Solo401K Mortgage Leverage questions.

2 Replies

Every time I use the Bigger Pockets Rental Property calculator and enter numbers for a property, where I do one with Cash, and one with a Non-recourse loan mortgage where I am putting in the exact numbers and costs of the mortgage that I get from the lender. If I change no other numbers in the expenses and income fields, I always seem to get a better return both Cash on Cash and Annualized Return percentages when I choose Cash instead of the mortgage numbers. I thought leveraging with a mortgage would make the Cash on Cash percentage go up compared to paying full cash?

So mathematically, if I had one property cash at 500K getting 10% cash on cash, and I had 2 properties with a mortgage 250K each, it would return a less cash on cash percentage on the same 500K cash I have in the deals. So I am really confused on when it makes more sense to mortgage a property in a Solo 401K.



@Mark Spritz

If you pay $500k cash for a house and make $50k/year it is 10% return. If you buy 5 houses with $100k down and borrowing $400k on each at 5% for 30 years  you will pay $30k P&I $6k principal and $24k interest per each house and $20 k cash.   $20k cash X 5 houses is $100k twice as much as the $50k. Add the principal and you have another $6k X 5 houses is another $30k. Not sure how you figure it. This is looking at the fist year. It gets better with time because less is interest and more is principal. I hope it helps. 

But the rates aren’t 5% for non recourse loan. It is 5.25 for 5/1 amortization over 25 years and 3+ Unit building is an even higher percentage and if older building amortization over 15 years. Sometimes the rate might be 5.5 or 5.7. Cash on cash ends up being lower when getting one of these mortgages.

And you can’t beat these rates when you have a Solo401K where you can only use non-recourse loans.


Updated over 1 year ago

I should add, LTV is 60% for SFR and up to 3 Units and 50% LTV for 4+ units and sometimes 40% LTV.

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