Is it worth pulling from 401k to buy first property?

Question

I don’t have a large amount of cash at hand, but I have a nice nest egg in my 401k. Can someone help me with pros and cons of withdrawing from my 401k (and the crazy tax hit) to buy a rental property (buy and hold)? What kind of cap rate would I need for this to meet the same return that this money would earn in my 401k?

Nicholas L. · Answer

@Kenny Hill

short answer - no. you're going to have to save up more. returns on non value add LTRs are terrible right now so to take money out and pay a penalty to invest in property you lose money on doesn't seem like a good plan.

hope this helps

Jonathan Taylor Smith · Answer

Hello @Kenny Hill - My first rental property purchase was funded with a loan from my wife's TSP account (Military 401K). Because it was a loan instead of a withdrawal, there was no tax hit. There was just the interest expense, essentially paid back to yourself, and whatever gain you might have made on those funds if they had remained invested. The loan was paid back over 24 months and I still own that property (and many others) 11 years later. I've since done the same thing several more times. TSP allows up to two simultaneous loans.

Flores Marcus · Answer

I will suggest using a local lender with little or no money down to secure your first deal instead of pulling from your 401k. Let's connect. I do have some recommendations.

Basit Siddiqi · Answer

Taking money out of a 401K to purchase real estate can be worth it.I did it 2016 to purchase my first and second rental property. However, I would only do it under the following circumstances

• You are aware of the tax hit + Penalties. You should ask your accountant to run the scenario.Also, be precise to figure out the Federal + State Taxes, not just the federal
• You have a track record or can make a larger return in real estate than you can with the investments inside of your 401K.
• I would also look and analyze whether doing a Solo401K / SDIRA with checkbook control is an option.

You are aware of the tax hit + Penalties. You should ask your accountant to run the scenario.Also, be precise to figure out the Federal + State Taxes, not just the federal

You have a track record or can make a larger return in real estate than you can with the investments inside of your 401K.

I would also look and analyze whether doing a Solo401K / SDIRA with checkbook control is an option.

Ashish Acharya · Answer

Kenny, I’d be very careful about comparing the rental’s cap rate directly to what your 401(k) might earn. The first thing I’d calculate is the after tax cost of getting the money out of the 401(k), including any applicable income tax and early distribution penalty.

Then compare that with the rental’s full after tax return: cash flow, appreciation, principal paydown, leverage, depreciation, and the eventual tax when you sell.

One alternative worth checking is whether your specific 401(k) plan allows a 401(k) loan. That can be very different from taking a taxable distribution, although it comes with its own rules and risks.

I also wouldn’t use the rental’s depreciation benefit alone to justify the investment. The property should make sense on its own numbers first, and then the tax strategy can improve the after tax outcome.

The better question isn't really “what cap rate matches my 401(k)?” It’s “what return does this rental need to generate after accounting for the cost of accessing my retirement funds?” That’s the comparison I’d model before making the move. Happy to connect!

Michael Barnes · Answer

Do you perhaps have a rollover IRA or a 401K with a previous employer (that can be rolled over to an IRA) in addition to your 401K with your current employer? I ask since there is a premature distribution penalty exception for IRA's, but not 401K's, for up to $10,000 used to purchase a first home.

Divin Kanyama · Answer

@Kenny Hill , I’d be very cautious about pulling money from a 401(k) for this. With a traditional 401(k), the withdrawal is generally taxed as ordinary income, and an additional early-withdrawal tax may apply. That means the cash you actually have available to buy the property could be a lot less than the amount you take out—not to mention the tax-deferred growth you give up.

A rental can offer cash flow, appreciation, principal paydown, and tax deductions such as depreciation and mortgage interest. But make sure the numbers also include vacancy, repairs, capital expenses, management, selling costs, and taxes when you eventually sell.

There really isn’t one cap rate that automatically makes this worthwhile. The better comparison is the property’s projected after-tax return versus the 401(k)’s expected long-term return, adjusted for the added risk and work. Before withdrawing, it would be worth exploring conventional financing or a 401(k) loan if your plan allows one, then asking a CPA to model the actual federal and state tax impact.

Henry Clark · Answer

OP. Lunch always helps me think better. Pop Eyes chicken and Red Beans and Rice. I would look at your personal finances first.

• How secure is your job?
• How much set aside funds do you have?
• What is your personal housing situation?
• Do you have all of your debts paid off? Credit cards, car, student loans, etc.
• Now determine if you are seeking mainly Cash Flow or Capital Gains. If your seeking cash flow, keep in mind your 401k loan will have to be paid on top of your Cash Flow property, so you need to model both together. About the only way this will work is if you go for Value Add, matching your loan term limits.

How secure is your job?

How much set aside funds do you have?

What is your personal housing situation?

Do you have all of your debts paid off? Credit cards, car, student loans, etc.

Now determine if you are seeking mainly Cash Flow or Capital Gains. If your seeking cash flow, keep in mind your 401k loan will have to be paid on top of your Cash Flow property, so you need to model both together. About the only way this will work is if you go for Value Add, matching your loan term limits.

I would look at the above, before taking a Loan or divesting from your 401k.

Henry Clark · Answer

OP. I’ll go with the Pro of taking it out.

Don't you do it though.

I have taken all of my 401k out and invested. About a 50% cut. Plus you lose the benefit of those tax dollars earning money for you into the future.

The reasons I would withdraw

• I can make at “least” if not more than 100% COC cash on cash return.
• If I thought my 401k investments were going to take a 40% dive or more. Which I do. Look at your statement. How much is contributions and how much is gains?

I can make at “least” if not more than 100% COC cash on cash return.

If I thought my 401k investments were going to take a 40% dive or more. Which I do. Look at your statement. How much is contributions and how much is gains?

Those are my pros.

Joshua Parsons · Answer

Hi Kenny,

If taking from your 401k is your only option, I agree with the other posts, take a loan, not a withdrawl. A withdrawal comes with your ordinary tax rate + a 10% early withdrawl penalty.

The downside to taking the loan is that the funds are typically devested and earn only what you pay yourself back in interest.

If you want to talk through your options a little more and see if getting a rental right now even makes sense financially Let me know, I'm more than willing to sit down and give you a financial review & build a plan for you.

Is it worth pulling from 401k to buy first property?

Is it worth pulling from 401k to buy first property?

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