Forfeit my 401K benefits to invest in RE ?

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Forfeit my 401K benefits to invest in RE ?

Michael D.
Rental Property Investor · Cleveland, OH · Member since 2015 · 24 posts · 6 votes

Hi everyone,

I need some advice moving forward (yes I understand you're not a financial adviser)

I have great 401K benefits through my employer they'll match up to 50% of whatever I contribute and vesting is immediate.
i.e. I contribute 18K they add 9K, which is what I'm currently contributing, this is a new rule since 2016 (previously it was 50% up to 6% like other companies).

Obviously this is a tremendous benefit which I'd like to keep using, but I feel I can put that money to better use as a down payment on a sfh/2-4 plex/etc..

I've been in contact with the broker that manages the 401K and I've asked;
1. Can I roll over my current 401K into an IRA while I still work for the company?
=> No, not allowed.
2. Is there some form of self direct method that I can use with my 401K?
=> Yes, via brokerage link. But investing is only allowed in stock market securities, not Real estate.
3. What other options do I have to invest in real estate?
=> You can take a loan out on the 401K, max amount able to lend is 45% of your 401K


What would you advise me to do? I understand that having a diverse portfolio is key but maxing out my 401K does chop into the amount of cash that I can save each month for a down payment.


Thanks in advance!
Michael

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Roy Oliphant
Rockwall, TX · Member since 2014 · 380 posts · 211 votes
10y

@Michael D.

I am not a CPA and you need specific tax advice regarding this.  However, if you put the max in (18K) wait for the match (9K) and then borrow 12K (27K*45%), you have 2/3 of your money for RE investment, you are leveraging the 401K return to 150% of your investment (9K match on net 6K Investment) and you have enough from the match to cover taxes and penalties if you cant pay the loan back when your RE investments are paying so much money you don't have to work anymore (LOL!!!)

Seriously, a guaranteed 50% return on your investment in the first year for doing nothing but saving the money? Plus don't forget the tax deferral on that income that you would have to pay if you don't do the 401k. I don't know how you risk that for the joys of RE investing. Build the 401K and convert it to an IRA when you change jobs in a few years.

Just one man's opinion.

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  • Larry H.
    Investor · San Antonio, TX · Member since 2016 · 90 posts · 28 votes
    10y
    I currently have a 401k loan that I used towards my investment properties. I didn't want to do it, but sometimes you just have to do what you have to do to make things happen. At the time it seemed like my only option to get the cash I needed.
    1Reply
  • Roy Oliphant
    Rockwall, TX · Member since 2014 · 380 posts · 211 votes
    10y

    @Michael D.

    I am not a CPA and you need specific tax advice regarding this.  However, if you put the max in (18K) wait for the match (9K) and then borrow 12K (27K*45%), you have 2/3 of your money for RE investment, you are leveraging the 401K return to 150% of your investment (9K match on net 6K Investment) and you have enough from the match to cover taxes and penalties if you cant pay the loan back when your RE investments are paying so much money you don't have to work anymore (LOL!!!)

    Seriously, a guaranteed 50% return on your investment in the first year for doing nothing but saving the money? Plus don't forget the tax deferral on that income that you would have to pay if you don't do the 401k. I don't know how you risk that for the joys of RE investing. Build the 401K and convert it to an IRA when you change jobs in a few years.

    Just one man's opinion.

    3Reply
  • Henry J.
    Monterey Park, CA · Member since 2014 · 157 posts · 80 votes
    10y
    Before you take out a loan, understand that the loan will be due when you leave the job (or whatever amount of time you have - 60 days?) before the loan becomes part of your income and you are assessed 10% tax penalty. Find out the exact details before you take out the loan. If you have automatic 50% return from company match, I would stick to that for now. Once you have a unit under your belt, you have the tax write-off to start. Let your tenant pay your mortgage. If you have PMI - you can do the math to figure out if it's more beneficial to keep in 401k or pay down mortgage.
    2Reply
  • Michael D.
    OP
    Rental Property Investor · Cleveland, OH · Member since 2015 · 24 posts · 6 votes
    10y

    @Larry H. that's exactly how I feel right now, I have some cash saved up and a decent amount that I can loan to put towards a down payment on a duplex. 

    @Roy Oliphant while yes I can take loans out of my 401K (after recalculation it's more around 33% what I can loan) there's got to be a limit to that. It's more of a liability than an asset when taking out a loan. I'd rather have the cash up front vs. paying off a loan to myself.
    I work for a big tech company, so switching jobs is not likely to happen in the foreseeable future, thus ruling out the rollover.

    0Reply
  • Michael D.
    OP
    Rental Property Investor · Cleveland, OH · Member since 2015 · 24 posts · 6 votes
    10y

    @Henry J. That's exactly what freaks me out about the loan too. If I were to lose my job I would need to repay the loan(s) after x amount of days. If I'm carrying 5 loans that's would be terrible, hence why I'm asking for advice moving forward :)
    I can determine the repay time on the loan myself 12, 24, 36, 48 or 60 month's at 4.50% interest.

