Novice investor looking for a plan

5 Replies

Hello all! Just to give a bit of a background, I'm a pretty novice investor. I bought my home in 2010 when the 40k I was saving up for a downpayment was able to buy an entire property outright and have been house hacking it ever since. In 2016 I simultaneously lost my job and doubled down on my business, greatly increasing my income but losing my ability to get traditional financing. I understand that I could have found creative ways to finance deals otherwise, but honestly it was easier (and comfortable) to work and earn a high income while I could. In 2019, with 2 years of strong tax returns finally under my belt, it was finally time for me to build my real estate portfolio since traditional financing is now on the table. 

For context, I live in South Florida where cash flowing single-family homes are tough to come by on the open market, but small multifamily opportunities can be found albeit infrequently, and the ones that do get snagged pretty quickly. I'm trying to figure how I should be going about offering on deals, and any insight would be helpful.

I currently have about 100k in investible cash, my home is how worth about 160k, my 2016 and 2017 tax returns can support a modest 250k loan, my 2019 return will be significantly higher but I haven't filed yet at the advice of my CPA, I have ~150k in retirement accounts that I could access, and my parents would like to partner and are willing to contribute 100k. 

Strategies that I've considered are: Conventional 20% down on small multifamily properties until I run out of financing, paying "cash" (using invisible cash, HELOC, retirement funds, or a combination thereof) and re/financing, and/or getting an FHA 3.5% down on a small multifamily property, but I think the order in which I do this can be optimized as doing some will lock out others.

As I'm planning the financing strategies I'm still analyzing markets/properties, viewing, and writing offers (none have been accepted thus far), so hopefully you guys don't assume I'm being paralyzed by being over-analytical, but my intuition tells me there's an optimal order on the financing side to map out. Any thoughts would be appreciated. Cheers!   

Hi, Don. I can't comment on the analysis of using a HELOC, re/financing, and such, but I would advise to steer clear of the retirement funds, for a variety of reasons. There are typically onerous rules you need to follow to avoid penalties.

For instance, if you are borrowing from a 401(k), you have to pay back the loan on time, with a stated interest. Effectively paying yourself, but this interest rate is typically less than what could be received in the market. In addition, if you were to leave your employer, there's the chance these funds would have to be repaid immediately.

There's some other ways to invest with retirement funds, but it can get complicated to follow and ensure compliance.

Hey @Ryan Lane , thanks for the response! Luckily it's an individual 401k sponsored by my own company. The CARES act relaxed some rules for distributions and loans from 401ks and IRAs, so it became an option for liquidity. Exiting the market is definitely an opportunity cost though.  

@Don Pham

Keep in mind that in order to take a distribution or loan under the CARES Act you must have been impacted by the virus in one of the enumerated ways.

Distributions:

If so, you can take a penalty-free distribution (as well as waive the 20% withholding requirement) from your 401k (assuming that the employer allows it) anytime between 1/1/2020 and 12/31/2020. You may avoid the taxes if you deposit the funds in an eligible retirement plan (which includes anIRA) within "3 years and a day" of the date of the COVID-19 distribution (note: compare to a 60-day rollover). Please note that the account into which the funds are deposited must be the same type of account from which the funds were first withdrawn (e.g. withdrawal of pre-tax funds from a 401k could be deposited in a pre-tax IRA but not a Roth IRA - "like to like").

Loans:

Payments on a 401k loan taken under the CARES Act must be paid back starting in 2021 over a 5 year term.

Here are the details regarding the loans:

NEW LOANS:

The CARES Act which was enacted to provide relief to individuals impacted by COVID-19 allows for increased 401k loans and more flexibility for repayment of these loans.

Specifically, you must be an individual who meets one of the following conditions to demonstrate that you have been impacted by the crisis (and it will be your responsibility to retain documents in your files that demonstrates that you are a qualified individual):

    • Individual who is diagnosed with COVID-19, with a CDC-approved test;
    • Individual whose spouse or dependent is diagnosed with COVID-19, with a CDC-approved test; OR
    • Individual who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or other factors as determined by the Treasury Secretary.

On or before September 23, 2020, such individuals take a 401k participant loan subject to the following terms:

  • Maximum Amount of the Loan: 100% of their 401k balance not to exceed $100,000. Please note that per the multiple loan rules, the amount of the loan must be reduced by the highest outstanding balance of any other 401k participant loan over the prior 12 months (regardless of whether such other loan is currently outstanding).
  • Monthly or Quarterly Payments: The loan must be paid back in equal monthly or quarterly payments of principal and interest.
  • Interest Rate: The interest rate is equal to prime plus 1% (or CD rate plus 2%) and is a fixed rate that is set at the time that the loan is taken.
  • Term of the Loan: Five-year term unless the proceeds of the loan are used to purchase a primary residence in which case the term of the loan may be up to 30 years.
  • First Payment:
    • For monthly payments, the first payment that would otherwise be due is delayed until January 2021 (e.g. if the first monthly payment would have been due on May 15, 2020, it will be due on January 15, 2021).
    • For quarterly payments, the first payment that would otherwise be due is delayed until the first quarter of 2021 (e.g. if the first quarterly payment would have been due on May 15, 2020, it will be due on February 15, 2021).

EXISTING LOANS:

The CARES Act which was enacted to provide relief to individuals impacted by COVID-19 allows for increased 401k loans and more flexibility for repayment of these loans.

Specifically, you must be an individual who meets one of the following conditions to demonstrate that you have been impacted by the crisis (and it will be your responsibility to retain documents in your files that demonstrates that you are a qualified individual):

    • Individual who is diagnosed with COVID-19, with a CDC-approved test;
    • Individual whose spouse or dependent is diagnosed with COVID-19, with a CDC-approved test; OR
    • Individual who experiences adverse financial consequences as a result of being quarantined, furloughed, laid off, having work hours reduced, being unable to work due to lack of child care due to COVID-19, closing or reducing hours of a business owned or operated by the individual due to COVID-19; or other factors as determined by the Treasury Secretary.

If you meet the above conditions:

  • You may delay making any 401k loan payments due between 3/27/2020 and 12/31/2020.
  • You must commence making loan payments in January 2021 (or the first quarter of 2021 if your loan payments are due on a quarterly basis).
  • If you elect to delay making such loan payments, the term of your loan will be appropriately extended. For example, if there are 10 monthly loan payments remaining on your 401k participant loan and the next payment is due April 15, 2020, you can elect to delay making such payments until January 15, 2021 and at that time would need to make 10 more monthly payments through October 15, 2021.