401K roll over to payoff investment property

[Dominik Makaneole]

Aloha All, Looking for Tax specialist or investors who have experience with rolling over a 401K into investment properties.

My situation: 1) I have a military retirement so I'll always have something to eat and medical insurance.  2)  My wife and I have 8 rental units which all cashflow in the Hawaii market which sees higher rents and equity every year.  We are not at what the IRS considers retirement age.  We both are planning on changing jobs soon and our 401K's could pay off 4 rental units.  Our 401K's produce 10% a year.  Rents in Hawaii have climbed 22%-29%+ in 5 years. Average sale prices up 45% from last year.  

My wife and I have been land rich cash poor for many years because of our strategy to acquire property in an area with a high barrier of entry.  We are looking to minimize the risk of hurricanes, etc. by getting these mortgages paid off ASAP.  Our 401K should jump start the snow ball affect in paying off these loans.  Also, we want to enjoy life more now that we have young grandchildren.

Thank you for any advice you all can offer,  

Dominik Makaneole

[Joshua Thompson]

Aloha Dominik! I was stationed out on Oahu a while back, good times and good people!

This, in my opinion, is more of a financial question rather a tax question.

I'm a big fan of diversification but a few things didn't make sense here. Why pay off 4 rental, that usually has increasing expenses and average 6% rent increase yr/yr (it's been a extremely high rent increase the past 6 years) by cashing out a 401k that averages 10% per year? Don't get me wrong I know the benefits of paying off a mortgage early but now you're putting more eggs in the HI basket considering you're nervous about hurricane exposure. I much rather see you adjust your insurance to match current market rates, let the tenants continue paying off your mortgage, and continue to invest in your 401k.

If you take funds from your 401k to do this you might get hit with the 10% early withdrawal penalty + the income tax if it's not a Roth account, and that is only at the federal level.

If cash is what you desire to pay off a few of the rentals, have you considered selling one of the rentals, pay off as many mortgages as you can with it, and save a few thousand to buy a different property somewhere safer from hurricanes? Yes, this will result in a tax hit but at least your 401k can continue making you 10% per year, you diversify more, and cash flow will increase from those properties.

The big thing comes down to your goals, what you want to accomplish and your full financial picture.

Good luck!