Thoughts on 401K loans

[Josh Duncan]

Hello all, I'm working on trying to grow my rental business and looking at different avenues for funding. My situation currently is I have 1 SFH rental that is owned by my LLC and doing well, and also I'm doing a live-in flip on my primary residence. I'd like to add another SFH to the business in the near future with the main goal being grow the business as fast as possible. Been looking at hard money loans, and also looking at doing a 401K loan from my w-2 job. Anybody had any dealings with this?

Thanks!  

Josh Duncan

[Kevin Sobilo]

@Josh Duncan, a few thoughts:

1. In terms of maximizing your returns you want to compare the interest to an alternative. For example is a personal loan from a bank is 7.5 % that you could use as a down payment (after its seasoned), and your 401k loan is 4.5% but the 401k is expected to return 7.5% per year the money you save on one end you miss out on the other end basically and if your 401k returns are 20%, then you lose out significantly.

2. Reserves! You didn't mention having other money available. So, if you don't have reserves you NEED them. The more rentals you have the more risk there is to having a bad situation crop up.

Right now, even if you have no reserve money saved, if a bad situation came up you could tap that 401k to cover the situation.

3. Changing jobs! I believe if you change jobs or leave that job, you have to pay that loan back or else it counts as a distribution. So, it would then potentially cost you a penalty for early withdrawl and also income tax owed on it.

Note: This could happen NOT by your choice with a layoff. So, it is something to be wary of with the liklihood of choppy financial waters ahead.

4. If you are doing a live-in flip why not use that equity for a down payment with a refi or HELOC?

5. If your goal is to grow faster, buying rent ready properties isn't the usual way to do that if you have limited funds to start with. Many investors in that situation look for value-add opportunities. That is why BRRRR (Buy Rehab Rent Refinance Repeat) is so popular.

[Stevan Stojakovic]

When thinking about using a 401(k) loan for real estate, view it not just as an access point for funds, but as a strategic part of your overall financial plan. While it’s tempting to see the low-interest, self-repayment setup as a win, the key question to ask is whether the opportunity cost justifies the move. You’re pulling money from a long-term compounding vehicle to fund a potentially higher-risk asset. Can your real estate investment outperform the long-term returns of your 401(k), net of taxes and penalties if something goes sideways?

Another angle to consider is liquidity and flexibility. Real estate investing often demands reserves for unforeseen expenses. Using a 401(k) loan reduces your emergency liquidity, which could make the investment riskier if unexpected costs arise. Instead of tying up your retirement funds, tapping into financing specifically designed for real estate investors can keep your portfolio diversified and your retirement intact.

Leveraging your 401(k) is your personal decision, but framing it within the broader context of balancing risk, liquidity, and opportunity cost can clarify whether it’s the best tool for your goals.

Best regards, Stevan

[Rene Hosman]

Quote from @Josh Duncan:

Hello all, I'm working on trying to grow my rental business and looking at different avenues for funding. My situation currently is I have 1 SFH rental that is owned by my LLC and doing well, and also I'm doing a live-in flip on my primary residence. I'd like to add another SFH to the business in the near future with the main goal being grow the business as fast as possible. Been looking at hard money loans, and also looking at doing a 401K loan from my w-2 job. Anybody had any dealings with this?

Thanks!  

Josh Duncan

I'm curious if you have any money in an IRA? If so, and you're looking at a purely rental property (not to live in at any point) you could consider opening a self-directed IRA to invest in the new property without having to pull money out and pay penalties? I met with Equity Trust at BPCON2024 and have been exploring this option myself as well! https://www.trustetc.com/ 

[Josh Duncan]

@Rene Hosman

Thanks for the reply! At this time I do not have any money in an IRA its in an account provided by my employer. It is flexible though, in that I can roll it into any IRA at any time. I've been looking into this very thing! I am unfamiliar with being able to roll it into an IRA and THEN be able to invest it into properties. Very interested in this!! That was my whole reason for the post, trying to figure out how to use my sizeable retirement account to my benefit to grow my business of owning/managing rentals.

[Josh Duncan]

@Rene Hosman 

Did some research on these options and found some unfortunate news. My retirement system doesn't allow for me to roll anything over given that I'm still employed with the company and also under 59.5 years old. This is very frustrating given that I was under the impression that I could just roll the entire retirement balances over to a IRA and then have complete control to invest that money into properties.