Anyone ever use a TSP loan to purchase a rental?

34 Replies

TSP is the Feds 401K. I have been considering taking a loan out to purchase a rental property free and clear. The problem is loan repayment term is 5 years, which pretty much kills any cash flow. The interest rate is only 2.25% and I would be paying my self back.

I had upped my TSP contribution to the legal limits the last few years in anticipation using the funds to buy a rental at some point, but now I realize I should have kept the contributions at an amount that match employer contributions and saved the rest.

Has anyone used this strategy (TSP or 401K loan) to buy an investment home? Were you still able to cash flow? What was the outcome?

@Drew Vukov TSP loans can only be made to purchase a primary residence. Unless you are buying a 2-4 unit and living in one I would not consider trying to sneak one by the federal government / your employer. It is not worth losing your job and committing federal fraud

@Brie Schmidt there are two types of TSP loans. One for purchase of a primary residence this requires documentation and proof, with loan terms up to 30 years. The other type is a general purpose loan, it requires no docs, and can be used for any purpose including purchasing non occupied property

Just wondering if anyone has used a loan like that ( low interest, 5 year term, paying yourself back) to buy a rental property? How did it work out for you, were you able to get it to cash flow immediately ?

@Drew Vukov  

Robbing Peter to pay Paul rarely works IMO. I have TSP and I view it as one part of my overall investment/retirement planning strategy. Like a Roth IRA, brokerage account, or TSP those funds are for those vehicles alone. Cut back to employer match, save cash, and buy a lower priced unit to get started in real estate. You induce less risk that way.

@Bryan N. thanks. That's what I'm going to do. I already have one duplex and I'm in contract on two other investment properties right now. I just found a good deal and thought using a TSP loan might be a viable option. But I can't make the numbers work, at least in the short term.

@Drew Vukov  

No problem.  It's probably a good call to pass for now.  I am similar in many ways.  When the train gets going I search for non conventional ways to keep the train going.  unfortunately, all avenues will be exhausted and you could end up in an asset fat; cash slim situation which is not good for you or family.  I've learned over the years another deal will always be there and pushing the train too far means digging out of a hole later.   I choose a good night sleep and a nice cigar with a microbrew over too much risk regardless of the investment. 

Originally posted by @Drew Vukov:

TSP is the Feds 401K. I have been considering taking a loan out to purchase a rental property free and clear. The problem is loan repayment term is 5 years, which pretty much kills any cash flow. The interest rate is only 2.25% and I would be paying my self back.

I had upped my TSP contribution to the legal limits the last few years in anticipation using the funds to buy a rental at some point, but now I realize I should have kept the contributions at an amount that match employer contributions and saved the rest.

Has anyone used this strategy (TSP or 401K loan) to buy an investment home? Were you still able to cash flow? What was the outcome?

I realized the flaw in using general TSP loans for buying rental property a while back, and instead have been directing the majority of my savings into a brokerage account. I do not have to "borrow" my money, and pay it back.

The other flaw with the TSP loan is that you can only borrow half of what you have in the TSP, and only up to $50,000. So even if you have $500,000 in the TSP, you can't borrow more than $50,000. Your money is essentially tied up until you reach retirement.

Also you can only invest the money that you have in the TSP in the very few funds that they offer. I invest in REITS and individual stocks, while in the TSP I am limited to essentially index funds. Nothing wrong with that for the general masses, but I want more control.

you could buy a property with the loan as a cash buyer. Then cash out refinance when available to pay it back. I plan to do that with my 401k and cash on hand. Assuming the monthly repayment doesn't significantly hurt your budget I would keep the option open. 

Anthony G. Good points you have brought up regarding the use of TSP loan. However, since Roth TSP has now become available so the pro is if you maximize your contribution, it grows over years and you will be able to withdraw it tax-free without paying one cent to the government. If you choose to contribute just 5% that max out the employer's matching, whatever funds you choose to place (i.e. real estate property or stock market via your brokerage account) instead, then all the gains you make will be taxed. I have read a book that says that what really hurts people's wealth the most is TAX! So, that's something to think about.

Originally posted by Account Closed:

Anthony G. Good points you have brought up regarding the use of TSP loan. However, since Roth TSP has now become available so the pro is if you maximize your contribution, it grows over years and you will be able to withdraw it tax-free without paying one cent to the government. If you choose to contribute just 5% that max out the employer's matching, whatever funds you choose to place (i.e. real estate property or stock market via your brokerage account) instead, then all the gains you make will be taxed. I have read a book that says that what really hurts people's wealth the most is TAX! So, that's something to think about.

That is true, they will be taxed, the thing is that if I am able to earn double or even triple from investing outside the TSP, and have more control over my investments, the taxes aren't even an issue. That is the whole reason I got into real estate investing. No matter how much I invest in the TSP, it doesn't earn me nearly as much as my real estate, even with the match and the tax benefits. Real estate also has some extremely good tax benefits that make it in my opinion superior to those offered by the Roth IRA/TSP.

