Tapping Your 401k To Invest In HomesSubmitted by Castlebar Asset Management on May 28th, 2013
There was an article on CNN/Money that discussed how some individuals are tapping their 401k accounts to buy homes as investments. On some levels this may seem like a solid investment idea although the quote “Those who cannot remember the past are condemned to repeat it” somehow comes up as a read the article. Many individual investors remain disenchanted with stocks, bonds and mutual funds after the market decline in 2008 and 2009. For those individuals that stuck with their portfolios have seen their investment accounts recover to pre-crisis levels. The housing market is storming back although anyone who does not trust stocks but thinks real estate is a safer investment has a short memory.
Individuals are taking out loans out against their 401k accounts to buy an investment property outright or use it as a down payment. In some cases this could be a sound investment strategy as long as the property is thoroughly researched and the purchase price allows for a margin of safety.
As I see this there are several reasons why this is not a smart idea.
Wall Street Has Beaten You To the Punch: Private equity firms and Wall Street banks have been large scale buyers of foreclosed homes in many markets around the US. They were early to enter the market and purchased much of the distressed inventory before it hit the market. Their plan is to rent these homes out until prices recovery.
Home Values Are Recovering Fast: The Case Shiller Home Index which measures residential real estate prices around the country just posted its strongest gain since April 2006. The housing market is well into its recovery and the easy money may already have been made.
If You Lose Your Job You May Have Double Trouble: Borrowing money from a 401k may seem like a risk less transaction. You will ultimately pay yourself back with interest and still get your real estate investment. If you happen to lose your job and have not repaid your loan in full this could be problematic. Your outstanding loan balance could be counted as a distribution which will be taxed at income. If you are younger than 59 1/2 you will also have to pay a 10% penalty on the distribution. That raises the cost of your real estate investment significantly.
Historically Home Prices Don’t Outperform Stocks: Individuals often think that home prices do beat stocks over some periods of time. The evidence does not support this case. Equities outperform stocks hands down.
Taking a loan from your 401k to invest in real estate is something that needs to be well researched and all of the risks need to be taken into consideration prior to making a purchase.
Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.