Real Estate With Your 401K

How can you buy a rental property with your 401(k)? That’s today’s video. Let’s get to it. Hey, everybody. I’m.

How can you buy a rental
property with your 401(k)? That’s today’s video. Let’s get to it. Hey, everybody. I’m Clayton Morris. I’m the founder
of Morris Invest, a turnkey rental provider. And I’m a longtime
real estate investor. And I’ve done
hundreds of rehabs. And I own many, many properties. So today I want
to talk about how to buy a rental property
using your 401(k). Now, I said at
the top that I own many, many rental properties. And guess what. I buy many, many rental
properties using my 401(k). Well, how in the
world do you do that? Well, it’s a killer strategy. And you may hear from people
in the Dave Ramsey world and others who say
never touch your 401(k). Never use your
401(k) for anything. Well, I totally
disagree with that because it’s your money
sitting there in a fund that your employer had
selected, and it’s your money. And for the most part, given
the stock market craziness, I’d much rather be buying
real estate with it than sitting there at the
whims of the market where it’s going up and down
and all over the place. Give me a real
cash-flowing asset any day of the week in a
rental property. I’ll take that 9
times out of 10. Actually, no, I’ll take
that 10 times out of 10. So how do you do it? How does it work? Well, any time anyone
says, use your 401(k), alarm bells go off. And people get all freaked out. What? I’m going to use my 401(k)? But that’s sacred to me. Well, here’s the difference. We are not withdrawing
from your 401(k). When you withdraw
from your 401(k), you can do that during
a hardship, right, like perhaps a death in
the family or a foreclosure you’re facing. You can actually do a
withdrawal from your 401(k). And then you’re
taxed on that money. That’s not what we’re
talking about here. You can also do that
when you turn 59 and 1/2. You can withdraw your
money from your 401(k) and start using it and
paying taxes on it, as well. Again, not what
we’re talking about. What we’re talking about is
borrowing from your 401(k). How can I borrow from my 401(k)? Well, I’ve been beating this
drum so much on my podcast. By the way, the link, if you
want to listen to my podcast– it’s a weekly podcast– it’s
in the show description below. It’s called Investing
in Real Estate. I talk about this with a
lot of experts who actually help you construct these plans. So you should go ahead
and listen to that. We’re talking about
borrowing from your 401(k). And most of your 401(k)
providers, or, I think, all of them, frankly,
will let you borrow. And then you pay it back. And what’s great about this
strategy is, number one, it’s your money, so you’re
not borrowing it from a bank. You’re not borrowing
it from Wells Fargo or some other source. You’re borrowing it from the
bank of you, which is great. Secondly, you have to pay
interest on that money. But guess what. Because it’s mortgage
interest, you get to write off the interest
that you’re paying yourself. So it’s twofold. Not only are you borrowing
the money from yourself, you also then get to
write off the interest that you’re paying back
on that loan to yourself. It’s your own interest. So at the end of the year on
taxes, you get to do that. It’s a double whammy. I actually kind of think
of it as a triple whammy because, you know what,
at the end of the day, you’re also getting to
buy a rental property with that money. I do it every year. And many of our investors who
purchase properties through us at Morris Invest
also use their 401(k) to purchase rental properties. So how does it work? Well, it’s very, very simple. In fact, my mother-in-law
recently did it, and she was shocked
at how simple it was. So, for instance, I use
a company like Fidelity. That’s who runs my 401(k). You simply go to the website. You click on the Borrow tab. And then, from there,
you click on how much you want to withdraw or how
much you want to borrow. And it literally will move
it right into your account within like a day or two. It’s that simple. It’s your money. And it’s transferred
very, very quickly. Again, my mother
in-law said I can’t believe how easy this was. It really is. Well, then what
happens is you pay it back out of your payroll. So every time your
paycheck comes, you’re going to notice
that there’s a 401(k) loan. And that will pay back to
your payroll department out of your weekly or
biweekly check that you receive from your employer. The other thing that, of
course, you’ll want to do is pick how long it
takes you to pay it back. So most 401(k) providers will
give you 12 months, 24 months, or et cetera. So you pick the time-frame
on how quickly you want to pay back your 401(k) loan. You don’t have to pay it back
quickly if you don’t want to. You can stretch it out into
a couple of years typically. And then once it’s paid
back, once you’ve paid back that full amount, boom,
you can rinse and repeat, and you can do it again. Now, most 401(k) providers have
different limits on how much they’ll let you withdraw. For me, they let me
withdraw $50,000. $50,000 is the most
that I can withdraw, which is fine because the
houses that I like to buy are in the $40,000 range. So I can withdraw that amount. And then, once I pay it
back in a year or two, I rinse and repeat, and
I borrow it once again and buy another rental property. So it’s a killer way for you
to kickstart your real estate investing. Most people don’t
even know that they can borrow from their
401(k) without penalty. Again, there is no
penalty doing it this way. It’s your money sitting there. Why not leverage it? I’d love to hear your
thoughts and comments. Have you ever purchased
a real estate property using your 401(k)? I’d love to hear about it. You can do so in the
Comment Thread below. You can also subscribe
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publish multiple times a week all about real estate investing,
helping you become a better real estate investor
and learning how to create positive
passive income in your life. Go out there. Take action, and become
a real estate investor. We’ll see you next
time, everyone.

