I NEED YOUR CRITICISM ABOUT MY 401K

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I NEED YOUR CRITICISM ABOUT MY 401K

Justin O'Malley
Lakewood, CO · Member since 2017 · 66 posts · 21 votes

Hey BPers,

So I've been brainstorming about how to start stacking up my finances to come up with a down payment and I came across something. I'm freshly out of school and I have a good paying job but it still takes some serious time to save up for a down payment on a home in the Denver area. I was think about everything I own down to the shirt on my back to see if anything to get me into a new property. I have a nice truck but I can't sell it because I use it for work and it's nice having a car nice enough that I don't have to worry about it starting up everyday.

I came to this realization....the only considerable amount of money to my name is what I have been putting in my 401k. I've set contributions to the max because A) I want a nice back up retirement plan in case I don't hit it big in RE and B) who doesn't hate watching all their money go to uncle sam.

I came across an option to take a loan out of my 401k. I did some research and found that my 401k provider allows loans up to 50% of your account value at a 7.5% rate. This intrigues me because for a 10k loan my payments would only be about $90 per month. To get a 3% down payment on a $300k house this could work perfectly and I would mind the $100/mo payment because it wouldn't hurt my numbers too much.

My question to you is this...accounting for all the negative effects ($100/mo loan payment, missed opportunity cost of taking my money out of the 401k, and the banks knowing I have an additional loan in my name) is this idea remotely feasible to speed up the clock on my savings account and get my name on a house hack title.

Feel free to tell me I'm dumb for even considering it or if I shouldn't be contributing to my 401k at all at my age but keep in mind that my company has a very competitive match program.

Thanks for reading!

1Reply
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Account Closed
Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
7y

How about not funding the 401K for a while and saving the money for down payment instead? Its a lot simpler solution. If the company matches you could still put that minimum into the 401K

6Reply
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  • Becca Summers
    Real Estate Agent · Highland, UT · Member since 2015 · 407 posts · 272 votes
    7y

    @Justin O'Malley A lot of first-time buyers use their 401K for a down payment. Being a first-time buyer you can buy with a no money down loan. You'll probably have mortgage insurance it might be worth looking into. Check out your local credit unions they are typically the ones who have the no money down loans.

    2Reply
  • Justin O'Malley
    OP
    Lakewood, CO · Member since 2017 · 66 posts · 21 votes
    7y

    @Becca Summers thanks for the reply!

    Do you know the name of a no money down loan package? I've read up on FHA, HomePossible, USDA, 203k, CHFA etc. but they all require at least a 3% or $1000 down.

    0Reply
  • Becca Summers
    Real Estate Agent · Highland, UT · Member since 2015 · 407 posts · 272 votes
    7y

    @Justin O'Malley I don't know the names in Colorado but I'm sure one of the Realtors out there knows of one. In Utah we have a USDA Rural loan that is no money down, there is also Utah Housing and credit unions all have some form of no money down. Just make a few calls.

    2Reply
  • Bill S.Pro Member
    Moderator
    Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
    7y

    @Justin O'Malley so the only hitch in your plan is that you need to read the fine print for the loan. Mine required I pay it back if I left the company whose 401K it was. If you don't pay it back they count it as a distribution and you pay the  penalty as well as it being counted as income for the year. The tax liability can be a large bite. 

    CHFA is the Colorado program if I remember correctly. @Dan Mackin puts on a seminar for first time home buyers looking to do house hacking. I think he posted it in the market place. 

    Even with a loan against the 401k you can still contribute and get the company match. Also the interest you pay on the loan is actually paid to yourself in the account. The reality is you are making at 7.5% interest loan to yourself.

    3Reply
  • Matt M.
    Realtor · Denver, CO · Member since 2013 · 2k+ posts · 1k+ votes
    7y

    One of my lenders will do 100% financing on a 20 year AM for qualified buyers. In reality though, if you don't have $10k to scrape together, should you be buying? What happens when the furnace goes out? Roof needs replaced? Etc... Owning a home is EXPENSIVE. I'm starting a $20k retaining wall next week... 

    5Reply
  • Parker Fairfield
    Rental Property Investor · North Conway, NH · Member since 2016 · 104 posts · 26 votes
    7y

    @Justin O'Malley

    Assuming you've more than ... say $60k in your 401k, my suggestion is GO FOR IT. 

    Also - look into buying a 4 unit with FHA; 4 units is the max # of units they'll allow.

