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.

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  • Joel Florian
    Member since 2019 · 111 posts · 130 votes
    5y

    @John Kernen

    A couple of thoughts:

    The HELOC is your best option. Origination fees are lower than a refi and you only have to pay interest (albeit higher) on the amount you need.

    If the deal is good enough, I would continue to borrow from the 401k with the plan to pay it off once the HELOC goes through. The risk is that if you lose your job, you might no longer qualify for the heloc and have to pay the 401k immediately (or pay the taxes and penalties). If the deal is not good enough to offset the risk, move on. Consider investing in tax deeds, tax notes, RE notes, or looking for properties where owner financing is an option.

    I have experienced the same frustrations as you describe. I got a HELOC and used it til I sold my home. Now I'm applying for another. I started a Solo401k under my own LLC. Because of restrictions, I have mostly invested the 401k in real estate notes, but occasionally borrow up to 50% to buy property. More recently, I started with Paradigm Life, similar to Nelson Nash's "Be Your Own Bank". Basically, i have overfunded a cash value whole life policy which I can borrow against for any reason (and gain interest either way)

    Another option would be to visit a local REA or otherwise network with local RE investors. Pethaps a local investor or hard money lender would partner with you on the deal.

    2Reply
  • Rick K.
    Investor · Hampton Roads, VA · Member since 2020 · 8 posts · 6 votes
    5y

    @Mike Dymski

    I think that's great advice... One of the great things about real estate is that you can use long-term loans to make short-term money (flips, rents, etc) AND long-term money (appreciation, etc). Using short-term funding to try to make longer term $$ flips that equation and increases the risk.

    1Reply
  • Jonathan StonePro Member
    Rental Property Investor · Camas, WA · Member since 2020 · 284 posts · 202 votes
    5y

    @John Kernen

    Awesome questions and you already have a ton of great responses. Here are some notes I will give from my personal experience:

    I borrowed from a 401k for a primary residence and learned many valuable lessons, 1 even if you aren’t planning to leave your job if you leave that balance is due, if you can’t pay it you now have a withdrawal penalty and tax bill due. This happened to me as I was being forced from a position just less than a year after buying a house. Issue 2 if you don’t have reserves for the size of investment you are making be very diligent in all you research and cost estimates. Stretching to buy an investment where the math barely pencils out is trouble. If you find a good deal there is money to be had. If you find a great deal, people are always going to help you find a way to make it work.

    I think others have said the same thing but look for a mentor someone with experience and possibly some capitol to partner up with for this deal. As I often hear on the BP podcast it’s better to have 10% of 10 deals than 100% of 1. It seems like you have invested quite a bit of time and energy and that is something people with capital available often don’t have. The work you have already done is useful but as others have said proceed with caution, but don’t let speed bumps stop you.

    Have an awesome 2021!

    0Reply
  • Miriam Vicovan
    Real Estate Agent · Chicago, IL · Member since 2020 · 1 post · 0 votes
    5y

    @Greg Scott what are hard money loans?

    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ 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?

    The advantage of a cash out refinance is the interest rate on the cash out is lower than a HELOC and you can get it on a 30 year pay back. It is better than borrowing from your 401K in my opinion. Just keep careful records on the cash out portion. The interest on the cash out portion will be deductible against your rental property - after you close on it. As long as you are doing the refinance anyways, it makes sense to just pull the cash out. You may not be able to take out as much on a HELOC as you could on a cash out refinance.

    0Reply
  • David Martin Jr
    New to Real Estate · Orange, CA · Member since 2018 · 62 posts · 15 votes
    5y

    @Stephen DeThample how do you get the Covid relief for borrowing from 401k?

    0Reply
  • Stephen DeThample
    Real Estate Agent · Las Vegas, NV · Member since 2020 · 459 posts · 305 votes
    5y

    @David Martin Jr

    It’s not borrowing, it’s a withdrawal. Check your 401k site, look at the withdrawal page. If your employer participated it will have a small 1 question qualification. Search google for the irs site fir more info, or any financial website.

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

    @David Martin Jr

    It must be taken before new year, unless they extended it.

    0Reply
  • David Martin Jr
    New to Real Estate · Orange, CA · Member since 2018 · 62 posts · 15 votes
    5y

    @Stephen DeThample thank you!

    0Reply
  • Antonio CuccinielloPro Member
    Investor · Austin, TX · Member since 2016 · 531 posts · 310 votes
    5y

    @John Kernen 1. I KNOW THE FEELING. Waiting for the right deal. I personally was nervous and scared to buy a bad deal up front, because of the years of mistakes I could run into with these properties if I bought a bad deal.

    2. I want to challenge you to think of the money from the 401K as a tool in your tool box.  You only use it if it makes sense financially. Your HELOC on your primary is also a tool in your tool box. You don't use a hammer to screw something into the wall, instead you use a screwdriver for that (that's about how much rehab knowledge I have in total in that one sentence.)

    3. See if you can find other viable tools for your toolbox.  Can you move from your current residence and move into the new property and turn your current one into a rental? This way you can use that loan from 401K and get a lower down payment on the property. Can you get a partner to help cover the down payment? Its important to start as you mentioned, but its also important not to buy a bad deal. Stick to your numbers.

    732-402-6988
    0Reply
  • John Kernen
    OP
    New to Real Estate · Pueblo West, CO · Member since 2019 · 22 posts · 11 votes
    5y

    @Stephen DeThample

    Everything says I have to have hardships related to covid. I have not had any employment hardships.

    0Reply
  • Roy CovertPro Member
    Rental Property Investor · AR · Member since 2019 · 12 posts · 2 votes
    5y

    @John Kernen

    John,

    Have faith brother, what you described has been experienced by at least 85% of the investors reading this. If it was easy, everyone would do it. In time, with persistence and lots of due diligence you WILL find that 1st deal and you will be so happy that you waited for it. Look up Independence Realty Group on IG, hit the link in his bio for a program that will show you multiple ways that he has purchased 60+ properties using small banks and different loan options ( this is NOT a get rich quick scheme) Henry is a solid guy that’s been on the Bigger Pockets podcast with Brandon and really knows his stuff.

    I hope this helps you or who ever reads it.

    You don’t have to go into huge debt to by RE if your educated about the ways banks work.

    Best of luck,

    Roy

    0Reply
  • Zachary Ray
    Investor · Tampa, FL · Member since 2017 · 589 posts · 251 votes
    5y

    Joe is right, also pull the trigger on deals. Getting a property just for the sake of it will only bring you down in the future. Sometimes you have to look at 100's before one or two draw your attention. If your agent doesn't like that then find another. This is your investment. 

    0Reply
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