Down payment
Are you better off borrowing against your 401k or using a bank for a down payment on home?
You are better off having the down payment :) with out needing to borrow. If you do not have the down payment I would look at why you do not have the down payment and what kind of time line you have to come up with the down payment. When my wife and I purchased our home we did half from savings and half from my 401k, but this decision came from believing that the market was going to be doing garbage returns over the 4 years we gave to our selves for paying off the 401k loan, and the interest I would effectively be paying my self over that time frame would be better or equal to what the money would be doing in the market to begin with. The only reason we even touched the 401k was this was during the housing crisis and banks were requiring 20% down which we were not expecting.
thanks for the advice!! @Chris Vail i guess it is just my eagerness to purchase property that makes me even considerr borrowing against the 401k
What is the return in your 401k and what return would you be getting in REI. I personally borrowed money out of my 401k to invest and don't regret it. They are just two different asset classes, put the money in the one that is performing the best. On another note, its only a 5 year loan, so its payback is pretty short.
@Rusty Thompson return is 2.3%, see that was my logic, if it's a 5 year loan and the interest would be paying yourself back, then i do not see what would be the drawback?
I am also from an old school mentality on what the 401k is for, (Retirement). For instance I am in the process of purchasing my first rental, and the money I am using for a down payment is from a stock account not a 401k account. So my reference earlier on time line, is related to the discipline of saving for some goal. If you know that you need 20,000 for a down payment how long would it take you to save that money? What sacrifices would you make in order to reach that goal? Why haven't you saved that money so far? What can you change from here going forward to make that possible? Not saying you shouldn't borrow from the 401k, if you have to borrow and the two options are bank or 401k I would say 401k every time as this way you get the interest instead of the bank.
I forgot to mention that there are generally 2 types of loans you can do out of your 401k short term which is less than 5 years payback I believe and long term I forget what the time frame is on these (20-30 years?)
excellent points @Chris Vail i am really not familiar with all the nuances of what can be done with the 401k, i am looking to purchase a rental property as well. Thanks for the insight again, i think i will do more research and keep saving.
Joel - a few other items to consider. If you do a 401k loan and lose your job, you have to pay it back in full, otherwise you're hit with penalties.
The other part of your original question: borrow the DP from the bank: generally the lender will not allow the DP to be borrowed from any other source (401k loan and gifting are some exceptions). Generally they like to see it from savings. FHA loans are a possible option, as I believe they're only 3.5% down if you occupy it (requirement to occupy).
- Tom
@Tom S. thanks Tom i will look into the FHA loan, seems like a very viable option.
Taking things slow always win the race. IMO if you don't have any money you don't have any business investing in real estate. Save and work extra jobs until you can put 20 to 25% down. Be smart.
The long term loan from my 401k is 10years. But it can only be used for a primary residence. I still stand by my conviction that a 401k loan, used wisely, can be one of the best ways to kickstart real estate investing.
It's your choice ultimately the best thing you can do is hear other perspectives and come to your own conclusion. The right answer for you might not be the best for someone else and vice versa.
My experience: I used 401k money (loan) to purchase my first property. I put 20% down around $50k. Bought a 4 bedroom with the intent of moving out of my parents house and having 3 roommates to help cover the mortgage. So far so good. 2.5 years later that property had appreciated about $63k which allowed to cash out re-fi and buy my first rental.
Now that rental has appreciated approx $60k over what I bought it at and I'm looking to use that equity to purchase another property. It all started with my 401k loan. I would still be saving for that 1st down payment had I not borrowed the money from my retirement.
Looking back I realize I shot myself in the foot a little by not taking advantage of a low down FHA loan for my first house. But then again I wouldn't have had the ability to refi so soon with a small down.
You can generally only use the FHA 3.5% down on your first property so it might be good to do that first, then put 20%-25% down on your second property using the 401k loan.
I'm 27 so I know I have a lot of time before I'll be taking any withdrawals from my 401k so that played intoy decision as well.
What is your plan for the house? What kind of house are you looking for, personal or pure investment? We buy personal properties with as little down through conventional 5% loans. While we have not made the 1%, 2% or 50% rule we still have done very well. We are able to highly leverage our houses. We have short margins but have done well controlling them. We buy short sales, or foreclosures allowing us to come in with equity.
At the same time we believe in building other baskets. My husband is active duty so he plans on his pension. We also building his 401k since until you have the pension you get nothing so in his TSP.
We have done very well turning personal properties into rentals when my husband transferred. We also buy pure rentals by living off one income and saving the other. We have friends that have their living expenses paid through roommates. While our "strategy" is very unusual. As discussed in my blog it has been great for us. The key is to be flexible and find what works for you and your goal.