How to Turn Your 401(k) Into A Real Estate Empire — Without Killing Your Retirement

A real estate investor or agent talks on his cell phone in the large living room of a historic home. The room has very large windows and an ornate fireplace mantel.

(Image credit: Getty Images)

It's human nature. You visit a charming coastal town or picturesque lake village and turn to your spouse on the ride home and say, 'I love that spot. Let's buy a place. We can rent it out. It will help pay the bills in retirement.'

Then the dream collides with financial reality: How will you come up with the cash for a down payment?

Whether you want to buy a single investment property or fantasize about owning multiple rental units, coming up with the initial capital can be tricky. While the Trump Administration floated the idea of penalty-free 401(k) withdrawals for down payments, that proposal did not include second homes or investment properties, and President Donald Trump has since said he does not support it. Still, don't rule out your retirement account as a source of start-up capital if you're thinking of adding real estate to your retirement plan.

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The game plan? Use your initial 401(k) investment as a building block. "Let the real estate fund the expansion (and acquisition of other properties) going forward," says Ryan Shuchman, senior partner at Cornerstone Financial Services. For example, your sweat equity can improve a property and increase its rental income and property value over time, enabling you to borrow against the home equity you've built up and fund the purchase of a second property. "You're creating equity through all those activities, and it becomes a compounding effect," says Shuchman.

Ways to build real estate wealth

Buying one property to diversify your retirement portfolio is one thing, but how would you construct that real estate empire? There are a few ways to leverage your initial purchase.

Take advantage of tax breaks. If your income is $500,000 or lower and you're looking to free up cash from your primary home to buy a rental property, you can take advantage of the temporary $40,000 deduction for state and local property (SALT) taxes put in place in 2025 by Trump's "One Big Beautiful Bill." The tax savings can go toward a down payment or to renovate an existing property. Another plus: investment properties are not subject to the new SALT cap (which expires at the end of 2028) as property taxes are treated as a business expense. "There is no limit to how much (property tax) you can write off," said Shuchman.

Profit from "bonus depreciation." Trump's 2025 tax bill restored the 100% bonus depreciation for qualifying property placed in service after Jan. 19, 2025. It's a potential game-changer. It means a real estate investor can immediately write off up to 100% of costs, such as updates or improvements to a rental or investment property (personal-use real estate does not apply), rather than spread tax savings over multiple years. The property (excluding the building structure) must have a depreciable life of 20 years or less.

The upshot: real estate investors who spend money on appliances, certain flooring and interior finishes, landscaping, and HVAC systems, can write off the full amount instantly. These same-year deductions can enhance cash flow and offset rental income at tax time. Say you invest $25,000 in qualified property improvements on Jan. 31, 2026, for your short-term rental that generates $25,000 in taxable rental income each year. You could potentially eliminate all of that taxable rental income this year.

"The freed-up cash could then be used to go buy another property, and 'quote' build the empire," says Shuchman.

Turn mortgage interest deductions into an advantage. Mortgage and home equity line of credit interest deductions can be a powerful lever for real estate investors as well. Married homeowners who itemize their returns can deduct interest on mortgages and home equity lines of credit (HELOCs) up to $750,000. To deduct HELOC interest, the borrowed funds must be used to buy, build, or substantially improve a home.

These tax savings can also be used to fuel acquisitions by reinvesting the freed-up cash into new properties. Savvy real estate investors can also strategically use the capital from a HELOC and the resulting interest-related deductions to improve properties they already own to boost future rental income.

For example, you could buy a fixer-upper and renovate it, boosting the home's equity. "You can go use that equity as a down payment on another rental home," says Shuchman. Then execute the same strategy for your next real estate investment. "That's probably the most powerful model to follow in real estate," adds Shuchman.

Profit from a 1031 exchange. This IRS rule allows you to sell one investment property and reinvest all the proceeds into another investment property and defer capital gains on the sale. That means you don't have to pay taxes on the sale gain, keeping more money to invest in your next property. "This allows you to increase the number of properties you own by going from a single-family home to a multi-family property, or trade up to better properties," said Shuchman. Going the 1031 route entails risks, including identifying a replacement property within 45 days and closing on the property within 180 days.

If you're 401(k)-rich, you're not alone

No wonder Americans may be tempted to dip into their 401(k)s. There were 654,000 401(k) millionaires in Fidelity Investment plans at the end of the third quarter of 2025, the latest data available. Older generations have higher average 401(k) balances than younger savers.

