401 k loan

6 Replies

The fact that you're asking hints that you may not have the confidence to KNOW that your rental is going to kick out cash. I am also assuming that you don't have many additional cash options because a loan like that is pretty extreme and low on the totem pole. Without additional free cash you would be somewhat exposed with a lack of funds if any major expenses came along with the rental home. You will lose the capital gains from the funds taken out of your 401k (market average 10% a year). You will have to pay interest back to yourself on something that you aren't entirely sure will work. You will also be looking at paying income tax on your already depleted funds along with a 10% penalty to the government if your rental does not work out.

You could take out a 401k loan to finance a rental.  You could also think that fantastic 4 was a good movie.  My advice is don't screw around with your retirement funds, over a long enough time frame the market will ALWAYS go up.

@Ken Wicks

Could it make sense to take a loan out short-term? It would be cheaper than HML. For example, with my employer, I could take out a loan of $50,000 or 50% (whichever is less) and amortize it over 5 years at 4.25% with no prepayment penalty.

What if I was able to use those funds to purchase or put a down payment on a distressed property, renovate in 3-6 months (via construction loan), and refinance into a mortgage after? In a cash-out refi, I pay off the construction loan and pay off the 401(k) loan in 3-6 months.

There are two kinds of 401k loans- under $35k and over. If you can't get find a property in your ideal location that is up to your standards, you can use this loan to fix up something that needs work. 

Is this a good idea or not? That is hard to say without knowing more information about you, what your options are and what you are trying to accomplish. 

In my experience most buyers are spooked by having to do anything more than changing a lightbulb, so first I think you need to decide if a rehab is truly something you have the stomach for.   

If you know you can pull this off then by all means yes it would be a good idea. I still wouldn't because IMO retirement is the 1% goal of doing any of this and you are putting that at risk by using your 401k as an ATM, I liken this to all of the home equity loans back in the 2000s except of losing your home you would be losing your retirement savings. I am not familiar with the acquisition of construction loans nor the refinancing rules, but I still think the risk outweighs the reward. Depends on your experience and confidence.

IMHO it depends on how old you are, how much you've been contributing, how much you make currently, and if the property will CF or provide a nice flip return. If the property will CF for the amount of your 401k loan that comes out of your check, then you get to double dip; you pay yourself guaranteed interest, and you get a property that if done properly will provide a good return when you sell it you may end up making well over 100% of what you borrowwd back on your money. Also, if you're a high income earner and maxing, it's a way to put in over the 18000 limit per year due to the interest. Make sure you use the calculators on here and be conservative, if the numbers work, they work. Good Luck

Beware that some 401k loans require full repayment when leaving the company.  Meaning if you get fired or quit you may be required to repay the loan in full or pay healthy fees.