401(K) Loan To Buy Into Syndication or Equity Fund

[Yuuj V.]

Hello Hivemind!

I'm hoping someone can lend me a hand on this math problem...

HYPOTHETICAL: I have a $100,000 401(k) account. I can take a loan for $50,000, with a payback period of 5 years and interest rate +1 point above prime lending rates. (So about 4.25%) **NOTE: Anything paid back will be deposited straight back into my 401(k), including interest**

Scenario: I would like to leverage this loan and invest into a 1) Syndication deal like a MultiFamily Apartment or 2) A Equity Fund that buys Commercials Multi Family RE. 

Let's pretend both 1 & 2 have industry average returns of 7% (Cash on Cash) and Preferred Return of 14% over 5 years. 

A $50K Investment would provide:

• $3,500/Annual CoC, $291/Mo CoC
• $17,500 return in 5 years through CoC alone
• $4,000 + return of capital ($50,000) year 5
• Total Return is $71,500

A $50K Loan would cost:

• $868.41 Monthly installment taken out of paycheck over 60 months
• $10,421 Annual payback
• I will need to stay employed for the next 5 years at the same job

My thoughts: 

Obviously, the cash flow from the investment will not cover the loan installments. But the cash flow would be added to the balance sheet. I would be paying money out of my W-2 paycheck to re-pay my loan to myself in my 401(k), thereby adding to the balance sheet. 

At the end of 5 years, I would technically be $21,500 'richer' on the balance sheet due to the investment, as well as $50,000 added additionally to the balance sheet from repayment of the loan from my W-2.

I'm literally taking money out of a tax-advantaged account that I can't touch until retirement, without fee's and penalties, and using it to invest in cash flow assets that I will get back at the end of the investment period. 

My question is:

What am I missing? I'm sure there are tax advantages which are a given, but I can't help think this is something I should avoid doing. Technically, from a loan perspective, my cashflow would pay almost half the loan at $21,500, and my W2 would pick up the remainder. So the actual 'cost' to me is $577.41/mo & $34,644.6/total repayment after 5 years.

What are the disadvantages? 

Is my thinking/numbers correct? 

Anyone ever try something like this?

Looking forward to what others think. 

Thanks!

Yujin

[Taylor L.]

Personally, I would find another way to fund this investment. Can you transfer to a Solo 401k or SDIRA?

The negative cash flow is really what sinks it for me. Plus, remember that this deal may not meet its projections (because that is always a possibility). In which case you'll still have to work to pay off the loan.