Use a 401k Loan to Purchase Real Estate
Buying Investment Property with a 401k Loan
Using 401k loans is a great way to buy investment rental properties or the house that you want. Don't do a 401k withdrawal, follow 401k rules. You can buy small fixer-uppers or use the loan as a down payment for your rental investment.
401k loans are allowed by most plans and you to take out a loan against the balance. The maximum loan amount for a 401k type loan is $50,000 or 50% of your balance, whichever is the lesser amount. Typically the interest rates are reasonable and fixed through the life of the loan. Rates in the past 20 years have been between 5%-8%, which is much lower than you might get for a personal (unsecured) loan.
The term of a 401k loan is usually 5 years but if you use it to borrow for the purchase of your primary residence, you can get a 10 year term. I don't know if there is a limit to the number of times you can get the 10 year term but I have done it 3 times now. The main caveat to using your 401k is that if you lose your job, you are required to repay it in full. If you don't have the money, the loan is considered a withdrawal and you must pay income taxes plus a 10% tax penalty on the balance owed. So, if your job is not secure, don't try to use this type of financing.
Borrowing against your 401k is a subject that stirs lots of emotion, but does it make sense in certain situations?
- using a 401k loan to consolidate date is not a good idea.
Use the snowball method instead
- don't use it to buy a new car - buy a used car instead and pay cash (I buy my cars on E-bay)
- don't even think about using it for a vacation!
Can I use my 401k to buy a house?
I think that the best use of a 401k type loan is towards the down payment of your primary residence. And if you use the "Bootstrap method" of investing in rental properties, you probably can do this multiple times. A secondary use might be to go towards the purchase of a rental property, but you will probably need to use the 5 year term option.
There are some things you should be aware of when using your 401k for a loan.
- The interest is not tax deductible if you are borrowing it to purchase your house. It may be tax deductible if it is used for business purposes.
- You pay taxes twice on the interest.(This is not as bad as it sounds. Even if you are in the highest tax bracket when you retire it means an incremental increase of 2%.)
- If you default, you will have to pay a 10% tax penalty plus income taxes on the balance
There is a good discussion of this topic here -
Why not borrow from your 401k.
Why Not Borrow Against Your 401k?
Borrowing against your 401k is a controversial subject. Many experts seem to think that is not a good idea. Do you have some insight into this idea? Share it and we'll give you credit.
What Other Visitors Have Said
Click below to see contributions from other visitors to this page...
Return from 401k Loan to Real Estate Loans
Return to Investing in Rental Property Home
- How to Get Rich and Build Wealth
- Learn the secrets of how to get rich by using leverage and compounding. Learn the 8 steps to becoming financially independent.
- The Best Investment - Real Estate, Stocks or Gold?
- What is the best investment to make? Investing in rental property can beat stocks, bonds and gold in security, return and tax advantages.
- Investment in Rental Property - Rental Property Investment
- Investment in rental property page outllines the basic skills and knowledge you need to be a real estate investor and to avoid risk when buying rental houses
- Owning Rental Property - Adding Investment Property to your Portfolio
- Owning Rental Property; Learn how to choose the right investing software, make wise property investment choices, calculate property depreciation, real estate tax information and tips on finding the best investment property
- Buying a House for Rental Property Investment
- Some tips for buying a house for use as a rental property investment
- Residential Real Estate Investing Guide
- Single family residential real estate investing is the best way to start investing in rental property - buy a house!
- Buying Foreclosures - Buying a Home after Foreclosure - Buying a Bank Foreclosure
- What to look for when buying foreclosures either at foreclosure auctions or after foreclosure - bank owned properties
- Home Inspection and Home Repair Advice
- Perform a thorough home inspection before buying rental property. Get some house inspection tips on the knowledge you need to buy an investment property
- Get a free credit score instantly from 3 credit agencies and learn how to improve credit score
- Get a free credit score online instantly, what your free credit score report means and learn tips about how to improve your credit score
- Creative Real Estate Investing Ideas
- Here's a long list of creative real estate investing ideas to do deals for your rental property investment business
- Real Estate Loans - How to Finance Investment Property
- Real estate loans - the most complete guide to financing investment property on the web. Learn every source of funding your property investment.
- Rent to Own Advantage - Using Lease Options
- Leasing your house with a rent to own investing concept will optimize your profit and minimize tenant problems. Sometimes called lease purchase, lease with option to buy or lease with option to purchase. This type of renting mimimzes empty property, maximizes rent and gives you the best tenants.
- Tenant Screening Tips and Tenant Credit Checks
- Some tenant screening tips to ensure that your lease-purchase tenant will take care of your property. Doing tenant credit checks.
- Flipping Real Estate - selling your Investment Rental Property
- Flipping real estate the slow way makes more sense than the popular TV shows methods
- Investment Property Exchange - 1031 Property Exchange
- Use an investment property exchange (also called a 1031 property exchange) to sell your rental property without paying taxes
- Real Estate Forms - Free Real Estate Contracts
- Some basic real estate forms for rental property investment including lease option contracts for a rent to own concept and free real estate purchase agreement
- Real Estate Investing FAQ
- Real estate investing FAQ, ask or find answers to your rental property investing concerns, tenant problems or other investment property question
- Real Estate Legal Tips - Protecting Investment Property Assets
- Real estate legal tips to help you when buying and owning investment rental property - protecting your investment property assets, dealing with tenants, real estate forms
- Real Estate Resources to help investing in rental property
- A guide to real estate resources - real estate book, real estate courses and real estate web sites
- Investment Rental Property Blog
- Get updates to the Investing-in-Rental-Property website as new information is added and the latest news that relates to investments in rental property
- Investing in Rental Property SiteMap
- Detail list of web pages for Investing in Rental Property Website
- Free Real Estate Articles
- Real estate investing articles published by Investing-in-Rental-Property.com
- Contact Us at Investing in Rental Property
- Contact Us at Investing in rental Property Website
- Disclaimer Investing in Rental Property
- A disclaimer about the website Investing-in-rental-property.com
- About Investing in Rental Property Website
- About the author of the Investing in Rental Property web site