Should I borrow from 401K

Question

So my husband and I have little chunk of money in our 401k as well as some money saved. We plan to house hack our first purchase with the BRRRR method. Should we borrow from our 401k to make up the rest of the down payment? We are sooooo over renting and need to purchase when the lease is up. I've never touched that money but from what I understand there are penalties. Any advice would be great.

Account Closed · Answer

My daughter really wanted to get into the RE market in the SF Bay Area when the market crashed.  She borrowed from her 401K, and she also changed her withholding on her paychecks, so less was withheld.  With the increased income, which she saved, and money borrowed from her 401K, she was then able to get into an FHA mortgage with 3.5% down after she saved the additional income for about a year.

The next year, she was in her home and worked out a payment plan with the IRS.

A few years later, she got a job a couple hours away, and FHA let her keep the first home and rent it out, since her new job was too far to commute.  For the 2nd house, also a 3.5% FHA loan, she just borrowed from her 401K and had enough for the downpayment without doing the IRS tapdance again.

The first home she decided to sell when the market came back around, and sold it at a profit.  The second one is in the Oakland hills in the SF Bay Area.  If you know anything about that market, you know she bought into a goldmine there.

So, yes, it absolutely can make sense to use the 401K money for property.

Brian Mathews · Answer

That's the best thing to do.   People try to get overly sophisticated when investing.  Those people usually end up broke.   Take your time, save up some money and buy something.   Make sure you have a few thousand in reserves when something breaks.   I guarantee something will break such as a water heater, a furnace, the roof will leak, etc.....    As a tenant you never had to worry about that, as  a landlord, you will have to fix it just as quickly as you expected your landlord to fix for you.   Don't rush into anything  or you'll end  up worse off than you are now and take you years to climb out of .

Dmitriy Fomichenko · Answer

@Alex Maldonado I think you are confused between the 401k loan and 401k investment.

Whether self directed or not, 401k loan is tax-free and penalty-free, as long as you keep up with the payments. If you fail to pay back the loan on time, the unpaid amount will be considered distributions, and taxes will apply. If you are younger than 59 1/2, it is an early withdrawal and the penalty will apply. This is regardless of the type of account, ie. self directed or not.

The difference here, is that a self directed account may allow you to invest in real estate. But, as you say, unlike with the loan, any income from the investment property should go back to the 401k. Plus, as the plan owner, you wouldn't be able to live in the house, or benefit from it in any other way. For example, you cannot use the 401k money to invest in the house and then rent it to your husband or your daughter. In this case, that would not work for @Fe Kelly , since she plans to live in the house.

Account Closed · Answer

@Fe Kelly as I recall for my daughter's 401K loan, there were less penalties because she was buying her first home.  I'm no expert on this stuff, but you might check to see if it will be better than you think, if it's a home you're going to live in.

John Hickey · Answer

@Fe Kelly I borrow from 401s all the time.  I've borrowed from one and paid  it back several times.  I've borrowed from my wife's and am now paying it back.  I've done well with the stock market( vanguard index funds) but that can't compare to what I've done with real estate.  Right now I'm using my wife's 401 to pay for a rehab BRRRR.  My accountant thinks I'm out of my mind but he agrees it has worked out so far.  He still says I'm way to heavy into real estate and would rather I not touch the 401s.

You have to run the numbers and decide for yourself.

Mike Dymski · Answer

I did not have to repay my 401k loan when I left that employer.  I left both the 401k plan and loan in place and the loan payment was set up on auto draft on my checking account.

Fe Kelly · Answer

I also may have forgot to mention that we plan on living there before we rent out.

Fe Kelly · Answer

thanks everyone. I think I may leave the 401k alone and just use the down payment that we have saved.

Should I borrow from 401K

Most Popular Reply