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Are you planning on using your 401k to buy a multi-family investment property? If so, you’re not alone.

Every year, thousands of people around the world consider tapping into their 401K’s to buy investment properties for the first time because investors who have sizable 401K’s may be tempted to use the funds in their retirement accounts to get started with investing in multifamily real estate.

If you’re ready to use the funds in your 401K to invest in multifamily real estate, this article will provide with several strategies that you can use to accomplish this goal.

How To Finance Your Multifamily Purchase From Your 401K

One of the great things about pulling money out of your 401k to purchase your first multi-family investment property is that there are several different ways that you can do this including the following.

Loan – The first way that you can purchase a multi-family property using the funds in your 401k is to take out a loan of up to $50,000 from your 401k and use that as the down payment on the multifamily property that you intend to purchase. If you choose this option, keep in mind that you will have 5 years to pay that money back, compared to 15 years if you were to use the money to buy a primary residence, so it’s best to carefully consider this option and be certain that you will have the cash flow to pay this loan back within 5 years.

Hardship Distribution – Another way most investors borrow money from their 401k’s is by requesting a hardship distribution.

With a hardship distribution, keep in mind that there may be specific guidelines for you to follow regarding the availability of funds so it’s important to contact your 401k plan administrator to find out what the specific details of hardship distributions are with your plan for you to move forward with this option.

Unlike taking out a loan from your 401k, a hardship distribution cannot be repaid, and it may increase your tax liability, so this something to seriously consider before you choose this option.

Rollover Money To Your Roth IRA – Besides taking out a loan from your 401k, or choosing to go with the hardship distribution, another option that you can choose is to roll over money from your 401k into your Roth IRA.

With this option, you can rollover as much as $10,000 (or more) that you want to use towards purchasing your first multi-family property. Keep in mind that 401K funds are typically classified as “pre-tax contributions”, while Roth IRA contributions are “post-tax”, this means that you may increase your Federal Withholding or take-home pay.

Self-Directed 401K – As I mentioned in my previous post, another great option that you can use for purchasing multifamily real estate with your 401k is to choose a solo 401k. With this option, you have the opportunity to purchase commercial property, residential property, and land using your 401k.

Self-directed 401K’s are typically classified as “do it yourself” retirement plans. This means that they are most often used by people who are not real estate brokers but, investors who are knowledgeable about the real estate market and have a full understanding of the types of real estate transactions that they can be involved with using their self-directed 401K’s.

Keep in mind that when you purchase property using a self-directed 401k, there are a wide variety of rules that you need to follow including the fact that you cannot stay in the property, even on an annual basis.

Even though the rules may seem complex to some investors, using a self-directed 401K is a great way to get started with investing in multifamily properties.

Cash Out – Last of all, you may want to consider cashing out some of the money from your 401K. Keep in mind that if you choose to cash out, this can be an expensive strategy because you’re going to have to pay taxes on the funds that come out of your 401K plus if you’re under 60 years old, you can expect to pay an extra 10 percent penalty as well if you don’t meet specific exceptions.

Before moving forward with one of the options mentioned above, keep in mind that you may already be indirectly invested in real estate thanks to your 401K because many 401K’s are invested in funds that are tied to real estate.

You can also invest in real estate indirectly when you invest in a Real Estate Investment Trust (REIT) so there is more than one way to get started with investing in multifamily properties.

Is It A Good Idea To Take Cash Out Of Your Investment Account To Buy A Multifamily Property?

Ultimately your decision to take cash out of your 401K to buy a multifamily investment property depends on you and your situation.

Keep in mind that implementing one of the strategies mentioned above can be very costly so it’s best to consult with your accountant and consider each option carefully.

Before moving forward, some of the questions that you may want to ask yourself include the following:

What would the Return on Investment (ROI) be on the multifamily property?

Will the multifamily property get you closer to your financial or retirement goals?

How far away are you from retiring that you can ultimately make up the penalties that will come from cashing out your 401K?

Contact Trier Capital

At Trier Capital, we specialize in creating lucrative apartment building syndications. Our company does all of the hard work to find and acquire ideal properties, and then oversee asset management after purchase, while our investors sit back, relax, and receive tax-advantaged passive cash flow.

To learn more about the services we can offer you, contact us today by calling (630) 229-2383 or click here to connect with us online. 

Erik Hatch

Erik is currently invested in projects in Florida, Texas and Kentucky totaling $79 Million. He is an accomplished leader who motivates and inspires action while at the same time, is grounded in business metrics and information that drives successful businesses.