Justin Reyes. I personally would not liquidate my entire 401k. Maybe try to partner with someone before doing that. Do you have any liquid cash available? Do you have a deal worthy of cashing out your 401k or are you just trying to get your first property? Do you own your home? Maybe buy a duplex and rent out one side. Hope that helps.
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Luis DeLaRosa
Fairfield, CA · Member since 2017 · 7 posts · 3 votes
7y
I would have to agree with the Majority and say no. However, if you really want to access your 401 K to do a flip or any other real estate investment. I would research Self Directed IRA/solo 401 k. Make sure there are no early withdrawal penalties. Ask whatever company you choose to roll the money over to, allows the funds to be used for real estate investing.

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Richele Reiske
Realtor · Madison, WI · Member since 2018 · 11 posts · 8 votes
7y
@Abel Pacheco @Justin Reyes
If you have the ability to convert it into a self directed IRA, then go for it!
Today I submitted an offer on my first investment. I had zero liquid funds of my own, so I converted my 401k from a previous job into a SDIRA.
75% of the purchase will be funded with a private money loan and 25% with my SDIRA. I’m keeping a reserve balance in my SDIRA to cover one year of holding costs plus the full renovation estimate.
Where there’s a will, there a way. Best wishes!
3 Reply
Shawn Coverdell
Investor · Clatskanie, OR · Member since 2014 · 212 posts · 233 votes
7y
Although in your situation I would not recommend doing so, I will say this, I took mine out, paid the penalty and used the remainder to purchase properties, which I then fixed up and mortgaged to buy more properties, then I mortgaged those too and bought even more properties! I know this goes against all conventional teaching but this is what I did. I did have approx. 20 properties and felt very confident with multiplying money when I cashed out my 401K.
I quit my job. I am 48 years old.
Shawn Coverdell
Homes in the Hood
0 Reply
Cameron Searle
Longwood, FL · Member since 2018 · 26 posts · 8 votes
7y
Sounds like the old seminars or cable infomercial investing. Your doomed.
0 Reply
Cinnamon Harley
Member since 2019 · 9 posts · 5 votes
7y
@Justin Reyes
I did just that. I had $80k in my 401k pulled it all out prepaid the taxes took the penalty and used it on a down payment for 2 triplexes and a duplex. I actually received most of my prepaid taxes back in my refund due to the rehabbing expenses I did that year. The properties all had decent cashflow in the beginning but have steadily increased over the 5 years and also the triplexes have doubled in value the duplex has has a little less gain. So all in all I've had a better return for my money with less volatility. But you need to do what is right for you. Only you know that answer. If you trust yourself go for it. I was only an investor for 6 months and these were my 5th, 6th, and 7th buildings. It was one of the better decisions I made and gave me even more motivation to succeed. Good luck in your decision making
0 Reply
Ryan Proffit
Saint Joseph, MO · Member since 2018 · 401 posts · 244 votes
7y
@Justin Reyes
To me, it’s almost like you need a time machine to properly answer this. If you do it, and it blows up and you get rich, it was def worth it. If things go south and you lose your money, then obviously it wasn’t worth it. But if you stay in the game no matter what, and learn either way, you are certain to be successful. I do think taking a loan may be a happy medium.
1 Reply
John Burtle
Real Estate Broker · IL · Member since 2016 · 284 posts · 178 votes
7y
You said you don’t have a 700 or higher credit score.
Not to get too personal but a credit score under 650 will make things even more difficult to get started.
I’d talk to bank(s) and let them know what you plan on doing and tell them you have around 20,000 cash and ask them what you could get approved for etc....it would be terrible to pull that money out and take all the hits with fees and a bank(s) won’t work with you.
2 Reply
Remington LymanBusiness Member
Real Estate Agent · Columbus, OH · Member since 2017 · 6k+ posts · 7k+ votes
7y
@Justin Reyes It just depends on how good the deal is. Liquidating your 401k can cheaper than borrowing hard money. I know investors here in Columbus, OH that borrow hard money all the time. I have leveraged myself and used my cash so far but if I keep finding deals I will start borrowing hard money.
[email protected]614-541-8475 Podcast Guest on Show My Job Laid Me Off, So I Replaced My Salary with Rentals
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John Burtle
Real Estate Broker · IL · Member since 2016 · 284 posts · 178 votes
7y
***edit. Tell the banks you can come up with around 20,000 if you pull money out of your 401k*** not that you already have it. I tried to edit the post but it wouldn’t let me.
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Andrew Pongyan
Rental Property Investor · Long Beach, CA · Member since 2018 · 27 posts · 12 votes
7y
@Justin Reyes
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Andrew Pongyan
Rental Property Investor · Long Beach, CA · Member since 2018 · 27 posts · 12 votes
7y
@Justin Reyes it’s better to take a loan out. I’ve don’t that twice already.
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Bryan MitchellPro Member
Rental Property Investor · Columbus, GA · Member since 2016 · 634 posts · 337 votes
7y
@Justin Reyes, one thing to consider is risk mitigation. List out associated risks and assign a severity. Then list a control measure that mitigates the risk. Now reassess the risk to see how much the risk has been lowered. Now you’re able to make the most educated decision in regards to assumption of risk.
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Bryan MitchellPro Member
Rental Property Investor · Columbus, GA · Member since 2016 · 634 posts · 337 votes
7y
@Jassen Bowman, I like the nomadic approach especially when it comes to single millennials. I also like the idea of adding value (income) where possible such as renting rooms out to people you can trust. In fact you could do both if you’re aggressive enough. You could buy a duplex or house with live in basement and rent rooms out as well. Rates of return are the largest of almost any other option, but many don’t want to do this.
1 Reply
Sherwin Gonzales
Rental Property Investor · San Francisco, CA · Member since 2015 · 236 posts · 156 votes
7y
@Justin Reyes great question!
As many have already mentioned before, I suggest you borrow from your 401k instead of pulling it out. There are countless articles and videos about this topic. Below are two videos with different views. Let me know what you think and good luck to you!
Morris Invest
https://youtu.be/e_ZQqmBrGRQ
Dave Ramsey
https://youtu.be/PpHksut_R_8
0 Reply
Jaison Emmanuel
Investor · Missouri City, TX · Member since 2015 · 70 posts · 19 votes
7y
You can transfer your 401k funds into a REAL estate IRA (or Roth) fund.. and use the Real estate IRA Funds to buy homes for you. I use Quest IRA, perhaps you can give them a call.

