Borrowing From Your 401(k) to Buy Real Estate
May 28, 2014 | By fischer |
Should you do this? Is an investment shift to real estate advisable in the long term? Will it help you to retire early? Or bankrupt your future? The short answer is: maybe.
Like any other big shift in 401(k) investment strategy or major life decision, buying real estate with your retirement account may be an excellent idea and a moneymaker. Or it could be a huge mistake that jeopardizes your financial future. So how do you know? Another short answer: Look before you leap.
“Spending” your 401(k) early is risky
Investment values (stocks, bonds, precious metals, pork bellies, real estate) are more erratic than ever these days. This is largely due to the instant (therefore often unsound/biased) “analysis” of the always-on news organizations and un-vetted experts.
Bottom line: Be careful to whom you pay attention, research investments carefully and plan for possible consequences.
Evaluating investment risks: factors to consider
• What if you borrow from your 401(k) for a real estate purchase, then leave your employer before repaying the loan?
• Do you have a backup source of funds to pay back your investment account–or are you relying on luck, a long-shot strategy?
• Are you prepared to pay the 10% penalty on your early withdrawal? Or will you be in debt to the IRS? How much will IRS penalties/interest, plus the stigma of such debt, affect your future? Your credit rating? Your retirement date?
• What does paying the IRS penalty do to the ROI of your investment strategy? Do you have other diversified investments or savings to balance out this risk?
• Do you have deep pockets? Do you have a large source of capitol to mimic big investors suddenly jumping into real estate? Can you afford volatility–losing big with enough remaining funds to enable a turn-around?
• What if you end up “underwater”? Could you ride out big real estate losses/devaluation until prices go back up? Do you have your own bailout fund?
• Are you knowledgeable in real estate? Do you know the property you’re buying is a good deal? Or could the local market bottom out sharply like so many did over the past 5 years?
• Are you getting “professional” advice from someone with vested interests–in selling real estate, for example?
Jumping on a hot tip or “breaking news” isn’t investing. It’s gambling.
The Wall Street Journal has noted the huge effect of fake tweeting, attributed to trusted news source AP (the Associated Press). Investors rushed to sell stock and buy bonds instantaneously when the AP’s hacked Twitter account inaccurately reported explosions at the White House and injury to the President. As the WSJ noted, the hacked twitter message “sent financial markets veering…highlighting the potential pitfalls of…reliance on technology.”
Financial markets had one of their most volatile days recently. With each sentence Ben Bernanke spoke–each immediately reported/tweeted–the market went wildly up, then down. As Reuters reported, by being up-front and transparent, Bernanke “confused the market.” Unfortunately, confusing the market is incredibly fast and easy today–if Bernanke sneezes we’re in real trouble!
Resist the “buy now” culture–opt for a secure future.
How should you react to the current hubbub about shifting 401(k) investment to real estate purchases? Think it through first–or seek advice from someone qualified to do so. Moving into real estate without intensive research is betting your future, AKA your retirement savings, on unanalyzed or improperly interpreted data–or just plain rumors.
Remember, the recent worldwide financial crisis stemmed from big investors putting money into investments–derivatives–that they didn’t completely understand.
When making major investment decisions, especially involving your 401(k), it literally pays to seek professional financial advice–tailored to your own unique situation.
Contact Ted Fischer for a free consultation! (805) 418-7686
Article: Content Marketing Exchange