I have a deal that requires 36k down. I don’t want to exhaust all my savings and have a potential investor who would give me the whole amount for 8% annualized. Cash flow is around $500 a month.
I could also borrow all of it out of my 401k. Laying it back would eat all of the cash flow for 5 years, but I don’t need the cash flow at the moment.
It would be nice, but it’s not necessary.
Anyone have any thoughts?
Is your 401k with a current or previous employer? That makes a significant difference on what option to take because one will come with penalties and the other not.
You have the option of paying yourself back or paying the investor back? Do you think the stock market is going to affect your 401k negatively during the next 5 years anyway?
500 cash flow is a LOT for 36k down where I'm at.. curious what type of deal you found.
It’s my current employer.
The deal is on a single family rental in Illinois. High monthly rates in the area and it’s a lower cost property. Would be better returns if the property taxes were not so high.
It’s a really high rate of return, but the numbers look solid.
Brian, since your 401k is active (you are still with current employer), you are not able to invest / buy real estate. You would have been able to use 401k to buy real estate if it was from a previous employer.
Maybe raise money from friends and family and pay back at lower rate?
How long is the loan for? Is the loan for the $36,000, or for the entire deal.
If your $36,000 loan is for 5 years at 8% you will be paying about $8,000 for the loan interest at about $730 per month.
If your money is in its current investment earns 5% per year you will earn almost $10,000 in 10 years. if you earn 6% per year you will earn almost $12,200.
So, if your get your $36,000 loan at 8% you will be better off. I THINK???
If you used your investment money to pay the $36,000 you will have the entire cashflow of $500 per month for 60 months = $30,000, but if you get the loan you will be paying out $230 per month extra for 60 months = $13,800 extra, or a total $730 x 60 months = $43,800.
For 8%, I would play it safe, keep my cash tucked away since it is very difficult to work and save $36,000 in one wad of cash and use someone else's money for such a low rate.
Sorry! You will earn almost $10,000 on your current investment money in 5 years at 5% (not 10 years at 5%).
I’ve done three 401k loans against my current plan to acquire RE. Definitely no regrets. I pay myself back 6% interest. Big deal. I’d rather pay myself 6% vs paying a lender 8%. If you can survive without this cash flow it’s a no brainer. I can, so that’s why I’m constantly doing 401k loans.
@John Morgan , thanks! I definitely can. I’m actually new to this and just want to get started. I thought through the process very similarly. I don’t need the cash flow and I’m paying myself back and my rate is actually 4% which seems pretty good to me!