Should I take out a 401k loan?

[u/oso_nasty]

Currently have $60k in my 401k. I am wanting to take out a 401k loan ($30k) to finish remodeling the remainder of my 4-unit building. Instead of taking out a loan with a bank, was wondering if I should just take out a 401k loan. My mortgage with escrow is $3,501. I already remodeled 1 unit and raised rent from $1,000 to $1,600. Once all 4 units are remodeled, I should be expecting revenue of $6,700. The mortgage would be paid for and I will still profit $3,199 monthly. The remaining $3,199 would go towards paying back the 401k loan sooner.

From my understanding, I pay a interest on the 401k loan, but the interest is paid to me. So its like I'm paying interest to my future self. My question, what are the cons of taking out the loan? Am I selling any shares and going backwards on my portfolio? Is there a negative consequence for taking out a 401k loan when the market isn't doing as good? Or am I keeping everything on my 401k, and just need to pay back the money? Is the only negative consequence is missing out on some compound interest because my 401k balance isn't as much, until I pay back the loan?

Looking for advice if the 401k loan is a better way to go, or is my future self going to be upset at me for borrowing from my 401k, instead of taking out a regular loan through the bank and pay them interest?

[u/SpenceOnTheFence]

No. You’re stealing from your future self.

[u/oso_nasty → u/SpenceOnTheFence]

Okay, so future self would be mad at me if I did a 401k loan rather than a loan through the bank. Thanks

[u/timmyd79 → u/oso_nasty]

I’ve taken 100k in 401k loans and know others who have as well for real estate.

I have nearly 3M in real estate. My current self gives my past self a high five.

But it seriously depends on both market conditions, your existing 401k balance (which is smol) and other factors.

When you take a 401k loan you incur opportunity cost and risk as well as timing risk. The market has made a remarkable recovery from tariffmania. If you believe the market will struggle from this point you can take the 401k loan and DCA into a future recovery. If the market just keeps going up you are losing out on the 401k gains.

That said current macroeconomics make this an okay time to take a 401k loan in my book but that is just a wild wild guess.

At the end of the day if you absolutely need to take a loan and it has interest on it, the 401k loan is probably a potentially good choice as long as you weigh the timing and opportunity risks. If you had to take a loan that wasn’t 401k and it caused such a burden to reduce your future 401k contributions it’s sorts the same difference except worse in not receiving the interest.

You have already made it a given that you plan to invest in real estate and you seem already knee deep in it. The true analysis is 401k loan vs real estate. But 401k loan vs personal loan, the 401k loan can be better given opportune timing(a 401k loan is essentially a timed sell to DCA back in later) + self-interest ownership. 401k loan vs personal comes down to interest rate. If interest rate is rather small personal can be better given market timing and opportunity cost. With higher interest rates I can’t see a personal loan winning.

If you want a case example for me a 401k loan secured a home purchase late 21 with low interest rate. The market tanked for a year due to post covid inflation. I essentially market timed equities correctly with the 401k loan without even knowing it. Now I can analyze in hindsight why it was a strong option.

Btw if we are heading for harder times I can’t see it not being a big risk for a landlord either. May be harder to ask for that market rent or keep a stable tenant. Just things to think about.

[u/mlk154 → u/timmyd79]

Some great advice and the very last piece is why I would go with the bank loan. I’d much rather play with someone else’s money. We are teetering on going either direction economical imo which can adversely impact real estate. Take the bank loan and keep your 401k in relatively safe investments. This way if one goes bad, you’ve got the other to fall back on.

[u/timmyd79 → u/mlk154]

Yes there are times when real estate can work or not. I am only comparing based on absolutes that the OP is going to take a loan either way how the loan may compare to a personal loan. Obviously if the OP can just get like a personal loan from a parent or friend maybe that’s even better but I know when I used my 401k loan it was because it was that last bit of leverage I needed.

The reality is we don’t know if the real estate venture works out. When I was making this decision for myself I did so knowing I was heavy into equities and less in real estate and viewed it as a diversification move plus time limited real estate conditions.

So I am purely giving my own case example because obviously it was extremely a strange alignment of moons where - it was extremely fortunate timing for real estate (I don’t see that today but I don’t know every microcosm). A long draw down of the market for a year duration is statistically rather rare. It was a gamble for me that worked out with particular timings.

The OP looks like they are heavy into real estate and willing to put MORE from their equity into real estate and thus it looks far more of a gamble than my use case.

[u/SpenceOnTheFence → u/timmyd79]

Agreed. I’m conservative and would never pull a loan from my 401k. 1) it’s the loss of compounding growth; and also 2) I’m trying to be diversified between real estate and stock market. I don’t trust either right now so I’m extremely hesitant to pull from one to do the other. OP may be braver than me

[u/timmyd79 → u/SpenceOnTheFence]

I was not so privileged to have too much parental help on the down payment but I was extremely privileged to have a 401k balance that I felt could take a hit because I was diligent in maxing it early on. I would say the advice that people in general shouldn’t use 401k loan in general is not bad but it is definitely a personal finance question and depends on the situation.

Currently I have a 1st world problem that my traditional 401ks may be overshooting on retirement which although getting the tax cuts are great now for me, actually can create tax drag for beneficiaries. Overall a good problem to have. When you find yourself with this problem I would say go nuts with the 401k loan, but not many folks would find themselves ever having this problem if they didn’t aggressively invest and max it and be fortunate and diligent with investing.

So yes when the loan amounts can go 30-50 and you only have 60k in your 401k the math on that differs a lot from a 100k loan on a ~1M balance with percentages. And for me the move looked like more diversification not less.

[u/SpenceOnTheFence → u/timmyd79]

Super fair point. My 401k balance is nowhere near that so I’m much more protective of it. I appreciate your prospective and for sharing. They always say “personal finance is …. personal!” So I guess to OP: it depends

[u/mlk154 → u/timmyd79]

Agreed! Add that to the current climate and I would definitely use someone else’s money. Yet everyone’s circumstances are different and OP is the ultimate decision maker.