But time invested is also important. Plan participants who have consistently contributed to their employer's 401(k) plan for 15 consecutive years had an average balance of $613,200, according to Fidelity data through September 2025.

For many Americans, there's a big pot of money sitting in their retirement accounts.

The question is whether it makes financial sense to dip into a retirement account to fund the purchase of brick-and-mortar real estate. We're not talking about draining every penny from your 401(k). But rather taking a small slice of your retirement account balance (say 10% to 15%) and ring-fencing the remaining 85% to 90% in a well-diversified 401(k), so you don't jeopardize your retirement.

The downsides of cashing in retirement savings for real estate

Before you pull the trigger and try to build a real estate empire, be aware of the risks.

Remember, workplace retirement plans like 401(k)s and individual retirement accounts (IRAs) were originally designed for one thing and one thing only: saving for retirement.

A lump-sum withdrawal can negatively impact retirement readiness.

For one, money yanked out of a 401(k) or IRA misses out on future compounding.

You'll also pay federal taxes (and state levies in most states) at your regular income tax rate on any distribution from a retirement account that was funded with pre-tax dollars (such as a traditional 401(k) or traditional IRA). That move could also increase your income and push you into a higher tax bracket (one example of the "rule of $1 more").

If you need to raise $100,000 from a traditional 401(k) to buy an investment property and are in the 22% tax bracket, you'll need to withdraw $128,205 when taxes are accounted for. (If you're under age 59½, you'll also pay a 10% penalty.)

"The first thing you want to do if you're considering tapping your 401(k) is be mindful of taxes," says Shuchman.

The smaller account balance that results from a big 401(k) withdrawal could also boost the odds of outliving your money.

Not every financial adviser, therefore, thinks it's a good idea to tap a 401(k) to buy an investment property. "My general advice is not to do it," says Steven Conners, founder and president of Conners Wealth Management.

Conners's hesitancy, though, is more about today's pricey real estate valuations and elevated mortgage rates. "Real estate has been a tougher investment over the last couple of years," says Conners.

When tapping a 401(k) to buy real estate might make sense

Financial planners always preach the virtues of diversification. Adding a sliver of real estate to a retirement portfolio is still an investment, a diversifier. You'll own a real asset that you can touch and feel. Moreover, your property likely won't crater in price like the Dow Jones Industrial Average or a hot technology stock on a big down day on Wall Street.

Diversifying retirement dollars away from traditional assets such as stocks and bonds isn't inherently problematic, says Rob Leiphart, VP of financial planning at RB Capital Management.

"Are stocks and bonds the only asset class that (retirees) should consider? The short answer is, no," says Leiphart.

Real estate is known for its income-generating potential. Finding steady income streams to pay the bills when the regular paycheck stops should be at the top of retirees' to-do list. Social Security is one source of guaranteed income. So is an annuity or a work pension. Taking a set withdrawal each month or quarter from your retirement savings account is part of the income equation, too. A rental real estate property, such as a lakefront cottage or a beach getaway, can deliver additional income, too.

Shuchman says tapping a 401(k) to fund a real estate purchase can be a viable strategy for certain people, especially those with larger account balances.

But just as a retirement portfolio should aim for a solid return that builds wealth over time, so should a rental property. Shuchman says he likes to see a return on rental property of about 10%.

And while yanking money out of a 401(k) to buy real estate isn't an ideal scenario, it can work if the account has a sizable balance and the withdrawal won't gut the account. "If you have $1 million in your 401(k), and you take $100,000, or 10%, out, I think that's probably a prudent rule of thumb." Limiting the amount of your withdrawal will mitigate the negative effects of fewer dollars compounding over time.

Taking a loan from your 401(k) is another strategy to consider. But the most you can borrow is 50% of your vested 401(k) account balance, or $50,000, whichever is less, according to the IRS. The biggest plus of taking a 401(k) loan is that you repay yourself with interest. A hybrid approach of taking a distribution from your retirement account and a 401(k) loan could work, too.

So, should you buy that property?

If the complexity and risk of building a real estate portfolio are daunting, there is a middle path. Shuchman likes the idea of purchasing a second home with the dual purpose of using it during retirement and renting it out to defray ownership costs.

"This (real estate investment) can be part of your retirement plan, but also something you're going to get personal enjoyment out of," says Shuchman.

Adam Shell is a veteran financial journalist who covers retirement, personal finance, financial markets, and Wall Street. He has written for USA Today, Investor's Business Daily and other publications.