401k loans should only be taken out if you can virtually guarantee to receive a significantly higher return on the loan than it has historically averaged. This is how.
A 401k account is a retirement savings program and as such, taking money out of it should only be seriously considered when you have an opportunity to increase (let's say double) the average yearly return on the amount within a very short period of time (perhaps within 6-8 months), with your money secured to an appreciating asset, like real estate. The idea is to always invest securely with as little cash out of pocket as possible, letting your money earn much more money than itself or it is earning elsewhere. While there could be arguments as to the minimum threshold amount of return to trigger borrowing the money to make the investment, I would consider it a secure investment if the projection is that I can earn double or more on my existing annual return on investment relatively passively. We will take a look at some examples to illustrate below but let's take a look at the general rules about taking the loan.
The maximum amount one can borrow on 401k loans is 50% of the account and up to a maximum of $50,000. A discussion with your Benefits plan administrator is imperative to understand what you can use the funds to do privately, the interest amount you will pay (usually prime + 1 or 2 percentage points) and the likely duration of 5 years although may be more for purchasing a home. Job security is also important as on the loss of your job, you would be required to pay the loan balance in 60 days plus it would be assessed as an early withdrawal with a 10% tax penalty. The loan payments are taken out of your after tax pay check. So make sure you have a good relationship with your employer, that tat least the flexibility exists to retain you such that your loan is not called up due to employment termination unless you can make the payoff easily on time. Other methods of investing in real estate is to do a 401k rollover into a self-directed IRA account, Some account administrators are reticent or do not allow investing funds into real estate with their account management, not because there isn’t a legal process of doing this but because this is additional paperwork for them costing them time and money. Obtaining a 401k loan and or a self-directed IRA account for real estate investing is permissible and so don’t give up until you find an administrator that will facilitate the process for you.
So let's review a scenario where you have an opportunity from a real estate developer to purchase plots from virgin land slated for development, significantly below market value because it is undergoing a rapid entitlement process (where applications are filed to establish a higher grade title for the land thereby significantly increasing the market value). The land fits all the right appreciation models by being in the path of development progress very close to a large economic driver such as a newly cultivated trade zone. Your current land value is proffered to double in value on entitlement in 90 days, will appreciate 30% or more annually due to it being in the development path of progress over next 5 years. You investigate the offer thoroughly and know that your investment will be secured by the said land selling at the discounted value $3000 each, valued at $6500 each upon entitlement. You are one of several others that have obtained 401k loans for this land opportunity. You purchase 16 plots for $48,000. The developer offers to sell on your behalf 9 plots of the land for you over 8 months to pay off your loan & hold the remaining 7 plots to be sold for much higher 3 years later. Developer further guarantees refunding your money back within 90-120 days of your cancellation for any reason because of the appreciation in the area which he could always count on to refund your money and even make a profit on the re-sale.
Let's see how you did as your 401k investing unfolded. After 8 months sales of 9 appreciated plots have sold for a total of $58,500 (9*6500) which is enough to pay your loan of $55,604 including all interest. After 3 years, your 7 plots sell for your 100% net profit of $128,085 at a 35% annual increase over the market value of $6500 per plot. Your annualized return on investment was 180%, largely due to buying at 40% of market value & enjoying 35% appreciation even over the first year market price over 3 years. Such a scenario is very secure with the land as security plus the high return on investment such that even if the project under performed at 50% of the projections, it will still be a success. The investment is secure if usually even the worse-case scenario is an acceptable investment, however all plans are in place to far exceed the worse- case. Developing Land investments in highly appreciating path of development progress is a real opportunity for your 401k loans. To receive additional information on 401k investing in real estate or land investing that is secure, Contact our adept team today.