Which money should I use?

9 Replies

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?

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.

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.

@Brian Larson

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!