Rental Property Investor · Newport Beach, CA · Member since 2018 · 34 posts · 15 votes
Hi all,
Looking to get a quadplex in the pricey southern california market. Have been looking into creative ways to fund my first deal. Does anyone have any experience borrowing against their 401(k)? My company does a 50% match which i figured i would be able to take advantage of here?
My original idea was to use a FHA loan, but i want to use the BRRRR method on a property and noticed that government has FHA 203(k) loan that would be the option i want to use. My girlfriend also is teacher so was considering using the CAL HFA loan which has really good rates.
Ideally i was hoping to put 40K down, keeping about 20K in personal reserves.
Any tips, strategies or lessons learned with any of the above mentioned items would be greatly appreciated.
Here are the general considerations regarding both 401k loans & Roth 401k accounts.
401k Pariticipant Loans
If your 401k plan allows for 401k participant loans, the maximum loan amount is equal to 50% of the balance up to $50k. The repayment terms for a 401k participant loan are equal monthly/quarterly payments of principal and interest (typically prime plus 1%) over a 5 year term (longer if used to acquire your principal residence).
Please note that if you take a full $50,000 and then pay back the loan, you can't take another $50,000 until 12 months after the first loan was fully paid back.
Per the loan offset rules that went into effect with the 2018 Tax and Job Act: if you leave your job and the loan is current at the time you leave your job but then the loan goes into default because you left your job, you will have until your tax return deadline (including any timely filed extension) to make the loan current by depositing the outstanding balance into an IRA (and thereby avoid the taxes and penalties that would otherwise apply).
Roth 401k
Unlike a Roth IRA, withdrawals from a Roth 401k account must take a pro-rata share of basis and gain (i.e. you can't just take out the basis) and any non-qualifed Roth 401k distribution will subject the gain to taxes and possibly penalties.
While matching contributions are certainly pre-tax, if the plan allows for in-plan Roth conversions such amounts could be converted to a Roth sub-account which would be both taxable and reportable on a 1099-R.
A hard money lender was talking about the same thing at my last rei meeting. His wife is a teacher and you can bridge the down payment money. After a year or 2, you do what is called a streamline after your rehab or just plain appreciation gets you in a conforming loan.
I did the same on a conventional 10% with pmi and had a brokers price opinion got me out of the pmi after 2 years without an appraisal or refi because of the market rebound. The lender just removed the pmi after the 3rd time I inquired.
@Phil Collett where and what is your local meet up about? I am looking to connect to investors in the SoCal markets, especially those who are just starting out in Multi Family.
I go to ieric out in riverside and they talk a lot about flipping. I also go to a smaller Saturday group in Rancho Santa margarita for multi family. There are a few I found on here or meetup. You want to go in listening rather than thinking you know it all already. Also, be careful about the guru groups that are all suited up with a sales agenda. 1 had 3 rows of people trying to keep me from escaping without signing up doing the hard close. I will be trying out the larei that a dude named Bill Tan does that is in Covina to see what that is about.
Just don’t rush into it, and make sure you are educated (podcasts, books, and maybe you meet a mentor or can pick experienced people’s brains).
Did you typo 50%, you mean 5%? I'm a failure and work in the wrong industry if that's true.
If you truly want to BRRRR a property you need a HML or cash. You also need a deal otherwise the money invested gets trapped, hence no "repeat" step. I'd focus on learning as much as possible first, networking, reading, and finding a good deals. The financial aspect should be easy at that point.
If SoCal is as competitive as the Bay Area you will have a very hard time getting an FHA offer accepted on hot properties. If there are 5+ offers on the one you want most you will not get it. That's just how things work out. Sellers prefer to take offers that are higher down or cash.
My suggestion is you focus on properties that have days on market of 30+ days. You will have a better chance of getting your offer accepted. Saved you about 8 months here on lost offers and lost opportunities.