27 thoughts on “Real Estate With Your 401K”

  1. Hey Clayton. How much would you recommend borrowing from a 401k for one of your houses? I don't want to pay more per month than what I get from a cash-flowing property. Thanks

  2. Clayton, I am 29 years old and I don't have much in my 401 K. What is the best way for me to get enough money to invest it. This blows my mind though because I would do it if I could.

  3. Hi Clayton, I have a question for you.
    By borrowing money from a 401(k) to buy a property, you are actually creating a mortgage-NOTE in your 401(k), with the rental property as collatera; but you are not buying the actual property, is that correct?
    I am asking because I am not sure I understand how you otherwise would be able to take RMDs later in life if you own the actual property itself.

  4. I learned something from you today, the interest write off when borrowing for a 401k. And the kicker here is my tax preparer never asked or told me about this! And borrowing for a 401k is the easiest way to get your money! I really never thought about using it for real estate, but in 2017 I will!

  5. What about the risk of leaving your job? At that point the loan becomes due within 60 days or you get a 10% penalty and are taxed on the rest as income.

  6. Google says that the interest on a 401k loan is not tax-deductible because the loan is not secured by the home. The reference here is IRS Publication 936 , Home Mortgage Interest Deduction and Sec 72(p)3 of the tax code. Unless there is a different way we are deducting the interest? Are you loaning the money into an LLC and then the LLC deducts the interest?

  7. You mentioned you use fidelity and they allow you to take a loan against your 401k. I contacted fidelity about their 401k plans and multiple represents stated they don't and have never allowed loans out of a 401k plan. Are you on a special plan not available to the rest of us? My plan was to create a 401k plan under my business, rollover my current Fidelity IRA into that account then take out a loan.

  8. Clayton, I am guessing the rinse and repeat part of this is that you do a cash-out refinance to pay back the 401k loan, then at some point you do the same thing all over again. Is that correct?

  9. Why not just roll the money into a self directed ira or 401k. I just set one up through Broad Financial and purchased 2 condos for cash, they'll have a 16% ROI. My Fidelity plan and employer allows the rollover, a percentage of the total value. If you have a IRA then you can rollover the entire amount.

  10. I just bought my first rental real estate property and I used my 401k. My plan doesn't have a loan component to it. So I took it out as a hardship for a down payment on my primary residence. While I'm doing some of the minor rehab items to it I'm going to count that house as my primary residence. Then in about 2 months I will rent it out. I think this is a good strategy because I still have the equity in the house and it will grow over time just like my investment would in the 401K but it also will be cash flowing about $400 a month which I will use to purchase my next property.

  11. Clayton I am buying a property in St. Louis, MO using my 401k. The funds have already been deposited into my bank. I close on the property next week. The borrowing process was very simple. I will pay the loan back in 60 months maybe sooner. What a great strategy!!! The icing on the cake is I will own a property free and clear!!!

  12. I want to use this method to purchase my first investment. However, I am still confused on how I can purchase another property soon after, with that outstanding 401k loan to myself.

  13. I did the same I bought 111k property and borrowed 15k as down payment from my 401k and since I already own a rental and get an income of $650 a month and my monthly payment on the house is $1,015 I only have to pay about $365 out my check plus $500 a month for the loan. Ohh by the way the mortgage is for 15 yrs but plan to pay it in 7 or less. I have spent 5k on fixing up the house and lot of cleaning up outside the property is worth now about 140k and market prices on this area keep going up.

  14. What about borrowing from your 401k to do repairs on a new acquisition? I've recently done that for a new hvac unit, new carpet and some drywall work so i could keep my cash for more down payments!

  15. Clayton I just left my job for another. Will I be able to use my 401k for a downpayment on duplex. Or how does that work and what are my options. Thanks

  16. The most i can borrow is 25,000. So, i can't buy a decent house with that. So, I'd have to take out a 2nd loan. Is that, idk, cost effective? For lack of a better way to word it.

  17. Men i like Your video i wanted my first house with my 401k ..I just. Wanted said thank you for the info your given me ..

  18. OOOOMMGGGG. Thank you!!! I was trying to ask you this on another video you did, but did not asked you correctly!!! You referred me to your book. And you answer it here!!!???. Thank you!!! I will be calling my 401k folks soon!! Thanks!!!!!

  19. Hi Clayton, something I haven't seen or heard you address with this 401k loan strategy… have you thought about the tax implications of using a 401k loan in the following manner? The money paid back (both P&I) to pay off the loan is used with after tax dollars, and then it's taxed again upon withdrawal. So the way I see it if you recycle those funds by taking 401k loans year after year the 401k account balance becomes essentially "funded" with entirely after tax dollars only to be taxed again upon retirement withdrawal. For example, a 30% tax bracket hit, then another 30% hit making an effective tax rate of basically 50% on every dollar in the account. (1 x 0.7 x 0.7 = 0.49). Is your thought that this "tax loss" if offset by the "tax win" associated with REI? Im finding it hard to justify a 50% effective tax rate for quick liquidity. Thanks in advance.

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