Cash purchase then refinance?

Question

I'm trying to navigate my way around the best option to finance my 1st income property.

I'm looking to invest in small 2/1 or 3/1 single family houses in the lower income neighborhoods of the city where I live. They typical  range from 40-75K. I can use my TSP (Fed employee 401K) to loan up to $50,000 at 0.75% interest with a 5 year term.

I plan to rent to Section 8 since the HUD Fair Market Rent for our county is considerably higher than many of comparable units in the area are rented for. There is a lengthy list of applicants and the rent partially guaranteed by Big Brother too.

In the BRRR strategy, at what point would I need to refinance? With a 5 year term, the $849.32 payments are unsustainable for very long. Is there a time period I have to wait after the initial closing before refinancing?

Would there be any advantage to doing this over using my TSP loan for the down payment on a conventional loan?

George Blower · Answer

@Thomas Brinn

Here are the general considerations regarding 401k loans.

401k Participant Loans

• If your 401k plan allows for 401k participant loans, the maximum loan amount is equal to 50% of the balance up to $50k. The repayment terms for a 401k participant loan are equal monthly/quarterly payments of principal and interest (typically prime plus 1%) over a 5 year term (longer if used to acquire your principal residence).
• Please note that if you take a full $50,000 and then pay back the loan, you can't take another $50,000 until 12 months after the first loan was fully paid back.
• Per the loan offset rules that went into effect with the 2018 Tax and Job Act: if you leave your job and the loan is current at the time you leave your job but then the loan goes into default because you left your job, you will have until your tax return deadline (including any timely filed extension) to make the loan current by depositing the outstanding balance into an IRA (and thereby avoid the taxes and penalties that would otherwise apply).

Please keep in mind the multiple loan rules:Under those rules, the sum of the balances of a participant's outstanding 401k loans under a single 401k plan (using the highest outstanding balance of each loan over the last 12 months) can't exceed 50% or $50,000 whichever is less. Thus, if you took a $50,000 loan and paid it back within 6 months, you would need to wait another 6 months before you could take another $50,000 loan.

Harjeet Bhatti · Answer

@Thomas Brinn You can refinance under delayed financing exception any time if you will purchase with 401k funds. Or you can use 401k funds as down payment.