Should I use a 401K Loan to fund a deal?

Question

Ian Kee · Answer

@Debra A. Hopefully this doesn't come across as rude....but if you were taught to never touch your 401k, someone taught you who wasn't thinking outside the box very much. Why not take a loan on the 401k? The interest paid on the 401k is paying himself back, plus the return that he'll get on the deal is extremely likely to be way better than what the 401k is earning. A traditional 401k that is invested in the traditional instruments such as stocks, bonds and mutual funds, is typically earning you way less than if you self directed it. Obviously assuming you know what you're doing.

So in short, I would say yes to the 401k. You should be able to borrow up to $50k or 50% of the value of the 401k....but consult your plan administrator to know for sure. The other matter however is if you should be doing the deal at all. If you're stretching yourself too thin, maybe not. You might get lucky and be just fine, but you don't want to train yourself to stretch yourself too thin. Do that and something inevitably will go wrong in the future.

George Blower · Answer

@Bryan DeSellem

The plus about taking the 401k loan is that you won't have to go through a credit check.

Frankie Woods · Answer

6% is standard about now (I just got a 5.875 with a 776 credit score).  It is still incredibly low historically speaking.  Rates are most likely going to continue to rise unless we hit another recession unexpectedly (though keep in mind we are in a historic 10 year bull run).  25% down is also standard for investment properties.

If you don't already have a HELOC, remember that it will affect your DTI so be careful.  If you do, it's already counted against you so fire away.  The bank will most likely lower lower DTI due to a new 401k loan (if you proceed with that strategy), so again, be careful and do the math / keep an open dialogue with your bank.  I think your strategy is sound.  When you refi, pay back the HELOC and refund your 401k.

A bank pre-approval is only good to give your seller peace of mind that you can close.  There is no guarantee that the process will survive underwriting, especially if you are taking out additional loans during the process, which would affect your reserves and your DTI.

Your head is in the right place and you are definitely ahead of the pack in terms of creativity from a "new" investor.  I have a strong suspicion that you are going to make this work.  Get some!

Debra A. · Answer

I was always told to never touch your 401(k). There are many options out there now for funding real estate investments that will not only take in to account your monthly income from W2's or in your case retirement/pension but also look at the rent the property itself is bringing in. You should be able to qualify with that especially if the property is bringing in $2400/month. If you need the money for a down payment, then you probably shouldn't be looking to purchase just yet, as you will want to make sure you have enough reserves in case something happens...like your car blows up and you need money for a new one or the tenants decide they don't want to pay their new landlord the rent anymore. lol BUT now on the other hand...you're rehabbing another property right? What about a delayed financing option on the other property? Cash out on that one and use it to purchase this duplex? Just my thoughts...

Ian Kee · Answer

@Debra A. Yes!!! Isn't it great!???!! There are people with millions of dollars in their accounts, how does that happen when you can only contribute $18k a year? Growth...and not through the measly interest from stocks and bonds or mutual funds, which get eaten up with fees.... but from self directing them and investing it in real estate!

Debra A. · Answer

@Ian Kee Not being rude at all, that's why we're all here isn't it. The interest that he'd pay on a loan from his 401(k) goes back to his account??? I guess I gotta look into my 401(k)....lol

Tom S. · Answer

@Bryan DeSellem  Throwing in my 2 cents.  I've borrowed from my 401k a few times to makes deals happen, although generally short term.  Just be sure to weigh the risks.

If you lose your job, it becomes due and payable or else it's a taxable event.  More importantly, say your current job is fine and stable but you're offered a better opportunity with another employer.  You'll have to address the loan in order to jump jobs.

- Tom

Dave Chow · Answer

I saw lots of people took money out of 401k to fund.

6% seems high to me.  Lender shopping might be needed.

Rhonda Wilson · Answer

@Bryan DeSellem If you really believe in the deal, borrow from your 401k. When you can, pay it back. One thing to keep in mind is that you will have to pay it back in 5 years. Make sure that you have the cash flow to do it.

Should I use a 401K Loan to fund a deal?

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