In this episode, we work through one of the most common questions we get: should you use 401k funds to purchase a home. It’s a touchy subject, so we decided to breakdown a scenario for you and compare side by side the returns in real estate vs. your 401k.

The myth of using 401k funds to buy a home

Is it a good idea or is it a horrible idea to use your 401k funds to buy a house? What do the numbers look like? Tom and I are going to talk about the numbers, comparing what it’s going to look like if you just leave your 401k alone, don’t take the loan, don’t buy that house, or take a loan out and shift your funds to real estate.

First, we want to preface, we’re not advocating anyone do anything dumb or speculate with their 401k or anything like that. It is extremely important to involve your CPA and your financial advisor in any decisions you make with your retirement and savings. What we merely want to do in this episode is challenge the myth that pulling out money from your 401K is an absolutely horrible idea. Financial advisors, tax accountants, your friends, your family, your dad, your mom, everyone is going to have opinions on this topic.

All we’re talking about is using the 401k as an investment vehicle for you which is what the 401k supposed to be. But instead of having it sit in the stock market, we’re saying that it might be a good idea, not always, but it might be a very good idea to put it into a home or to put you in a position to buy a home. We are not saying dissolve your 401k to buy a wedding ring. We’re not saying take out a 401k loan to buy that pickup truck that you’ve always wanted. But can you transfer some of your wealth in a 401k to another asset class and make financial sense out of the decision, yes you can.

Scenario: Comparing 401k returns vs. real estate returns

In this video we break down a real world, side by side, comparison on ROI over 10 years. Watch the video to see what performs the best. Here are the highlights to consider.

Real estate offers the ability to factor in leverage. In a 401k your ROI percentage is calculated on the value of your overall cash portfolio. What does that mean? That means that if you have $50,000 in a 401k and your are earning 10% per year, you are earning $5,000 in interest on your money. However in real estate you may put $50,000 as a down payment into a property that is worth $500,000 and with an average appreciation of 3% (more about this assumption in the video podcast), you are earning on the overall value of the property not just your cash value. 3% on a $500,000 property is $15,000 per year. In essence you are buying a bigger bank account to earn appreciation and interest on.

There is a lot more details to compare. Check out the full video above for the entire side by side comparison.

If you have any questions about this or if you have any questions you’d like us to answer on our podcast, you can email your questions to team@azmortgagebrothers.com or give us a call at (602) 535-2171. Be sure to ask us for a free quote on your next mortgage. We’ll personally work with you and help you through the whole process.

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Thanks for listening and reading the Mortgage Brothers Show. Let us know if you have any questions you’d like us to answer on this podcast. You can email your questions to Tom@AZMortgageBrothers.com or Eddie@AZMortgageBrothers.com.

Be sure to ask us for a free quote on your next mortgage. We’ll personally work with you and help you through the whole process.

Signature Home Loans LLC does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal, and accounting advisors before engaging in any transaction. Signature Home Loans NMLS 1007154, NMLS #210917 and 1618695. Equal housing lender.

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