    To search, I've a link off of my profile to a short instructional PDF I wrote up (I got tired of explaining it) about how to search the commercial site www.LoopNet.com (which is the Zillow for commercial properties; 4units are commonlyconsidered commercial). 

    Loopnet is cool because I've a way to use Google to search it.... Check out the link if you'd like to learn how to use Google to show you its listings www.bit.ly/LoopnetInstructions

    You could then find & buy a 2, 3, or 4 unit, and (live in the smallest unit) and have your tenants pay down your costs, etc. 

    Good luck.

    1Reply
  • Account Closed
    Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    7y

    How about not funding the 401K for a while and saving the money for down payment instead? Its a lot simpler solution. If the company matches you could still put that minimum into the 401K

    6Reply
  • Michael T.
    Los Angeles, CA · Member since 2018 · 326 posts · 279 votes
    7y

    @Justin O'Malley it's okay to do but you have to make sure you're capable of paying it back otherwise as @Bill S. mentioned you will be penalized and the tax liability is not worth the loan.

    If the only way you are going to have enough for a $300k loan is by borrowing $9k for your down payment from your 401k you have to really think if you are prepared to purchase this expensive of a property.  If you're able to buy a multi unit and do a "house hack" it makes it more realistic. 

    Also, if your company provides a good match continue to contribute at the match rate.

    2Reply
  • Lien VuongBusiness Member
    Real Estate Agent · Boston, MA · Member since 2018 · 2k+ posts · 1k+ votes
    7y

    While I applaud you for thinking outside the box for your investing plan, it does not seem like you have enough funds to pull the trigger on your first property yet. Yes you can pull out that money out of your 401k and leverage it but it seems to me that that's some of the last few dollars you have. What if something goes wrong and you have a vacancy for two months? You'll be strapped. Don't be so hasty and jump into your first deal so quickly, learn about the process and save up some money before you take the leap. You'll thank yourself when your water boiler breaks and you got the $1200 bill. 

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    2Reply
  • Jim K.
    Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes
    7y
    Originally posted by @Justin O'Malley:

    Hey BPers,

    So I've been brainstorming about how to start stacking up my finances to come up with a down payment...I have a nice truck but I can't sell it because I use it for work and it's nice having a car nice enough that I don't have to worry about it starting up everyday.

    I came to this realization....the only considerable amount of money to my name is what I have been putting in my 401k....

    I don't mean to be critical and supercilious as the once-owner of a bought-new 2009, bought-new 2012, and current owner of a bought-new-and-finally paid-off 2015 Toyota RAV4 that I intend to drive into the ground, I have made my mistakes when it comes to automobiles and they have bled me dry for a long time. I was actually planning to go to Volkswagon for the next one before I started questioning my car strategy.

    In an era of cell phones, the easy availability of Lyft/Uber, and a AAA-plus tow-anywhere-within-a-150-mile-radius membership for $85 per year, the logical reasons behind owning your nice truck and paying all the expenses associated with it aren't anywhere near as logical as they used to be. I know this because they were certainly my excuses for buying three SUVs within 6 years, and yet I drove a 2000 white-and-rust Honda Odyssey with 200,000 miles on it for much of that time to do my maintenance calls as a DIY landlord. The denial was strong in me.

    You're shooting yourself in the foot when it comes to your savings rate.

    5Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    7y

    @Justin O'Malley. When you say “nice truck”. Is this a new truck you paid 40k or more for and is financed heavily? If so that’s a giant crutch.

    Also, don’t borrow from your 401k that’s a bad idea. If you switch jobs you’ll need to pay it back immediately and if you default you lose it.

    I’m with @Jim K. You need a cheaper car. I drive a car with 160k miles on it. It’ll probably go to 200 plus maybe 250 (it’s a Toyota). When it dies I’ll go buy another for 8-10k cash and do it all over again.

    Your vehicle is not an asset, neither is your primary house. Therefore buy assets (things that make you money). Not liabilities, like nice trucks and big homes

    3Reply
  • John Nachtigall
    Santa Rosa, CA · Member since 2017 · 325 posts · 701 votes
    7y

    My suggestion is to not take the loan from your 401k and continue to invest the maximum amount.    Simply put that is the best way you have to invest for the long term at the moment.

    First, 401k loans are always a bad idea

    https://www.investopedia.com/articles/retirement/0...

