House Hack vs 401k - CARES Act

[Tyler Kress]

Hi All!

I've seen a few videos recently on the opportunity with the CARES act to pull 401k $ for real estate investing. Basically in this analysis we assume we can withdraw our 401k balance with no penalty, and deducting the income tax due immediately from potential REI. My wife and I wanted a deep dive on the numbers and general financial advice so we hired a CFP with no skin in the stock game or products to sell. I was convinced when we looked at the numbers and described our goal to replace my office income with cash flow income (within the next 10 years) the 401k withdrawal to put towards a property would be a no brainer. But after he runs the numbers he advises us to not touch our 401k or at most only take half of the balance. Without doing a deep dive on his reports yet, I put together a rough spreadsheet isolating the performance of our 401k balance over the next 30 years (when I hit 60) vs. an owner occupied 4-plex using a 3.5% down FHA loan.

Please feel free to poke holes in my numbers or remind me of something I'm not considering... otherwise the decision seems pretty clear to me that we'd want to withdraw our 401k!

401k Balance: $45k

401k Performance over 30 years: CFP assumes 9% growth over 30 years. Pre-Tax Balance: $597,046

Balance unlocked at age 60 after 22% fed income tax reduction:$465,696

4-Plex Investment: $35k (FHA 3.5% Down + Repairs/Renovations)

4-Plex Purchase Price: $200k (typical for my area)

Cash flow over 30 years assuming $200/door = $800 * 12 * 30 = $288,000

Appreciation gains over 30 years assuming 2% appreciation = $162,272

4-Plex Cash Flow + Appreciation after 30 years = $450,272

Notes- cash flow is still $800/mo since we will rent out the current unit we are living in at $200/mo (acquiring 4 rental units). We have been through enough with our first duplex rental property that should help minimize risk of buying a bad deal or not doing enough thorough inspections/background checks/etc. 

There are also the intangible benefits like how you don't just get the lump sum of 401k at age 60 without paying more taxes, tax rates likely to be higher in 30 years, cash flow now will help us reach our cash flow goals/retire earlier, less eggs in the market basket, etc.

Thanks for the feedback!

[John Warren]

@Tyler Kress there is no right answer to this question, and the problem with analyzing a theoretical 4 plex versus the market is that you have to take an average deal as your starting point. The four unit that I purchased in Lyons, IL that started my journey has averaged a 100% ROI every year since I purchased it. It will not continue to return that high of a return, but it has still destroyed any type of retirement account investing I could have done. In addition, I have re-invested that money into several other deals which has greatly amplified the total returns from that initial investment.

I think that is the other part a lot of stock investing folks miss. You can't 1031 exchange your stock into 10 more stocks. You can sell that 4 plex if the time is right, and then re-invest the proceeds into an 8 unit or 12 unit. This is how average folks in real estate become incredibly wealthy over time.