Thanks for the advice on that @Frank Wong, that will save lots of time when looking for value add opportunities as well. @Jaron Walling no typo there, thats why i figured i would use the "Free money" from that as down payment. Also while using the BRRRR method is it possible to use a 203(K) loan?
Hey Trevor! Psyched to hear you're working towards a property in this tight market. Good luck! I'm a licensed financial adviser that works primarily in the retirement plan space. New to the REI world, but really interested in it. First of all, a 50% match is an insanely generous match from your company. Most companies tend to match 3%-5% of your contributions (if they offer a match at all).
I can tell you that borrowing against your 401(k) to buy a home is something many people do. Most people like the idea because they are "paying themselves the interest." However, be aware that you will face double taxation. While your loan comes out tax-free, you have to pay it back with after-tax dollars. When you eventually retire, the distributions from your 401(k) will be taxed. So the value of your loan (+ the interest) is taxed twice.
If your company offers a Roth (after-tax) feature and you're using it, you'll avoid that second tax.
You'll also have to pay back that loan in full before you leave the company (if you leave before its paid off, your 401(k) account balance will be used to pay it off.)
Not really REI information, but I hope this helps you out!
“Looking to get a quadplex in the pricey southern california market. Have been looking into creative ways to fund my first deal. Does anyone have any experience borrowing against their 401(k)? My company does a 50% match which i figured i would be able to take advantage of here?”
I’m curious if there’s some confusion here on how and when they match your 50%.
In most cases a company will have programs to match a portion of your contribution INTO your 401k. Certainly take advantage of this match to its fullest extent.
However, when borrowing against your 401k I don’t see how the matching program is to be taken advantage of here? Wouldn’t affect you borrowing against your acct + and I’m almost certain they wouldn’t be matching 50% of how much you’re borrowing against it? Maybe I’m confused but just wanted to clarify this here. Perhaps I’m mistaken.
As for experience borrowing against 401k... That’s how I got my first property. Borrowed about 25k + had 25k. The interest rate wasn’t great @ 8% but you feel a little better about it because half of the interest is yours and half is theirs. So I end up paying myself 4% interest back into my acct and 4% to them. Also by showing them I was using it on a primary residence down payment they gave me a 30 yr term which is nice having the flexibility.
I’m sure these programs differ greatly but that was my experience. Good luck man
@Kell Caro sorry if i worded that strangely, you are correct my company only matches when putting into the 401(k) but it serves as a nice buffer because i believe you are only allowed to pull out 50K max or up to 50-70% of total account whichever is less. For my account it is 50% so if i have 50K in my account and i pull out 25K ,~18K of that is "company ""free"" money" does that make sense? Also i may be understanding this wrong but my repayment terms would be 5.5% 15 years and all of that would go directly back into my account.
A couple questions for ya:
What kind of property did you end up getting and where? Hows it performing?
Whats your portfolio like now?
Do you find it hard to pay the mortgage and your loan back at the same time?
@Steven Sansone thanks for the tax info! i will double check with my companys plan manager but i believe i have most of the funds diverted into the Roth 401(k) account versus the regular 401(k). In my limited knowledge and understanding, i think this is the right move because i believe my future tax rate is going to be higher than my current one. Do you know of a good pros vs cons list on this subject specifically pertaining to REI?
Yeah double check how they treat the interest, but other then that as far as the amounts it seems very similar. Our program allows you to borrow up to 50% of account balance, up to 50k.
I used it just last summer, closed on a 4plex here in Oakland in June. One unit was vacant for me to move into (and subsequently renovate) and another tenant moved out a couple months after, which was great because I then moved into that unit and placed a new tenant in the renovated one. I was negative cash flow first couple months but now I'm breaking even on PITI while living there so I'm pretty happy with that.
Definitely factor in your 401k payment when analyzing deals. It's not hard to pay it as long as you're accounting for it. In my case, near the end of the year I had some extra money so I went ahead and paid about half of it back. I close on a SFR next week on my street. Will be using some 401 money again.