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Ahkeem Smith
Rental Property Investor · Easton, PA · Member since 2015 · 17 posts · 2 votes
7y
@Justin Reyes
Hey Justin id absolutely do this but not in a form
Of a withdrawal because that’s heavily taxed. Depending on your company’s 401k plan you should be able to take a loan out of about half your vested amount so that you’re not taxed and you’ll be paying yourself back. I personally have done this a few times to utilize my 401k into several other investments if that makes sense.
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Scott Amendola
Rental Property Investor · Staten Island, NY · Member since 2018 · 9 posts · 0 votes
7y
@Justin Reyes
I did that. I borrowed 40k from my 457 purchased a property. Paying it back with 5% interest to myself. Think it’s a good start
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Sam Bates
Rental Property Investor · Dallas, TX · Member since 2011 · 62 posts · 77 votes
7y
@Justin Reyes It completely comes down to your risk tolerance and are you going to bet on yourself versus a 401k administrator. If you are more risk averse and or do not have a good deal to invest in it may be wise to keep it in your 401K. If you are more prone to taking risks or you have found a solid deal I'd say go for it. You are only 30 and have a long time to save for retirement. You are buying a hard asset and the value will likely never drop to zero. The value of a property could go down, but if you are collecting enough rent to cover PITI and maintenance you will never have to sell it.

Numerous people on this post have said do not do it because of the penalties you will pay, but in reality you will pay roughly $3,000 in penalties for the withdrawal. You can easily capture $3,000 in equity if you buy it right or with principal paydown of mortgage on rents you collect.

Take this for what it's worth since you don't know me from Adam, but I've invested in the stock market for roughly 20 years, worked as a portfolio analyst for one of the largest financial institutions in the world, have an M.B.A and an M.S in Personal Financial Planning and I have over 95% of my assets in real estate.
My net worth has increased significantly because of real estate. A 401K provides a meager return at best because most 401K plans are too conservative because they protect must protect the masses (American workers). Time and again real wealth is made through real estate. More millionaires are made through real estate than anything else. It has changed my life like many other people who've invested in real estate.

With this being said, it takes time, effort, and a lot of perseverance because you will face challenges. Real estate is simple, but not easy. If you plan to buy only one home and then stop I'd keep it in your 401K, but if you want to buy multiple houses and or commercial investments I'd go for it. It could change your life dramatically. A 401K won't do that.
2 Reply
Henry Mal
Member since 2019 · 2 posts · 1 vote
7y
@Justin Reyes The tax implications are definitely unattractive, however I will share what I did when I was younger. When I was 24, I took 13k (down payment) from my 401k and bought my first home in Las Vegas NV in 2011. I sold my house in 2013 and made 100k net. This allowed me to by 3 additional rental properties which I still own and make $$ today. Although I had to pay early withdrawal penalties, it ended up being a much better investment decision vs just leaving the 13k in the market. The right/conservative answer is not to take money from your 401K.....But personally, if I didn’t take that risk, I wouldn’t have what I have today. Real estate has outperformed my 401k tremendously, so a little risk at a younger age is always attractive to me. Considering your age and your ability to bounce back, you can always take a small loan from your 401k and repay yourself back.....or the other option is do nothing.
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Henry Mal
Member since 2019 · 2 posts · 1 vote
7y
@Sam Bates very true! Great advice Sam
1 Reply
Milton Rodriguez Jr
Member since 2019 · 2 posts · 0 votes
7y
Hi my name is Milton and I just want to say that 2015 I close my 401k to buy a house cash and I have been living rent-free ever sent it is worth every single penny just do it
0 Reply
Milton Rodriguez Jr
Member since 2019 · 2 posts · 0 votes
7y
One suggestion if you never read Rich Dad Poor Dad read it and that was the whole reason why I did what I did I trade my 401k four double house and they will pay your rent when you live in one side for free I'm telling you is worth it and do not rent to friends or family Brookie mistake. good luck
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Jack B.
Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes
7y
I did, paid cash for my first house in my mid twenties. The house tripled in value over the next 6 years or so and I sold it at a hefty profit and used the money with some additional cash on hand to buy 2 more houses. Would go back and do it again.
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