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To pull or not to pull?
Old 12-08-2015, 11:21 PM   #1
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To pull or not to pull?

I have 42k in 401k, and less than 5k in Roth. No cash savings besides emergency fund (just paid off some debt). I really want to buy my first home, and get in while the rates are competitive. Is it foolish to pull from the 401k for down payment (looking at 250k max home). Income is just under 80k at the moment.

The purpose of the home is for investment property. Considering certain factors, the money may do better in the house than in 401k.
Honest thoughts?
Thanks!


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Old 12-09-2015, 06:29 AM   #2
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I would NEVER pull from a 401K to buy a house. Keep saving. If you do not have a down payment, you are not ready to buy a house or rental property. You need more capital that you have for a rental house.

Keep renting. Get a roommate. Get a side gig. Save more. Max out your 401K, max out your HSA and do not use it, and save more in a traditional or Roth if you can. Once you have met those hurdles, think about rentals. Rentals are HIGH risk, high reward.

If you buy a rental in a 401K, and you do any work on it at all, it could be a violation of tax code. You cannot work on a 401K rental, as it is like an additional contribution. You need to hire out everything, including the management.
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Old 12-09-2015, 07:00 AM   #3
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Quote:
Originally Posted by averagejoe View Post
I have 42k in 401k, and less than 5k in Roth. No cash savings besides emergency fund (just paid off some debt). I really want to buy my first home, and get in while the rates are competitive. Is it foolish to pull from the 401k for down payment (looking at 250k max home). Income is just under 80k at the moment.

The purpose of the home is for investment property. Considering certain factors, the money may do better in the house than in 401k.....
I was about to say it was suboptimal but not a bad idea until I saw that you would not be living in it but it was an investment. I don't think it is a good idea to do it to purchase a real estate investment. Not only would you owe taxes on the amount taken out you would also owe a 10% penalty. Does your 401k plan offer a REIT alternative? If so, consider that instead if you really want to offer a real estate tilt.

As far as getting in before rates spike, I don't see mortgage rates increasing a lot in the near term.
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Old 12-09-2015, 07:55 AM   #4
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Buying a used home may require some fixing and maintenance. Since you have no cash savings, you have no buffer to maintain and fix that home. Home maintenance is something you did not consider. And consider that if you need to liquid assets like a house, you may spend 6% to pay a broker, so that's a loss. Your 401K may lose 6% in a market downturn, but so will your house. Based your situation, Do not pull money from 401K.


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Old 12-09-2015, 08:04 AM   #5
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Check your 401k to see how much you can borrow......it may be less than what you need for your home down payment.....then, you pay yourself interest while you pay the 401k back.....higher interest than available elsewhere but, again, you pay it to yourself. IF you're stay in the home for years.....I'd consider it but if you're going to sell it in a few years you'll then have to pay, as sellers, real estate and closing fees.....lot's of stuff to consider. The real advantage to owning a home is you chose how you live.....as a renter someone else tells you have to live.....to me it's more a lifestyle issue than a money issue. good luck!
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Old 12-11-2015, 10:33 PM   #6
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If you really want to invest your 401k money in a rental, consider setting up a self directed ira so you can shelter the returns


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Old 12-31-2015, 10:32 PM   #7
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Originally Posted by jerome len View Post
Check your 401k to see how much you can borrow......it may be less than what you need for your home down payment.....then, you pay yourself interest while you pay the 401k back.....higher interest than available elsewhere but, again, you pay it to yourself. IF you're stay in the home for years.....I'd consider it but if you're going to sell it in a few years you'll then have to pay, as sellers, real estate and closing fees.....lot's of stuff to consider. The real advantage to owning a home is you chose how you live.....as a renter someone else tells you have to live.....to me it's more a lifestyle issue than a money issue. good luck!

I second Jerome Len depending upon the amount and the property. I took a loan from my 401k and used it as the down payment on an investment duplex in 2009. The loan will be paid off in April and I will have benefitted close to 100,000 in equity due to the timing. I also cash flow $800 per month on it...one of the best investments I've made and I wouldn't have been able to do it without the loan from my 401k. There is a fee but no penalty this way and you are paying your own self interest on the loan.


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