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How much risk are you willing to take to go from being comfortable to being rich?

That was the question facing Dr. Jill Green when she graduated from medical school with a ton of student debt and a family net worth of “negative $1 million.”

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Green and her husband, who is also a doctor, had only their primary home as an asset. Paying off all that debt seemed like it would inevitably require grinding 80-hour work weeks for the rest of their lives, according to Business Insider (1).

But her perspective changed when she went to a wealth-building seminar for medical professionals. The facilitators convinced her and her husband to reduce their tax burden and create passive income through real estate investing.

Today, Green owns several rental properties that bring her income. The catalyst for her first deal was not a traditional savings account or a windfall, but a loan taken against her 401(k) to cover a down payment.

However, while her success is remarkable, her journey serves as a case study of high-stakes leverage rather than a universal blueprint for retirement planning. The same financial mechanism that allowed her to jump-start her portfolio could have derailed her long-term security — just like it could do to you.

Here’s a look at some of the pros and cons of using retirement loans to invest in assets like real estate.

To get started, it’s worth looking into how Green did what she did.

Simply put, she borrowed from her 401(k) to help fund the down payment on a medical office building, which served as her entry point into property investment.

This approach functions as a form of self-financing. Instead of seeking a third-party lender for the full amount or waiting years to save up enough cash, a borrower can access their retirement funds as a loan — with interest you pay to yourself.

One way of doing it is to repay the loan through automatic payroll deductions. That’s what Green did over a five-year schedule, with only $200 coming out of each paycheck.

Using this strategy, she was able to scale her portfolio by adding roughly one property per year.

Read More: I’m almost 50 years old and don’t have retirement savings. Is it too late?

The practical appeal of this method is obvious for professionals who have significant retirement balances but little access to liquid cash. However, this path uses assets with two very different risk profiles.

Retirement accounts are designed for passive, long-term market growth, while real estate requires active management and the discipline to pay down debt.

What’s more, relying on a repeatable system of leverage depends heavily on external factors, including the presence of stable tenants, the availability of financing and the assurance that your high-income job (in this case, medicine) is not interrupted — because that is the key to being able to repay the loans.

It’s also worth noting that this approach might make sense for doctors, whose labor is always in demand. According to the U.S. Bureau of Labor Statistics, physicians and surgeons make a median income of $239,200 per year (2), and some specialties make much more.

But even if you’re highly paid, relying on this level of income to pay off loans tied to real estate may still be too risky.

While Green’s outcome is remarkable, borrowing from a retirement plan is relatively common.

Data from the EBRI/ICI 401(k) database shows that a meaningful minority of workers utilize these loans. In 2022, about 84% of plan participants were eligible for loans, and of those, 15% had outstanding loans (3).

If you’re wondering why more don’t go down this road, it could be because the rules governing these loans are strict.

According to the IRS, a 401(k) loan is not considered a taxable withdrawal if it does not exceed a maximum and is paid back within five years, with payments made at least quarterly. You can also take longer to pay the loan back if you use the money to purchase your primary residence. Finally, the maximum you can borrow is 50% of the account balance or $50,000, whichever is less (4).

However, the advantages of borrowing from your 401(k) — rather than cashing out part of the balance — is that borrowers avoid paying taxes and the 10% early withdrawal penalty owed on distributions. Furthermore, most plans do not require a credit check to borrow from, and the interest paid on the loan is deposited back into the borrower’s account.

But there are other hidden costs, including the opportunity cost of taking your money out of long-term investments. This means borrowers will miss out on any market moves and compounding growth that occurs over decades.

Even though the borrower pays themselves interest, that interest rarely matches the potential long-term returns of a diversified stock portfolio during a bull market. This gap in compounding can result in a significantly lower final balance at retirement.

If you’re weighing the risks of borrowing against your retirement plan to invest in real estate or a new business, you’ll want to plan different financial scenarios and get a realistic picture of what’s possible — the good and the bad.

Finding a reliable advisor can help you to understand your options and make a decision that weighs risk and reward.

That’s where Advisor.com can help by connecting you with a nearby financial expert for free.

The platform does the heavy lifting for you, vetting advisors based on track record, client ratios and regulatory background. Plus, their network comprises fiduciaries, who are legally required to act in your best interests.

Just enter a few details about your finances and goals, and Advisor.com’s AI-powered matching tool can connect you with a qualified expert suited to your needs based on your unique financial goals and preferences.

Finding the right advisor isn’t always easy — there’s no one-size-fits-all solution. That’s why Advisor.com also lets you set up a free initial consultation with no obligation to hire to see if they’re the right fit for you.

Green’s work and family situation may be stable enough to justify the risk of borrowing. But if a borrower leaves their employer, whether through a voluntary move or a layoff, many plans require the loan to be repaid in full within 60 to 90 days.

