Author Topic: Take money out of 401k (penalty free) to buy rental home  (Read 3325 times)

Telephone

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Take money out of 401k (penalty free) to buy rental home
« on: December 28, 2012, 10:21:44 AM »
Hey Mustachians -- since housing where I live is still very affordable and interest rates are around 3% I have been toying with the idea of buying a multi-family house.  Is it a bad move to use some money from my 401k towards my downpayment? I will not be penalized if it is used to buy my first home (I am unsure if it is still taxed, I assume it is) -- and since this house would generate income and be paid off by the time I would turn 59 and a half it could still be a part of my retirement.

Please give me any advice you can.

Blackbomber

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Re: Take money out of 401k (penalty free) to buy rental home
« Reply #1 on: December 28, 2012, 10:41:26 AM »
Check with your bank about the chances of getting a 3% loan on a multi. When their inspector comes in and sees the units, they are probably going to insist on an investment property loan, with a corresponding higher interest rate (even if you intend to live there). It happened to me, but in my case it was an illegal two family, and the inspector called ahead of time to advise me not to have the oven / fridge visible in the second floor apartment.

I'll let others comment on the 401k part.

sheepstache

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Re: Take money out of 401k (penalty free) to buy rental home
« Reply #2 on: December 30, 2012, 05:11:18 PM »
I'm thinking you're talking about taking out a 15-year loan on the 401k for a home purchase, in which case I don't believe it's penalized or taxed.  Because you're borrowing the money with the 401k as collateral, as opposed to taking the money out.  I took a loan from mine for part of an apartment purchase price, but I'm just paying it back over 4 years, not doing the special home-buying deal so I know less about that.  Part of the rules are dictated by regulations (for example you can only borrow 50% of the value) but some stuff depends on the company that administers your plan.  For example whether the loan amount is kept in your regular investments or placed in super conservative ones where you would miss out on market rises (or avoid market losses) in the meantime.  And what the loan origination and maintenance fees are.  And your options if you want to change the payment plan in the future.  I think it is standard that if you leave your job you need to pay the full amount back within 60 days or it is penalized like a withdrawal, in which case maybe there is some special consideration if it was for a home purchase, I don't know, probably pretty easy to google.  How long would it take you to save up the amount you need if you didn't use the 401k?  Do you have other ways to get a line of credit if the rental property needs immediate repairs or you have some other emergency?

arebelspy

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Re: Take money out of 401k (penalty free) to buy rental home
« Reply #3 on: December 30, 2012, 06:29:53 PM »
You can withdraw penalty and tax free from a Roth for purchase of a first time home.

I don't think you can from a 401k.

http://www.investopedia.com/ask/answers/04/010504.asp
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SunshineGirl

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Re: Take money out of 401k (penalty free) to buy rental home
« Reply #4 on: January 02, 2013, 09:34:05 AM »
What are your plans for living there or not? What is your current financial situation?

I think buying a fourplex as an owner-occupant could be an excellent move, IF the other tenants' rent would cover the mortgage, allowing you to live free. I see no problem using 401K money to do this. The closer you are to a university, the better, and if you are near a university, pick the best neighborhood you can near it. It's worth a higher price to buy where the professors like to live and the grad students like to rent.