First crack at a purchase has been discouraging.

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First crack at a purchase has been discouraging.

John Kernen
New to Real Estate · Pueblo West, CO · Member since 2019 · 22 posts · 11 votes

I have been looking for ther right deal for some time now. Dragging a realtor around to every house in town. The market is tough right now but I keep hanging on the thought that if I don't get started I never will. I had a pre approval from a bank, planned take a loan from my 401k to cover some down and rehab costs. I found a house that needs a bit of updating and probably not the best deal as it was on the MLS but at least not a complete basket case for my first deal. I got my offer accepted and started the process. My lender informs me that instead of the 20% down I will have to do 25% because the purchase price (125k)is less than I originally asked for on the pre approval. Ok not a big deal I planned to pull 50k from my 401 for down and rehab. I start to work on pulling the down money from my 401k and find that because this is not my primary residence I will have to pay the loan back in half the time I had expected. This puts me paying back the loan an mortgage at about 1350 a month on a home that should rent for about 900 per month. Don't think this is a good move...I also don't feel that pulling any money from my 401k is a viable option going forward. Very discouraging and I feel bad for wasting the time of those involved. I am still determined to get the first deal. I am in the middle of refinancing my primary home and may look to pull some cash from a HELOC after that settles. Had anyone else had similar issues? Anyone have any creative ideas or suggestions?

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Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
5y

Don't get discouraged, and more importantly, don't let all of this make you buy a property...instead of a deal.

11Reply
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  • Greg ScottPro Member
    Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
    5y

    Get a new mortgage broker.   All my rent properties had 30 year amortization.  There is no reason you should be forced into a shorter one.

    It also might be helpful to become familiar with hard money loans which would be a better way to approach a property with some significant rehab.

    Good luck.

    7Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    5y

    Don't get discouraged, and more importantly, don't let all of this make you buy a property...instead of a deal.

    11Reply
  • Andrew Zannotti
    Killeen, TX · Member since 2017 · 127 posts · 91 votes
    5y

    It's already been said in the post about but just to reiterate, get a different lender. Just because you have a pre-approval from them does not obligate you to use thier product. I recommend calling every bank and credit union where you are to shop around for the best terms and a product that suites you.

    2Reply
  • Account Closed
    Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    5y

    If you do not have enough cash you should not buy a property. Its a disaster waiting to happen. Unless you have enough for downpayment, rehab and at least 6 months expenses in cash, you should not buy anything. 

    11Reply
  • Kris L.
    San Antonio, TX · Member since 2019 · 930 posts · 836 votes
    5y

    @Anish Tolia

    Plus one to this advice. In the middle of a acquisition. Lender became very difficult to work with, poor communication and such. Fortunately had the cash to finish this thing out using cash as a backup before lender torpedoed things.

    2Reply
  • John Kernen
    OP
    New to Real Estate · Pueblo West, CO · Member since 2019 · 22 posts · 11 votes
    5y

    @Greg Scott the lender is giving me the 30yr term, but requires 25% down. I planned to use 50k from my 401 in order to pay the down and rehab. It's the payback requirement on the 401k that is going to screw me up.

    0Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    5y

    @John Kernen you are correct, borrowing from your 401k or worse liquidating it to buy rental property is not a good idea. In general, it’s a bad idea.

    You can use money from your primary residence refinance and saved after tax money. That’s the best way to get started

    2Reply
  • John Kernen
    OP
    New to Real Estate · Pueblo West, CO · Member since 2019 · 22 posts · 11 votes
    5y

    @Joe Villeneuve I am a bit discouraged but not beaten. I have been looking for a deal for a while now. Everything I find I really feel is a deal gets snatched up by a cash buyer before I can make a move. I do think it is better I get out of this one. I learned a lot just from getting this far. I will regroup and take another crack at it.

    2Reply
  • John Kernen
    OP
    New to Real Estate · Pueblo West, CO · Member since 2019 · 22 posts · 11 votes
    5y

    @Caleb Heimsoth

    I am I the middle of refinancing my current residence right now, for some reason I didn't want to involve it but I do have a large chunk of equity...I will look into this as an option. Thanks

    1Reply
  • John Kernen
    OP
    New to Real Estate · Pueblo West, CO · Member since 2019 · 22 posts · 11 votes
    5y

    @Caleb Heimsoth

    What are your thoughts on a cash out refinance vs a Heloc? Originally planned to refi and then get a HELOC. Would a cash out refi be a better alternative?

