Can You Use a 401k Loan for Real Estate Investment?

Investors continually seek to diversify their portfolios and enhance returns, often exploring new investment avenues. One intriguing option is using a 401(k) loan for real estate investment.

Typically, 401(k) accounts offer limited control over specific investments, prompting some investors to consider leveraging these funds for alternative investments like real estate. A 401(k) loan can be an attractive strategy for those with substantial savings.

This guide will examine the complexities, benefits, risks, and regulatory constraints associated with using a 401(k) loan for real estate investment.

Can I Use a 401(k) Loan for Real Estate Investment?

You’ll be happy to know that you can absolutely use a 401(k) loan for real estate investment.

Typically, you cannot use the funds directly from a 401(k) for real estate investment. However, using a 401(k) loan leverages your equity instead of using the funds directly.

Fundamentals of a 401(k) Loan for Real Estate

1. Loan Limits: Typically, the maximum loan amount is the lesser of $50,000 or 50% of the vested account balance.
2. Repayment Terms: Standard repayment terms for investment real estate typically extend up to five years.
3. Interest Rates: Interest rates are typically set at the prime rate plus 1-2%, and repayments are made through payroll deductions.

Legal and Regulatory Considerations

Before taking a loan out against your 401(k), it is crucial to understand the regulatory caveats associated with doing so.

1. ERISA Compliance: The Employee Retirement Income Security Act (ERISA) establishes the guidelines for most voluntarily established retirement and health plans. Ensuring that your 401(k) plan permits loans and that any loan taken adheres to ERISA regulations is essential.
2. Plan-Specific Rules: Every 401(k) plan comes with its own set of rules and restrictions regarding loans. Carefully review your plan’s documents to understand the permissible uses of loan proceeds and any specific requirements or limitations.

Risks and Challenges

While leveraging your 401(k) with a loan can enhance your buying power for real estate investments, there are several potential risks and downsides to consider.

1. Limitations: You can borrow from your 401(k) up to the lesser of $50,000 or 50% of your vested balance. This amount is often insufficient to purchase investment real estate outright, so it should be seen as a means to augment your purchasing power rather than as the sole funding source.
2. Market Risks: Real estate investments carry inherent risks, including market volatility, property depreciation, and unforeseen expenses. Like any investment, real estate can perform poorly, leading to potential financial losses.
3. Repayment Risks: If you lose your job, your 401(k) loan typically becomes due soon. Failure to repay the loan will result in the outstanding balance being treated as a taxable distribution, which may incur a 10% early withdrawal penalty if you are under 59½.

Exploring Other Options 

While investing in real estate with a 401(k) loan may not afford enough to purchase investment real estate, and there are specific caveats, there are other paths. You can also use a particular kind of 401(k) called a self-directed 401(k) to invest in real estate, and we can help get you started.

Partnering with CVC to Invest with Your 401(k)

At Canyon View Capital, we manage a diverse multifamily real estate portfolio valued at over $1 billion across the Midsouth and Midwest. We invite accredited investors to partner with us and benefit from our extensive experience and expertise.

With Canyon View Capital, you can enjoy passive real estate income without the headaches of property management. Our approach also offers numerous potential tax benefits, making your investment journey smoother and more rewarding.