Using 401(K) Loan to finance first property

[Louis Mannikko]

Hello,

Just curious what you all thought about the idea of using a loan from your 401(k) to finance the purchase and rehab of a 1st property.

My plan would be to use 40-50k to purchase a small rental apartment, fix it up, and then refinance the property to pay back the 401(k) loan.

Any downsides to this?  Thanks.

[Jason Krick]

I've done this with my first deal, and I'm thrilled with it. There are valid points to each side of this discussion. Here are my views:

1). After tax-dollars--Yes, you pay back the loan with after-tax dollars. However, any loan you get is paid back with after-tax dollars, so it should be moot. Scenario a: If you take a loan for 100k from a lender, you pay back that loan with after-tax dollars. Then, a 401(k) distribution is taxed. Scenario b--a 100k loan from a 401(k) is paid back with after-tax dollars. Then the distribution is taxed. My rate on my 401(k) loan is significantly lower than any HML and a little lower than bank rates.

2) Qualifying/applying--I don't need to apply or qualify for it. It's my money. I simply fill out a form with my wife signing it with a notary.

3). Return--in the short-term, I will force approximately $45,000 equity through a loan of $25,000. I can't get that return anywhere for a 6-9 month timeframe, and would more than cover any fees or tax concerns.

The biggest risk I see is that if there is a job loss, the loan is considered a distribution and you need to pay tax and a penalty on the money. My job is extremely secure, so this risk is minimal for me.

I will say that my views are based on using that money for a flip or a BRRR method, where the loan is short-term and paid back quickly. I do not believe that taking out a 401(k) loan to use as a down payment for a rental, and paid off long-term is the best use for it.