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using 401k to buy real estate

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crews58
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using 401k to buy real estate  Reply with quote  

Looking for to buy some investment property. i have a 401k with my company through fidelity. can i use it to buy real estate. or could i even borrow it to purchase a property. has anyone ever tried this and is this even a good idea? thanks
Post Sun Sep 22, 2013 1:12 pm
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oldguy
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You can hold property inside an IRA - but you cannot put a loan on the property, it must be fully owned. And that probably makes it a bad idea for investment proprty, a big part of real estate profitability is leverage. Eg, if you had $200k to invest in rental houses you would not pay cash for a sinhle $200k house, you would break it into $40k blocks and make down payments on 5 $200k houses.

Note: IRA rules are federal. Your 401k rulees are in your company plan plus the fed IRA rules - I doubt that many plans will allow RE.

As for borrowing from a 401k to buy houses - you could but it's dangerous - if you hit a layoff you lose the houses AND the 401k. And, with mortgae rates at a lifetime low, why would you want to borrow from your 401k?
Post Sun Sep 22, 2013 1:30 pm
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clydewolf
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Re: using 401k to buy real estate  Reply with quote  

quote:
Originally posted by crews58
Looking for to buy some investment property. i have a 401k with my company through fidelity. can i use it to buy real estate. or could i even borrow it to purchase a property. has anyone ever tried this and is this even a good idea? thanks

You need to read the Summary Plan Description for your 401k plan.
That will tell you if you can or can not do as you are considering.

If your 401k has a loan feature, the most you can borrow is the lesser of $50,000 or half of your account.

Usually borrowing from your 401k is not a good idea for the reasons Oldguy stated, and the loan balance would be taxable income to you for the year you lose your job. One more gotcha, if you are under age 59 1/2 the 10% early distribution penalty would apply to your loan balance. Borrowing from your 401k is not a good idea.
Post Sun Sep 22, 2013 7:16 pm
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crews58
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Well please tell me how can i buy investment property with hard cash with out using my money?
Post Sun Sep 22, 2013 11:27 pm
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oldguy
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Mortgages are cheap - less than 5%. And the seller gets hard cash at closing (same as if you were paying cash). That's how I bought our 5 houses.
Post Mon Sep 23, 2013 12:57 am
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crews58
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That does make a lot more sense to use a mortgage loan. well i know i have been talking about it for so long so im going to just go out there and do it. Even if i mess up i will have gained more experience and education. Il keep it posted
Post Mon Sep 23, 2013 10:49 am
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coaster
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quote:
Originally posted by crews58
im going to just go out there and do it. Even if i mess up i will have gained more experience and education.

I like that approach. Use it myself. Wink

Good luck, and please do keep us posted. Smile

~Tim~
Post Mon Sep 23, 2013 3:37 pm
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williamjrose9
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I thought of calling this article "Don't Lose a Quarter Million Dollars by being a Stupid Real Estate Investor" but I changed my mind. While I was speaking at a real estate seminar in Reno, Nevada not too long ago I was approached by a gentleman who was almost in tears over his experiences with out of state investing. Why was this grown man so shaken up?
Post Wed Sep 25, 2013 11:30 am
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crews58
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Well I have been to 5 houses in 2 days all a fail they ranged from 12-20k they all where crap
Post Wed Sep 25, 2013 12:24 pm
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oldguy
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quote:
they ranged from 12-20k they all where crap


Tell us what your goal is - maybe we'll have some ideas.

Are you really looking for $20,000 houses? (There are some in the small inland towns in SC - little railroad shacks that are rented).

But if investing is your goal, don't buy junk - but nice houses in nice sub-divisions where young couples want to rent a starter home for 2 or 3 yrs.
Post Wed Sep 25, 2013 1:35 pm
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crews58
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old guy, my goal is to buy a rental before the end of the year. i want to gain knowledge from the experience, so as long as im in the postive cash flow i will have achieved my goal. I def would love to buy a more upscale house for younger renters, would be ideal. just only have so much money to invest. I feel like my area is great, i live in between greenville sc and Spartanburg SC. there are about 10 colleges in a 50 mile radius.
Post Thu Sep 26, 2013 10:33 am
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oldguy
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quote:
i want to gain knowledge from the experience, so as long as im in the postive cash flow


Well, the knowledge/experience of railroad shacks is way different from landlording 'normal' houses. The shacks are falling down and it is near impossible to keep the antique heating, plumbing, septic, electric functioning. Or manage the bugs/rodents. The only reason the tenants don't sue is that they have no other place to live so they just keep quiet and crash there. But when a tenant dies (or gets knifed), the relative's lawsuit points out that the landlord didn't provide 'safe' conditions. (BTW, I have a relative who owned 3 of those houses in your area so I know the drill second hand).

As for positive cash flow - do you want more taxable income? I sometimes refi'd my houses to increase my unrealized capital gains, lower my taxable income, and increase my leverage to make a higher profit. All of which resulted in negative cash flow on some of the houses.
Post Thu Sep 26, 2013 3:05 pm
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SmartSpender
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The oldguy is right - you could hold real estate in the 401K or you can buy reits (real estate investment trusts) which manage real estate assets themselves. If you're looking for it to be your tangible asset (and there's something to be said for that) cash is king - and mortgages are cheap - dont take the penalties and taxes from tyour 401K - heck you'd save money even if you jsut did an FHA loan on a property -

Smart Spender
Post Thu Sep 26, 2013 8:48 pm
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crews58
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Im listening to all of you. Oldguy you definitely right i dont wont to be involved with antique rentals houses that are driving me crazy with problems And expenses. Really want a positive cash flow, instead of a capital gain. Ok so leave the 401k alone, they wont let me have an fha loan. can only get a conv. loan 20% down. that limits me. b/c im only willing to put 10k in cash into something. that leaves me with houses in the 20-40k range? Confused
Post Fri Sep 27, 2013 1:55 am
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oldguy
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quote:
i dont wont to be involved with antique rentals houses that are driving me crazy with problems And expenses. Really want a positive cash flow, instead of a capital gain.


You have to decide, at this point in your life, if you want to build wealth - or if you want extra spending money.
If you buy a small place with good cash flow and use the cash to supplement your income, you will have a higher income (but not much capital gain).
Or, if you do the opposite - ie, leave the cash in the business (capital gains), you can become wealthy but you won't have a higher income.

I've never been to greenville - but here is an example of what's avaialble. I buy 3 bd 2 ba houses about 1200 sq ft, 2 to 8 yrs old. Just the right size for your customers (starting families) - the first owner hung the drapes & planted the grass. All appliances, water heater, AC, plumbing, electrical, roof, flooring, are all modern technology and near-new. So no expenses for about a decade.

http://www.realtor.com/realestateandhomes-detail/3-Pennwood-Ln_Greenville_SC_29609_M51848-98021?row=237#modal_PhotoGallery

Buy one, let it grow for 5 yrs, refi it to get the money back, use that money to make DPs on 2 more. Wait 5 yrs, repeat.
Post Fri Sep 27, 2013 4:10 pm
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