    0Reply
  • Greg ScottPro Member
    Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
    5y
    Originally posted by @Caleb Heimsoth:

    @John Kernen you are correct, borrowing from your 401k or worse liquidating it to buy rental property is not a good idea. In general, it’s a bad idea.

    Why do you believe borrowing from your 401k a bad idea?   I'm not a fan of mutual funds and don't like the stock market.  With my employer's 401k, my only other alternative is a money market fund paying about 1%.  Why would I not borrow that (from myself) and make 20%?

    Why do you believe that liquidating funds from a 401k is a bad idea?  Assuming I can find mutual funds that can perform as well as my real estate investing (unlikely), the long-term results of a 401k are terrible.   At 59 1/2 I have to start pulling that money out as ordinary income for which I pay a lot of taxes.  If I keep investing in real estate, can structure it to pay no taxes.  Even better, all those taxes that I never pay get wiped out when I die and my heirs never pay the tax. 

    I use every option I have to pull money out of my 401k and am so much better off for having done so.

    3Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    5y
    Originally posted by @Greg Scott:
    Originally posted by @Caleb Heimsoth:

    @John Kernen you are correct, borrowing from your 401k or worse liquidating it to buy rental property is not a good idea. In general, it’s a bad idea.

    Why do you believe borrowing from your 401k a bad idea?   I'm not a fan of mutual funds and don't like the stock market.  With my employer's 401k, my only other alternative is a money market fund paying about 1%.  Why would I not borrow that (from myself) and make 20%?

    Why do you believe that liquidating funds from a 401k is a bad idea?  Assuming I can find mutual funds that can perform as well as my real estate investing (unlikely), the long-term results of a 401k are terrible.   At 59 1/2 I have to start pulling that money out as ordinary income for which I pay a lot of taxes.  If I keep investing in real estate, can structure it to pay no taxes.  Even better, all those taxes that I never pay get wiped out when I die and my heirs never pay the tax. 

    I use every option I have to pull money out of my 401k and am so much better off for having done so.

    If you leave your job or lose it you often have to pay that back immediately.  Liquidating it before 59 1/2 is a bad idea because you’ll pay the taxes and the penalty. 
    Its not necessarily always a bad idea to borrow from your 401k but for the vast majority of people it’s a bad idea.

    3Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    5y
    Originally posted by @John Kernen:

    @Caleb Heimsoth

    What are your thoughts on a cash out refinance vs a Heloc? Originally planned to refi and then get a HELOC. Would a cash out refi be a better alternative?

    I would cash out refinance if possible, but it depends on your situation. HELOCs can be frozen by banks.  A refinance cannot as long as you make the payment.

    1Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    5y

    The 401k loan works best for short-term purposes where you add value, refinance/sell, and pay back the loan. It's similar to using a HELOC. It's best to not have short-term funding for a long-term strategy. Match the funding with the property strategy. Good luck and stay encouraged. We all learn new things when taking action.

    5Reply
  • John Kernen
    OP
    New to Real Estate · Pueblo West, CO · Member since 2019 · 22 posts · 11 votes
    5y

    @Mike Dymski, wise encouraging words. Thank you

    1Reply
  • John Kernen
    OP
    New to Real Estate · Pueblo West, CO · Member since 2019 · 22 posts · 11 votes
    5y

    @Caleb Heimsoth

    Thanks, I am going to explore the cash out refi as an option.

    0Reply
  • Keith Jia
    Investor · Renton, WA · Member since 2016 · 2 posts · 0 votes
    5y

    If you want funds from 401k, loan isn't the best. Take your 401k to a self-directed servicer and you can invest 100% of the 401K with no repayment terms. Obviously, the profit proportional to the 401k investment needs to stay in the 401K porfolio, so you can't just take a vacation with it. But you get the point.

    0Reply
  • Jason Paredes
    Member since 2020 · 4 posts · 3 votes
    5y

    @Greg Scott

    The reason is because people follow traditional advice and don’t do the math.

    For e.g.

    20k in a 401k at 7% for 20 years.

