***This is not a ‘how to use your 401k to buyer real estate.’ It requires both legal and tax advice from the appropriate professions. I’m writing this because it is real estate related and I think it is interesting and it clearly isn’t for everyone. I don’t know anyone personally that has done it. Smart Money has an article this month about it.
It wasn’t for me when I looked into buying property with my 401k a couple of years ago. I haven’t done the hypothetical math to see if I would have been better or worse off moving funds out of the stock market and into real estate. I’ve typically been too interested in our properties as we self manage them. Giving that away to a third party means giving up too much control for my psyche, even if it would result in a financial gain. And of course there is the risk.
The gist, as I understand it, of the using a self directed 401k in a real estate transaction is that it has to be 100% hands off. You can’t use that lovely beach-front property for personal use; even once. If you mess up the taxes become immediately due and you’ll be facing a 10% penalty for withdrawing from your 401k before age 59. You are required to hire a third party to manage the property. The restrictions are many and the penalties are steep.
I know it is possible to get a mortgage but I am not clear how it works. There are tax consequences as the mortgage is going to be in your name, not the 401k’s. I cannot reiterate seeking professional tax and legal advice before heading down this road.
It would be great if there is someone out there that has used a self-directed 401k for a real estate purchase and is willing to talk about it here. Would you do it again?