TSP is perfectly fine if you intend on working for the government your whole life and then living a simple retirement. I dream larger than that, and that little match and the few tax benefits are not worth having all of my money tied up and missing out on investment opportunities that could make me some real money.

I personally would like to quit my job before I hit retirement age. Is that possible when I have hundreds of thousands tied up in a government sponsored retirement program and that money is 100% inaccessible until I retire?

In my position, I have the option of retiring at age 50 with 20 years of service. There are no provisions of the Roth TSP that will allow me to take a lump sum of the amount invested without paying tax penalties at age 50.

Elizabeth Colegrove

I am curious what purpose do you use TSP for "reserves"? You can only withdraw up to $50k even if you have $50,001 or more. That's one of the biggest negative about TSP. I have been maximizing out my TSP for years and after reading this post, I realized I am limiting my opportunities in real estate. I just decided to cut my contribution by large amount but still achieves my employer's full matching.

I think it just comes down to making right decision for yourself to balance out and ensure you have sufficient cash to make a large down payment on your investment property. If you have plenty of cash that you don't even know what to do, then maximizing your TSP would make most sense.

Agree?

Account Closed We are buy and hold investors. So the bank requires 6 months reserve for every house. They allow it in any kind of account even retirement. therefore we keep our reserves in a high yielding TSP account. It allows us to meet the banks requirements while building another basket. Since we buy houses often and they aren't cheap, i.e. every new houses requires another 10k or so in reserves. We put $800 a month in retirement as its kills two birds with one stone.

@David Holland

Awesome. Glad you got it worked out and bought one in Baltimore. I am also considering an investment property in Baltimore but I've had a difficult time finding a distressed multi family home to rehab and take an advantage of the additional equity between the total cost and after repairs value. Is yours multi family home or single?

Account Closed I know you mentioned Elizabeth, but I'll answer as well. Lenders will allow retirement account balances (TSP, 401K, IRA and others) to be used for your reserve requirement qualification. So say you had to show 10K in reserves after the down payment is funded for your purchase, but you don't have that in your personal account. You do however have a 25K retirement account balance. They will take that amount, adjust for some distribution and tax penalties and if there would be enough to meet the requirement allow that for the underwriting.

You don't actually have to cash out the plan, or take a loan out against it, they just know that were you to need the funds you could have them available. That gives them the security they need to underwrite the loan and close it. I've done this as well several times, and then build my cash reserves back up immediately following the purchase so I never end up getting in a position where I would need to raid the plan. 

Elizabeth Colegrove @Matt Devincenzo

Gotcha. I've not yet bought my first investment property so excuse me for my ignorance... The reserves requirement qualification is usually applied for investment properties only, correct? I'm asking because I don't think I was ever asked about my reserves when I bought my primary residence property.

Account Closed 

Make sure you are building your reserve account too! In the beginning it doesn't seem like alot of money but as you build you portfolio is grows too. At 5 houses we have to have more than 32k in reserves. We now put almost 1k a month into TSP in order to make sure it stay full. So stay onto of it so you don't have to play catch up later :)

This is a great post with a lot of great responses. It caught my attention because I have a TSP account and just called them about a month ago to see how much I could withdraw for a loan on a property and how much I would have to pay myself back. The 2.xx% is awesome but I really don't like being limited to my own money. I understand why and think it makes sense but also feel people are capable of making their own decisions and shouldn't be penalized for it. I was told that I could take a five year loan but would have to prove hardship and pay myself back, or I can take out a loan for a primary residence and pay it back over the course of 15 years. That would be awesome if I didn't already have a primary residence. Besides being limited on the amount you can withdraw, I think this strategy is an awesome idea!

Yep, done it. I have used TSP funds to purchase a Quad in Texas. Worked out beautifully. I repaid the TSP loan, and I have a nice cash flowing property. There are a lot of ways to finance a deal, TSP is one tool. In the end your personal situation, and the numbers should inform you wether this is right for you, or not.

Glad for the variety in comments here. I was looking at using the TSP as a general purpose loan, as mentioned above, because the interest rate is so low. At the same time, it works great for reserves. Thanks, all, for your opinions, which make it easier to make a decision.

Great discussion. I was looking at my TSP statement today, and it makes you wonder if handcuffing your money in a government retirement account is worth it. I like @Elizabeth Colegrove strategy of keeping enough for reserves through TSP, because its better than reserves sitting in a savings account. If you buy one property a year, putting 5% plus the match (GOV CIV) should keep you on par with reserves.

The one thing you have to look at when taking a loan is that you are being charged 2% on your money, and if you are not making that up plus the investment gain percentage, then you are losing money. i.g. if you are making 9% in TSP, you would have to better 11% on your real estate deal to make it worth it. 11% would be equal sum gain.