401K used as downpayment?

[Jason Boyer]

What would you all advise as far as taking money out of a 401K to use as a down payment for our first rental property?  I know 401K's are not popular but I have two different ones, which I know I would pay a small penalty but I would not be emptying it completely.  

[Albert Bui]

Originally posted by @Jason Boyer:

What would you all advise as far as taking money out of a 401K to use as a down payment for our first rental property?  I know 401K's are not popular but I have two different ones, which I know I would pay a small penalty but I would not be emptying it completely.  

 Its quite simple really you take it out you have to pay it back. If you leave your job before you pay it back you might have the out standing loan at that time as a distribution which means you might encounter a higher income taxes that year plus 10% penalty if you're under 59.5 yrs. The question is are you going to work at your current job forever? If not consider it carefully.

From a financial perspective if you borrow against the 401k your funds that would be in the market at the mercy of stocks/bonds/mutual funds may lose opportunity cost of greater gains so you'll have to have an inner dialogue with yourself about your own financial strategy. If you dont know of one then you can find a financial advisor or read a couple of books to help formulate one on your own.

401k is not like real estate where when you take a loan against real estate the market value is the same.

On a 401k if you take a loan from it you will dimish the value of your 401k by the amount of the loan. So if you have 100k and take a 50k loan you now have 50k working in the market and not 100k while with real estate if you had a 100k home and you take a 50k loan against the home you'd still have the 100k home thats fully participating in the RE market, but a lien against the home for 50k as well. This makes real estate more advantageous to leverage because you can be participating in two areas at once. There are of course pros and con's of extreme leverage too =/. 

Hope that helps but those are some basic implications of obtaining the 50k loan from compliance, to finance, to opportunity cost, etc