Real estate purchase using 401k

[Henri Meli]

I learned something recently about 401ks that I didn't know before and it really threw me off. Now I'm scrambling for alternatives.

I have been working a corporate job for the last decade. During that time I have invested in my 401k and following the advice of lots of financial Gurus, I have contributed the max allowed by law every single year. Simultaneously, I have also been purchasing real estate... I own 4 properties and I'm always looking to add to my real estate portfolio.

Recently, I found a property I'm interested in purchasing. My plan was to move into that property and rent my current primary. After talking to lenders, I was told that I'm carrying too much debt and that I needed a very big down payment to keep my mortgage payments low and within manageable range.

Because I didn't have that much cash available, I called my 401k provider and asked if I could make an out-and-out withdrawal from my 401k and use the money for my down payment. I'm very far away from 59. I'm well aware of the 10% penalty for early withdrawals and the fact that I will be taxed at my current income tax bracket. I'm comfortable with those things.

But my 401k provided told me that I couldn't take money out of my 401k, unless I could prove "hardship". Under hardship they cited things like High Medical Bills, Burial/Funerals, Education, ... etc. Basically, I couldn't claim hardship for purchasing another home.

I wasn't aware that I can't even take out my own money from my 401k, whenever I wanted to, even if I was willing to take financial hits that come with it. Taking out a loan against my 401k could be an option. I have been using the loans for a while to finance some of my properties. But 401k loans have a limit of $50k or so. I need way more than that.

Needless to say that I have stopped the 401k contributions (only contributing up to my employees match).

Given the fact that I do have money, but I can't cash it. Based on your experience, how can I find people willing to lend me money? Can private lenders accept the balance in my 401k as proof that I'm financially capable?

Henri

[Robert Leonard]

@Henri Meli

I think you are ready to start talking to commercial lenders because you have established the fact that you know how to purchase and manage properties profitably. You are thinking conventionally about what your options are for financing while they change a good bit when you start to do commercial business and commercial lending.

I would not take the hit on an early 401k withdrawal under anything other than a real hardship scenario. Whether it's gains or not, its throwing real money away, IMO. When you leave your employer, your options will change for what you can do with that 401k. That's when you will get access to all of your 401k funds for real estate investing, but still not for the purchase of your primary residence. I would max the matched portion of the 401k and if you are eligible, max a Roth IRA for yourself and your spouse with any additional funds you can save toward retirement. The day will come when you can use that money to invest in real estate and make tax sheltered returns in the 401k portion and tax free returns on the Roth portion.

I like to see investors be aggressive about growing their real estate portfolio, but keep it manageable and avoid giving back what you've built by paying penalties and early taxes. The bank is doing you a favor if they are telling you that you need more of a cash reserve, you should always have that.