If the balance is not repaid by the deadline, the IRS treats the remaining amount as a distribution. For those under the age of 59.5 years, this triggers immediate income taxes and likely a 10% penalty, which could turn an investment strategy into a potential tax disaster during an already stressful job transition (5).

For those considering a 401(k) loan, it is vital to evaluate alternatives first. Programs like the HomeFirst Down Payment Assistance Program in New York City offer help to eligible buyers without requiring them to tap into their future savings (6).

So, before following in Green’s footsteps, individuals might want to look at their specific plan policy to confirm maximum loan limits and repayment rules. It is also essential to stress-test the decision by asking what would happen if a job loss occurred or if the real estate market softened.

The lesson here is that a 401(k) loan can be a bridge to wealth, but it is a tool with sharp downsides that requires a stable income and a rigorous repayment plan to avoid a long-term retirement setback. Regardless of the potential for high returns in real estate, it’s best to beware of stacking multiple financial risks at once.

While Green’s daring is admirable, not everyone who invests directly in commercial real estate sees the same level of success. Plus, borrowing against your 401(k) with the long-term goal of generating passive income could be risky or seriously drain your retirement funds.

However, more cautious investors can still find the potential in real estate investing, and they can do it without taking on debt or borrowing against their futures.

You can now tap into this market by investing in shares of vacation homes or rental properties through Arrived.

Backed by world-class investors, including Jeff Bezos, Arrived allows you to invest in shares of vacation and rental properties, earning a passive income stream without the extra work that comes with being a landlord of your own rental property.

To get started, simply browse through their selection of vetted properties, each picked for their potential appreciation and income generation. Once you choose a property, you can start investing with as little as $100, earning any monthly dividends.

However, vacation rentals are not the only source of passive income. Long-term rental properties have become a proven source of steady, passive income for high-net-worth investors.

It’s no wonder that real estate accounts for nearly 25% of the typical family office portfolio. But the time, effort and costs involved in managing and maintaining multiple properties prevent many from investing. So, unless you’re a hedge fund titan or an oil baron, you’ve been shut out of one of the most profitable corners of the market.

That’s where mogul can help. This real estate investment platform offers fractional ownership in blue-chip rental properties, which gives investors monthly rental income, real-time appreciation and tax benefits — without the need for a hefty down payment or late-night tenant calls.

Founded by former Goldman Sachs real estate investors, the mogul team handpicks the top 1% of single-family rental homes nationwide for you. Simply put, you can invest in institutional quality offerings for a fraction of the usual cost.

Each property undergoes a vetting process, requiring a minimum 12% return even in downside scenarios. Across the board, the platform features an average annual IRR of 18.8%. Their cash-on-cash yields, meanwhile, average between 10% to 12% annually. Offerings often sell out in under three hours, with investments typically ranging between $15,000 and $40,000 per property.

Getting started is a quick and easy process. You can sign up for an account and then browse available properties. Once you verify your information with their team, you can invest like a mogul in just a few clicks.

The multifamily rental market also holds lots of opportunity for would-be investors these days, and you don’t even need the up-front capital to buy an entire apartment building to do it.

If diversifying into multifamily and industrial rentals appeals to you, you could consider investing with Lightstone DIRECT, a new investing platform from the Lightstone Group, one of the largest private real estate companies in the country with over 25,000 multifamily units in its portfolio.

Since they eliminate intermediaries — brokers and crowdfunding middlemen — accredited investors with a minimum investment of $100,000 can gain direct access to institutional-quality multifamily opportunities. This streamlined model can help reduce fees while enhancing transparency and control.

And with Lightstone DIRECT, you invest in single-asset multifamily deals alongside Lightstone — a true partner — as Lightstone puts at least 20% of its own capital into every offering. All of Lightstone’s investment opportunities undergo a rigorous, multi-stage review before being approved by Lightstone’s Principals, including Founder David Lichtenstein.

How it works is simple: Just sign up with your email, and you can schedule a call with a capital formation expert to assess your investment opportunities. From here, all you have to do is verify your details to begin investing.

Founded in 1986, Lightstone has a proven track record of delivering strong risk-adjusted returns across market cycles with a 27.6% historical net IRR and 2.54x historical net equity multiple on realized investments since 2004. All told, Lightstone has $12 billion in assets under management — including in industrial and commercial real estate.

As such, even if multifamily rentals don’t appeal to you, Lightstone could still serve you well as an investment vehicle for other real estate verticals.

Get started today with Lightstone DIRECT and invest alongside experienced professionals with skin in the game.

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We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.

Business Insider (1); U.S. Bureau of Labor Statistics (2); EBRI (3); IRS (4); Vanguard (5); City of New York (6)

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.