What may actually be helpful to a family (stability) is not what regulators look at.

Make sure the zoning, local building department/regulations, and neighborhood allow you to put a tiny house on your property and rent it out.If that is not possible, using that money for the next property makes sense.In general, I think increasing housing density will help provide more badly needed housing affordably.To Your Success!

People’s Republic of Asheville is more concerned with STR regulations than people living in boxes on the streets.

Pick up the phone or stop by local code enforcement offices to make sure that you have a crystal clear understanding of local laws and regulations.

Is it tied to changes in the market, a response to new regulations, or part of a long-term plan?

As with most municipalities and jurisdictions, the evolution of the AirBnB market has spawned regulation and restrictions on where, when and how a STR can operate.

I do NOT trust “regulators”.

Much of my career for the last decade has been in Cybersecurity, and we feel the same about DOJ and regulations around incidents. 

That would bypass many city/state regulations that force landlords to rent to people here illegally. 

I also doubt very seriously that any brokerage/custodian is going to allow this kind of loan with 401k assets; it's likely going to need to be a 401k general purpose loan, which is highly regulated (as someone else mentioned).