Have money in 401k thinking of take loan out to put money down on multi- family homes. Is this a good or bad ideal? Would have to pay loan back PLUS 8% in 5yrs, and can refi it 2x over life of loan.
Borrowing from your 401k can be more costly than you think. While you are paying the 8% interest to yourself think of the opportunity cost of not having that money invested in your 401k assets (typically stocks). If the market returns 10-20% over the next year that is return you never earn on your investment. The multi-family RE you are considering should offer sufficient upside to compensate you the foregone investment return on the 401k.
Another consideration is that if you leave your employer for any reason, the full balance may be due immediately. If you can’t repay, then the balance is considered an early withdrawal and subject to taxes and penalties.
I don’t think it’s an entirely bad option. I wouldn’t plan on keeping a loan for 5 years though. I’d only use it short-term (<6 months).
I would look at the ROI your use of the money would go toward and compare it to how well your 401(k) has done both recently and historically. If your 401(k) is like mine, you have many limitations as far as investment choices. I work for a large Fortune 100 company and we still don’t have many choices. I’m not a stock guru by any means, and the best my 401(k) has done on an annual basis was barely over 10% (not counting employer matches). My employer puts in 50¢ for every $1.00 I contribute up to 6% of my pay, so it’s like getting 50% ROI almost out of the bat. Again, I’d compare the projected ROI from both investment choices and go with the best one. In fact, I’m looking at a property now that will earn me 500%+ annualized ROI by using a short-term (<24 mos.) loan against my 401(k).
www.pensco.com (you can transfer you 401k money to them and then buy the property via your 401k) 30% of the Sales price from your 401k and then North American Saving Bank will lend your IRA the other 70%)
100% financing:
ck out pensco’s website they have a ton of free education on this subject.
I would advise against it. See if you can get 100% financing, if you have good credit. There are few situations for which I would dip into my 401K account.