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

[Bryan DeSellem]

My wife and I found what seems like a killer deal near where we grew up, we now live 8 hours away. The house is a duplex that is currently rented for $1200/month per side and the asking price is $120k. The only thing the house needs is new appliances because they are the owners and they do not come with the house (strange I know). Naturally there is a lot of interest in this property due to the fact that they just dropped to this price last week from $160k, so there is a good chance I will pay more for the house. My question is: should I consider using a 401k loan of up to $30k to fund this? I’ve never took a 401k loan but I understand how it works. It will have a 6% interest rate and a 5 year term. At the same time I am rehabbing another duplex that will eat up most of my other funds, so purchasing this other property will have me stretched pretty thin. Is the deal worth pursuing and using a 401k loan, thoughts?

[Ian Kee]

@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.