    Compared to 20k down on a 100k property renting for $1,000. After 20 years.

    1Reply
  • Greg ScottPro Member
    Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
    5y

    @Jason Paredes Amen, brother. 

    I don't have the marketing budget Wall Street does to brainwash people @Caleb Heimsothinto throwing their money away.  All I can do is challenge thinking with provocative questions.

    1Reply
  • Alexandre Marques dos Santos
    Rental Property Investor · Member since 2020 · 215 posts · 137 votes
    5y

    @John Kernen

    By the description of your acquisition it seems you speeded up. The absence of experience should advocate for a slower pace.

    RE is fascinating but there are certain aspects we learn with exposure. Reserves, unknown, are part of our routine. 1% rule is NOT a rule, but a guidance.

    Your situation does not seems to be a dead end. You need to evaluate if you can keep portfolio and if its profitable despite of cash flow. A one time capex expenditure should not dictate your future. But now you need to understand if you can face any adversity, and if not , put a property for sale. One bad asset cannot contaminate your whole portfolio.

    Take the lesson. You NEED to carry reserves as the unpredictable will knock at your door anytime.

    1Reply
  • Rumen Mladenov
    Investor · Newark, DE · Member since 2014 · 245 posts · 198 votes
    5y

    I have a HELOC on my primary residence and I use it for rental property acquisitions. Once the property is rehabbed and rented out, I do a cash out refi on it and pay off the HELOC. Rinse and repeat. The costs for a HELOC are much lower than the costs on a refi, I would only do the refi if you can lower your rate enough to justify it.

    With that said, $900 rent on a property you buy for $125k and you need to rehab does not sound like a great deal... 

    1Reply
  • Joe Cassandra
    Rental Property Investor · Woodstock, GA · Member since 2017 · 517 posts · 772 votes
    5y

    Never "rush" to buy a house because you feel some non-existent pressure to do so. 

    If you feel you're 'behind' others...buying bad deals will never make you go faster. Will only put you deeper in the hole. 

    We started in 2019...looked for a deal for 6 months...rushed into a flip...lost 30k. 

    Sure, we learned a ton of lessons, so we 'got some of that money back' in the school of hard knocks. But it's better to find learn on a better deal. 

    ...learn how to find deals. Better to invest cash into this than into bad MLS deals

    ...it gets easier

    ...find a private lender who can bring in money rather than borrow from a 401k (the worst idea you have unless maybe you're private lending it yourself...but that's a stretch too). 

    ...don't give up

    -------------------------------

    If all of this sounds hard, real estate is hard. But the returns are large.

    1Reply
  • Stephen DeThample
    Real Estate Agent · Las Vegas, NV · Member since 2020 · 459 posts · 305 votes
    5y

    @John Kernen

    Have you looked into using the COVID relief to withdraw your 401k without the penalty? You can even spread the taxes over 3 years. This will get you the money and no payback. The real estate should bring more than 401k long term.

    Good luck 🍀

    2Reply
  • Chase Busick
    Realtor · Oklahoma City · Member since 2020 · 258 posts · 139 votes
    5y

    @john Kernan I agree with @Caleb Heimsoth , @Greg Scott & @Mike Dymski on their earlier points made. 

    Typically you can avoid paying penalties on Roth 401k's & Roth Ira's contributions that you made after 5 years of being vested. If you use Roth, then the taxes would have been paid up front that year and will allow you to withdraw that money tax free after the vested time. If you withdraw any money other than the contributions like earnings/gains,etc. then you'd have to pay penalties+taxes. If you have traditional, you can do Roth Conversions if you are worried about the taxes and are ok with using the money up til that point. But if you do need or want to use that money a lot sooner, then it may be worth taking a loan, the penalty or whatever is best depending on what info/quotes you get. 

    For more about the Roth Conversions and withdrawing retirement account funds early, you can check out https://www.madfientist.com/ho... 

    1Reply
  • Shira Albert
    Investor · Spokane, WA · Member since 2020 · 37 posts · 18 votes
    5y

    Thanks @joecassandra. I am new as well and feel that urge to buy a property not a deal. This reminder help keep me on track. Just take my time and dont rush it otherwise I really will learn a very big lesson.

    1Reply
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