    Henry you mentioned if I have PMI? I was under the impression that a minimum of 25% down was necessary for investment properties. (I also heard a rumor that 25% would drop to 15% sometime in March)
    If it's possible to put less down, I'd gladly hear more about it.

    0Reply
  • Chris Soignier
    Real Estate Broker · North Richland Hills, TX · Member since 2013 · 1k+ posts · 607 votes
    10y

    It's awfully hard to pass up a 50% immediate risk-free return.    You'd even be better off doing that, then having to take a disqualified distribution and pay the tax + 10% penalty vs. just investing it all in RE.

    1Reply
  • Henry J.
    Monterey Park, CA · Member since 2014 · 157 posts · 80 votes
    10y
    I was reading your profile and noticed you are in the process of getting a duplex. If you are doing BRRR then you should qualify for low down (5%?) payment. I think you will need to live there for a year. This is the time you might want to evaluate if putting down more / borrowing against 401k would be beneficial vs paying PMI. For investment SFH properties I thought minimum down payment is 20% for 1st 4 properties. When you have more than 4 units I think it becomes 25%. Talk to your loan officer for details.
    0Reply
  • Bryan DruryPro Member
    Investor · Owensboro, KY · Member since 2008 · 131 posts · 65 votes
    10y

    @Michael D.,Is the duplex going to cash flow a 50% return in 1 year? If its a smoking deal it might. Add up all the other returns from the duplex and it would probably beat 50% return even for a marginal deal. But I'll bet the duplex is more management and headache intensive than investing in the 401K.I would convert the 401K to a self directed retirement account after they fire you,down-size you, or you get fed up and leave.In the mean time do both. Max out the 401K and save up for a down payment for the next deal by working your butt off so they don't fire you.To do the duplex deal use other peoples money for a down payment. You seem bankable. I think @Brandon Hall had a blog post on this subject that may interest you. Look up his writings, he's a sharp CPA

    1Reply
  • Franklin Romine
    Visalia-Fresno, CA · Member since 2009 · 1k+ posts · 863 votes
    10y

    When I had a day job I built up my 401k maxing it our for 5 years.  My employer allowed me to borrow against it to purchase a couple small properties up to 50K.  The one nice thing about a balance in a 401K account is you can use it as proof of reserves for lenders.

    Frank

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  • Michael D.
    OP
    Rental Property Investor · Cleveland, OH · Member since 2015 · 24 posts · 6 votes
    10y

    Hey @Henry J. it's not a BRRR, the duplex is in a different state. And you're correct SFH are 20% down. My loan officer said because it's a duplex it's 25%. That deal hasn't gone through yet, an issue came up with one of the tenants. They didn't want to cooperate with the inspection to the seller is starting an eviction on them.

    @Bryan Drury the duplex will provide about 20%, so not even close to 50%

    @Franklin Romine thanks that's a good tip actually.

    0Reply
  • Steven Eitreim
    Rental Property Investor · Hamel, MN · Member since 2015 · 54 posts · 48 votes
    10y
    Originally posted by @Roy Oliphant:

    @Michael D.

    Seriously, a guaranteed 50% return on your investment in the first year for doing nothing but saving the money? Plus don't forget the tax deferral on that income that you would have to pay if you don't do the 401k. I don't know how you risk that for the joys of RE investing. Build the 401K and convert it to an IRA when you change jobs in a few years.

    Just one man's opinion.

     While I largely agree with Roy, we have to remember that that 50% return is only on year 1.  after that, it's subject to the return on the investments within the portfolio (although you can look at the gains from the company match as bonus, since that money was free to you). 

    I was also just considering this option, and actually called Pensco yesterday (this was a sponsor of one of the BP podcasts) about transferring my 401(K) into a self-directed IRA. They also suggested it's very difficult to get access to those dollars until you leave your employer (which I also have no intention of doing).

    I plan to use more home equity and creative financing to fund deals going forward... this option seems like a headache.

    0Reply
  • Kerry BairdPro Member
    Rental Property Investor · Melbourne, FL · Member since 2011 · 3k+ posts · 2k+ votes
    10y

    As @Franklin Romine said, having proof of reserves is quite nice.  

    0Reply
  • Ryan Billingsley
    Investor/Realtor · Wentzville, MO · Member since 2014 · 846 posts · 431 votes
    10y

    @Michael D. I have also borrowed against our 401k to buy rental property. If you can buy right (75% or less of ARV) you are able to use delayed financing based off of appraised value with a max loan amount of what you paid for the property. This would allow you to take the money you borrowed from your 401k back out and pay the loan back. BRRR strategy. I just completed this process and just sent the check to pay off my 401k loan. I will end up with just a couple thousand in closing cost in the deal.

    0Reply
  • Michael D.
    OP
    Rental Property Investor · Cleveland, OH · Member since 2015 · 24 posts · 6 votes
    10y

    Just listened to podcast #17 I'd like to hear what @Jeff Brown thinks about it

    0Reply
  • Gabe G.
    Greenwood, IN · Member since 2013 · 346 posts · 93 votes
    10y

    50 percent of whatever amount, is a great match in the day of no pensions.

    I would milk it as long as I could.

    0Reply
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