Correct! One of the key drivers behind picking the Roth feature is to avoid paying taxes at a higher rate if you believe you'll be in a higher tax bracket when you retire. Unfortunately, I don't have a pros vs cons list. I would say your best bet is talking to your HR manager (or whoever handles your retirement plan administration). Ask them specifically if you can speak with the adviser on your retirement plan. Your adviser should be able to walk you through your options in regards to taking out a loan from your plan for REI purposes.
If you leave your company your repayment period shrinks to, ordinarily, a 3-6 month time frame to pay back the remaining balance on the loan. Otherwise it becomes a taxable event.
If this is something you foresee yourself doing prior to paying off the balance (not sure of your longer term goals but seems likely if you're looking to withdraw upwards of $18,000) then it may not be your best option. Whatever ROI you get from your investment property will likely be eaten away a good bit if not entirely by the tax penalty.
One thing about the Roth piece; an individual can always get their basis back on the after-tax money they deposited into the account. However, when you invest Roth into a 401(k) and there is a company match, the match is always pre-tax money - this is because the company is trying to get their tax write off themselves which they lose by investing after tax dollars.
Point being, the money the employee put in May be used without penalty, but the employer match if withdrawn is going to have to be repaid or there will be the rather hefty 10% on top of ordinary tax rates.
(And growth within a Roth sleeve must be held there for a minimum of 5 years before it can be accessed tax free after age 59.5)
@James Rodgers i plan on staying with this company for a long time, but that is indeed very good information to know. How do you think one would prepare or build this expense in as a safeguard to losing their job unexpectedly ? Is it as simple as the vacancy calculations, factoring in a certain percentage just in case?
I’m not the biggest fan of pulling money that’s been designated in a retirement account for purposes of other investments. But if this is the direction you go, I would just attempt to pay it back as soon as you can. Rather than pay the minimum on it each month I’d take some of your cash flow and divert it right back into the 401.
Honestly, at 5.5% interest rate you are likely looking at using hard money and refi to a conventional as a better strategy. Especially if the property needs some love.
One thing I wanted to add - make sure you are 100% vested in your employer’s contributions. Many times you have to work at the company for 3-5 years before those contributions are considered “yours”.
@James Rodgers right i am still ~10 months out from having enough saved up to where i feel comfortable putting this much down, so lots of time still to formulate the right plan to market that works best for me. I will have to weigh many different options still, so thanks for your input! I think 203(K) option sounds pretty nice as all the rehab costs get wrapped into one loan and work must be performed within a certain time frame by certified contractors.
Here are the general considerations regarding both 401k loans & Roth 401k accounts.
401k Pariticipant Loans
If your 401k plan allows for 401k participant loans, the maximum loan amount is equal to 50% of the balance up to $50k. The repayment terms for a 401k participant loan are equal monthly/quarterly payments of principal and interest (typically prime plus 1%) over a 5 year term (longer if used to acquire your principal residence).
Please note that if you take a full $50,000 and then pay back the loan, you can't take another $50,000 until 12 months after the first loan was fully paid back.
Per the loan offset rules that went into effect with the 2018 Tax and Job Act: if you leave your job and the loan is current at the time you leave your job but then the loan goes into default because you left your job, you will have until your tax return deadline (including any timely filed extension) to make the loan current by depositing the outstanding balance into an IRA (and thereby avoid the taxes and penalties that would otherwise apply).
Roth 401k
Unlike a Roth IRA, withdrawals from a Roth 401k account must take a pro-rata share of basis and gain (i.e. you can't just take out the basis) and any non-qualifed Roth 401k distribution will subject the gain to taxes and possibly penalties.
While matching contributions are certainly pre-tax, if the plan allows for in-plan Roth conversions such amounts could be converted to a Roth sub-account which would be both taxable and reportable on a 1099-R.