Although the rules governing a 401k mean that you cannot tap into the funding until retirement, you can still utilize the value of your account for other purposes. If you are planning to invest in real estate and have a healthy 401k, you have the option of utilizing that 401k toward a real estate purchase. Many lenders make it possible for real estate investors to take out a loan against their 401k, using the equity of the retirement account without actually taking money out of it.
Research the rules for your specific 401k. There are restrictions regarding how much you can borrow against your 401k, with most financial institutions placing a maximum of $50,000 on the borrowing. This means that you cannot plan to borrow against whatever cap is placed on your individual 401k.
Research available real estate. Regardless of market conditions, investing in real estate can be a risk. In a tough economy, investing in real estate is an even greater risk, and you will need to prove to your lender that the real estate is a wise option and will see profit in the near future. Most experts advise against any type of long-term investment with a 401k. The goal is to establish the investment, make the profit, and pay off the loan to avoid tying up the retirement account for too long.
Check into a real estate investment trust (REIT). The real estate investment trust provides you with the opportunity to invest in real estate without doing the actual investing: the trust makes the decision about worthwhile real estate investments, taking the burden of making that choice up to you. Because the REIT is considered fairly stable, many lenders are more willing to provide a loan when you plan to utilize the trust.
Research and select a lender. Every lender is different, and some will be more amenable to the idea of utilizing a 401k for real estate investment than others. Keep in mind that your loan will likely come with other stipulations as well. Most important, perhaps, bear in mind that even though you taking out a loan against the value of your retirement account, you will still have to make any required payments based on the money you currently have–not in the retirement account. The 401k simply secures the amount of the loan. Your lender will need to know that you can make payments from the income you have outside the retirement account.
An alternative to borrowing against your 401k is using an individual retirement account (IRA) for the investment. To utilize the IRA, you will actually have to move your money from the 401k to the other account, which will almost certainly incur a fee, but the fee might be worth the flexibility of investing your money as you choose. Check into the fee requirements, and take the time to assess the impact it will make on the value of your 401k.
Many real estate experts advise against using a 401k for buying land. The reason is that land purchases limit potential tax deductions and are also difficult to fit within the cap that accompanies 401k investment. In addition, the turn-around investment on a land purchase can be quite lengthy in time, so the retirement account might be tied to the loan for too long.
Typically, you cannot invest or buy real estate in your 401k account like you can buy stocks, bonds or mutual funds. According to the Wall Street Adviser, for a 401k holder to buy and hold real estate in a 401k account, it must be approved by the trustee of the account and all participants must have the right to buy and hold real estate in their 401k account.
Things You'll Need
Real estate with plans for purchase
Loan designed for 401k real estate investment