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Your 401k Real Estate Investing Questions Answered


401k real estate investing is a possibility. However it is important you understand how you can use your 401k for real estate investing and the limitations and consequences that come with it. First let’s consider your options.

First off you need to understand that you cannot use the funds in your 401k directly to buy an investment property without incurring penalties. Unless…you are 59 and a half or older in which case you can just take money out of your plan and then use it for real estate or for that mater, for whatever you want.

If you are not 59 and a half and take money out of your 401k this would be considered an early distribution and would be subject to ordinary income tax plus a 10% penalty…ouch! Now let’s say you were to find an incredible real estate deal. Who is to say that it would not be worth the penalty if the deal is so profitable that you can make multiple times the penalty?

401k real estate investing this way would be a judgment call on your part once you have weighed the pros and cons. I just want you to be aware of the penalties you would face if you use money from your 401k.

401k Real Estate Investing: The 401k Loan

The second option you can consider for 401k real estate investing is taking a loan against your 401k. This option has specific limitations and rules. The IRS has rules for this and your 401k plan administrator should have all the details and can also impose more restrictions, but at the least you will have to comply with the following loan guidelines:

  • You can only borrow up to $50,000 or 50% of what you have in your 401k, whichever is less.
  • You have 5 years to repay the loan. There is an exception to this if the funds are used to buy a primary residence.
  • If you lose or change jobs you have 60-90 days to repay the loan in full. This is a big one to me...having been through a layoff before, who is to say that the job you have today is going to be there tomorrow?...
  • If you cannot repay the loan it will be considered an early distribution and you will pay taxes plus 10% penalty
  • You loose the growth on the amount that you borrowed. Since the funds in your 401k will now be lower,whatever return or interest you were making on your 401k funds are now based on a lower amount.
  • The interest rate is prime plus 1-2%, the good news is that you pay this interest to yourself.
  • No credit check or qualification needed. It’s your money after all so as long as the money is in the account you should not need to qualify for the loan.
  • Provides much better terms and interest than a credit card
  • Loan payments come out of your paycheck…whether you want it or not
  • Monthly payments are made with after tax money in contrast to your 401k contribution which are made with pre-tax dollars
  • Interest is not tax deductible in contrast to the interest on home mortgages.
  • Low costs…as long as you avoid penalties and taxes

Now that you are more informed on the rules of 401k distributions and loans let’s consider how 401k real estate investing can be done:

  • Through a qualified distribution. Like I mentioned above, if you are 59 and a half or older you can take the money in your 401k and buy a property either for rehabbing and reselling or for renting out. All you have to make sure is that the return you will be getting in real estate is better than what you would get if you left it in the 401k. Expecting a 10% return on rental property or 20% or more on a flip is realistic in my opinion.
  • Rehabbing and reselling. As an experienced rehabber myself I know that rehabbing requires a short term source of money which a 401k loan can provide. You can either take out the loan and use the funds to pay for repairs or lend the funds to someone like me who would pay you 10%,12% interest or more.
  • Wholesaling real estate. Taking a short loan on a 401k can help you with the earnest money or needed for securing a property in a wholesale deal. You can even pay for a light cleaning and trashing of the property you want to wholesale so that it’s more attractive to a potential buyer.
  • Down payment on an investment property. I suggest doing this with a 401k loan only if you have a plan to quickly repay the loan, like refinancing or selling your ownership to someone else, etc.

Now that you can better understand the possibilities of 401k real estate investing you can see your options and determine if this is right for you. Just make sure you understand the rules and limitations so that you can make an informed decision.


References for 401k Real Estate Investing: 401(k) Resource Guide - Plan Sponsors - General Distribution Rules. http://www.irs.gov/retirement/sponsor/article/0,,id=151926,00.html. Accessed 7/31/12.


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