    Second, at 7.5% interest, your "home" would have to cashflow more than that for it to make financial sense.   The Denver Market is red hot, there is no way you are getting a turnkey property with better than a 7.5% return.  If you are buying a "fixer-upper" you will not have the capital to fix it since you are already spending more than your available cash to buy it.   You simply dont have the capital to invest at the moment.

    Take a deep breath, be patient.   Your financial plan is a marathon not a sprint.   Your 401k is giving you a free money (I assume there is a match) and tax free compounded interest.   Per your write up you plan on getting out about $10,000 (3% of 300k).   Given that you are probably 35+ years away from retirement, if you invest that in a S&P 500 index fund you are looking at 300,000+ in 35 years.   And that is if you don't add another dime.  the S&P has returned 10%, dividends reinvested, for 100+ years and the 401k allows it to compound tax free.  You dont have a better investment option at the moment.  Real estate is illiquid and capital intensive and you can't handle either, which is fine, this is just the beginning of your life not the end. 

    My advice

    - Make sure you have 6-9 months of living expenses in the bank, cash.

    - Get rid of all debt, including car loan

    - Make a budget and live below your means.   The delta each month goes into your Investment fund

    - As your career progresses you will earn more, dont spend it on "nice trucks" keep your expenses the same and put it in investment fund.   I started my career at 45k a year, 21 years later I am earning 300k.   Your income will go up, make sure your expenses don't go up at the same rate.   No one is saying live like a monk, but decide early on that money in the investment fund is more important than a new car every 2 years.  

    - When you have the capital you can then make intelligent investment decisions knowing that regardless you have a fully funded 401k and living expenses to cover any unforeseen circumstances.   That security allows you to take intelligent risks.   

    Good Luck

    3Reply
  • Justin O'Malley
    OP
    Lakewood, CO · Member since 2017 · 66 posts · 21 votes
    7y

    I appreciate everyone's input! I believe saving up is my first step but it's nice to get some input on different loan strategies so thank you! Also I probably should've been more clear...My truck is a 2010 Silverado and I meant "nice" as in it doesn't break down haha. For now I'll continue to bring PB&J to work and save up for the first dip in the market, thanks everyone!

    2Reply
  • Bob Woelfel
    Investor/Agent · Kansas City, MO · Member since 2017 · 291 posts · 308 votes
    7y

    @Justin O'Malley...I think the only way I would do this is if you were planning to house hack.  Don't do this to just buy a single family for you to live.  If I could start my investing career over and go back 10 years I would house hack and live for free.  Good luck.

    2Reply
  • Nik Moushon
    Architect · Wenatchee, WA · Member since 2018 · 843 posts · 907 votes
    7y

    @Justin O'Malley First thing I would suggest yo to do is to stop contributing to your 401k past what your company matches. If they match then thats a 100% return on investment. No brainer there. But past that I would not invest anything more. Take that money you would normally put into your 401k and put it in a SEPARATE bank account so that you dont accidentally spend it. Use that savings account as your funds for a future DP on an investment property.

    3Reply
  • Frank Wong
    Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes
    7y

    @Account Closed

    I am with Anish and Nick here.  Don't fund the 401k.  Unless your company matches, I think its a complete waste.  That's just my personal view.   I don't want my money trapped in the system.  You are not going to get rich funding your 401k.  Run the numbers.

    1Reply
  • Adam Laurenzo
    Member since 2018 · 39 posts · 16 votes
    7y

    Fund the 401K to the point where your employer matches, not a penny more. Find ways to increase your savings rate. Check out the Mr. Money Mustache blog, if you haven't found it yet. Start from post 1 and read at least the first ten.

    0Reply
  • Victor Viyuoh
    Los Angeles, CA · Member since 2017 · 39 posts · 25 votes
    7y

    Hi @Justin O'Malley, if the numbers still work with your 401K loan, take it. TAKE IT. The interest you pay on your 401K is to YOURSELF!

    2Reply
  • Bill S.Pro Member
    Moderator
    Rental Property Investor · Denver, CO · Member since 2013 · 4k+ posts · 2k+ votes
    7y

    @Justin O'Malley don't bet on a market dip. Buy when you can afford to. If the market dips no problem ride it out and make your payments. Market timing is a fools game. IMO, it really doesn't look like a dip anytime soon and I'm not an overly optimistic person. 

    1Reply
  • Account Closed
    Rental Property Investor · Brooklyn NY · Member since 2018 · 263 posts · 469 votes
    7y

    I would suggest getting your personal finances in order prior to real estate.  Play offense and defense.

