I've purchased 2 rentals this year (one SFR one vacation). Looking for ways to get my 3rd.
I can find deals that will cash flow 600-800 per month.
I can take a loan out on my 401K at 4.5% and a HELOC at 4.5% and those two numbers combined would be enough to get me another 30 year conventional down payment in my market (about 25k).
Is this a decent strategy? Will the property be producing more than the performance of my 401k? (I would stop the contribution and be paying back the loan over a period of 2 years and my paycheck would actually go up, but in 2 years as things are now I'm probably putting 20k into my 401K that I would no longer be doing, so when the loan is paid off I'd just end up with the amount that is in there right now).
The cash flow will be more than enough to pay back the HELOC and the 401K loan in 2 years but is this a good use of my money?
Am I better off finding partners to go 50/50 and use zero dollars of my cash? or pursue both avenues simultaneously?
I'm a big fan of always having multiple strategies happening in parallel. In your scenario, I'd make an objective decision based on the following:
- You need to convert your cash flow to a CoC (cash on cash) return rate, so you can compare that to your borrowing rate. If you can borrow money at 4.5%, how much CoC return can you get from that by investing in real estate? Is the return on cash in real estate higher than what you can borrow? Consider the two side by side.
- Some 401k plans allow you to borrow and pay yourself the interest vs it going to the administrator. If you are getting the interest back, consider that a good scenario.
- Consider the tax implications of your HELOC. Talk to your CPA and see if that interest would be tax deductible.
- Consider the tax implications of stopping your 401k contribution. Contributions lower your taxable income. Create a breakdown of both scenarios; contributing vs not contributing and see what the difference is in your taxable income for the year.
- Diversification. Some people would recommend against your strategy, because they like to diversify their horizontal streams of income; investing equally in stocks and real estate for example. However, I always recommend to folks to only diversify if you know the ins/outs of those different streams. If you don't know the stock market/funds then don't be investing your money there.
Overall, I'd suggest doing multiple projects in parallel. Line up your CoC return/borrowing rates, tax implications and make an objective decision on the data.
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