Use 401k Loans 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. 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 of 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.

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