    1Reply
  • Mark Welp
    Investor/Agent/CPA · Columbus, OH · Member since 2015 · 249 posts · 207 votes
    7y

    I agree with @Frank Wong.  401k Plans are a "jail" for your money.

    1Reply
  • John Nachtigall
    Santa Rosa, CA · Member since 2017 · 325 posts · 701 votes
    7y
    Originally posted by @Frank Wong:

    @Account Closed

    I am with Anish and Nick here.  Don't fund the 401k.  Unless your company matches, I think its a complete waste.  That's just my personal view.   I don't want my money trapped in the system.  You are not going to get rich funding your 401k.  Run the numbers.

     I agree.  Run the numbers.  30-40 years of compound growth, tax free, with a free match for a portion of the contribution.   If that is a trap then lock me up.   If you look above I calculated the 10k he wants to remove would earn him 300k in 35 years, just that 10k.   

    With the free money match and the tax free growth the numbers are almost impossible to beat.   Add in that you can contribute small amounts at a time and the investments are 100% liquid it becomes unbeatable for the vast majority of people

    0Reply
  • Frank Wong
    Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes
    7y
    Originally posted by @John Nachtigall:
    Originally posted by @Frank Wong:

    @Account Closed

    I am with Anish and Nick here.  Don't fund the 401k.  Unless your company matches, I think its a complete waste.  That's just my personal view.   I don't want my money trapped in the system.  You are not going to get rich funding your 401k.  Run the numbers.

     I agree.  Run the numbers.  30-40 years of compound growth, tax free, with a free match for a portion of the contribution.   If that is a trap then lock me up.   If you look above I calculated the 10k he wants to remove would earn him 300k in 35 years, just that 10k.   

    With the free money match and the tax free growth the numbers are almost impossible to beat.   Add in that you can contribute small amounts at a time and the investments are 100% liquid it becomes unbeatable for the vast majority of people

     Hi John,

    Yes, those numbers are correct.  You gave an accurate growth rate based on $10k.  The problem is that you have to wait for 35yrs for $300k.  Wheres the fun in that?  All the miss opportunities you could have invested and times you need the money for other things. 

    Let's use my real life situation.  I bought my first property a 4 unit in Ft Worth in 2002 for $172k.  I used the $10k I saved for the down and closing costs.   The building is worth $370k today.  It's been 17yrs and I have an equity gain of $198k + all the rents I have collected during this period + depreciation.  

    I am able to use the cash flow from this building to fund other purchases and make a direct impact on my life every day.  You cannot do that with a 401k.  Like I mentioned its a trap.  I want to enjoy the fruits of my labor now and don't want to wait for 35yrs.  $300k in 35yrs is nothing.  Cost of goods and living will be through the roof.  My point is run the numbers you don't get rich investing in a 401k.  At least what I think rich really is. 

    2Reply
  • John Nachtigall
    Santa Rosa, CA · Member since 2017 · 325 posts · 701 votes
    7y

    @Frank Wong

    There is no fun in waiting Frank, it is called investing not funvesting.  I plan on living well past 65, I assume you do also.

    Your example is super and I sincerely congratulate you. But it is unsustainable. You only get 10 FHA loans, you can only put 3% down on owner occupied, and there are only so many BRRRR opportunities available. And you have to find and manage them, not passive. The stock market on the other hand provides an infinite pool to buy, no limits, completely passive

    And your illiquid 198k equity gain is subject to the same inflation effects as my liquid 300k stock gain. So neither provides inflation protection. 

    My point is both can make you rich.  There is nothing wrong with your beliefs but a 401k is not a trap, it is a smart choice for most people and can make you a millionaire quite easily in a completely passive way.   With free match and tax free growth it has excellent returns

    0Reply
  • Account Closed
    Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    7y
    Originally posted by @Frank Wong:

    @Account Closed @Nik Moushon

    I am with Anish and Nick here.  Don't fund the 401k.  Unless your company matches, I think its a complete waste.  That's just my personal view.   I don't want my money trapped in the system.  You are not going to get rich funding your 401k.  Run the numbers.

     While I do suggest in this case saving the money outside the 401K I dont believe 401K is a bad idea. For those in high tax brackets its one of the few breaks left and is a more legit tax break than Mortgage interest where you just pay the money to the bank instead. By putting pre tax in 401K you can get the real tax break. Or put in a Roth 401K which is even better.

    0Reply
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