Not CAN, but SHOULD I use my 401K?

[Bill Brady]

I've tried to find the answer to this question over the past few days and have been unsuccessful. Everywhere I've read, including on BP, it's a "YES!!!...you CAN use your 401k to invest in RE" (rollover SEP-IRA, borrow, cash out, etc.) but nowhere can I find out if you SHOULD use it. I'm curious as to whether the longterm impact on taking money out of your 401k would somehow negate any return on investment you receive from a cash-flow positive rental.

If all numbers work out with a 15% CAP rate, $1000 cash-flow, 40% cash on cash return, etc....is there a true downside to using your 401k as a down-payment on a property? Are their any horror stories out there?

[Steven Hamilton II]

Bill Brady,

That would depend upon the return. You have to do the calculations to determine if the juice is worth the squeeze. I have a client who just took a 45% hit on 150k removed from his 401k because he didn't talk to me first. You have to look at the long term risk vs reward. What could you earn inside your 401k or IRA. Even consider a ROTH IRA. Because after 5 years you can remove the principal from the Roth IRA without any penalty.

-Steven the Tax Guy

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