I have a sizeable 401k but my Bay Area rent is putting a damper on my ability to save quickly. I'd like to buy here and potentially house hack, but it seems as if I'll be saving for years if I rely on only my savings, whereas I could use my 401k to get over that huge hurdle. It really feels like the down payment is the barrier to entry, not the monthly payments.
Nothing is 100% sure, but it seems most likely that the stock market (and thus 401k) will take a sizeable dip soon whereas SF real estate will be minimally impacted - therefore this problem will be drawn out for many more years if I don't act soon.
For someone who is very financially stable but simply unable to get past that barrier to entry - is it a good idea to borrow from one's 401k to get into the market?
Rental Property Investor · Berkeley, CA · Member since 2018 · 59 posts · 36 votes
7y
@Aaron Gomez
Fellow Bay Area resident and REI investor here. Run through the home affordability calculators online. After a down payment, consider your monthly payments: will you have enough savings to cover 6 months of PITI?
Your max 401K loan is limited to $50K or 50% of your 401K, whichever is less. That's nothing towards a down payment for a Bay Area home.
My suggestion would be to hunker down, reduce spending where you can, find roommates, or move to a cheaper place. But if you locked in a decent rental rate, rent control will work in your favor as a renter.
Consider this: buying a home, in the long run is cheaper, assuming you don't move for a long time. If that's you, great, but consider this: the average American moves every 7 years, and home buying calculators usually tell me its cheaper to rent... (Assuming you invest your savings well)
Investor · Corvallis, OR · Member since 2015 · 92 posts · 57 votes
7y
"Today, the total value of the U.S. stock market as a percentage of GDP is about 2.0. That’s significant because the highest it’s ever been in the past was 1.9 in 2000. John Hussman, a former professor of economics at University of Michigan, says that the U.S. stock market is “at the most offensive level of overvaluation in history” and believes that the expected 10-year return of the market is less than zero."
Pretty tempting time to get out of the market. Gotta do something with it. But BA Real Estate??? ;-)
Rental Property Investor · Berkeley, CA · Member since 2018 · 59 posts · 36 votes
7y
@Aaron Gomez
Fellow Bay Area resident and REI investor here. Run through the home affordability calculators online. After a down payment, consider your monthly payments: will you have enough savings to cover 6 months of PITI?
Your max 401K loan is limited to $50K or 50% of your 401K, whichever is less. That's nothing towards a down payment for a Bay Area home.
My suggestion would be to hunker down, reduce spending where you can, find roommates, or move to a cheaper place. But if you locked in a decent rental rate, rent control will work in your favor as a renter.
Consider this: buying a home, in the long run is cheaper, assuming you don't move for a long time. If that's you, great, but consider this: the average American moves every 7 years, and home buying calculators usually tell me its cheaper to rent... (Assuming you invest your savings well)
Specialist · Grand Rapids, MI · Member since 2016 · 1k+ posts · 611 votes
7y
@Aaron Gomez
Absolutely yes if its a good investment. But thats a big if. One thing people
don't realize is when you borrow from your 401k the interest you are paying is actually being paid back to your 401k not to your employer so you are actually growing your 401k at 1 percent above prime when you take out the loan and right now thats probably doing better than the stock market with the strongest guarantor possible: YOU.
Regarding taking a 401k loan here are some considerations:
You would have to confirm that your 401k plan allows for a 401k participant loan (and that you have not had an outstanding loan in the last 12 months).
If yes, you can borrow up to 50% of the balance not to exceed $50,000.
The repayment terms are equal monthly/quarterly payments (as you prefer) of principal and interest (e.g. prime + 1%) spread over a 5 year term (or longer if you will use the loan to purchase your primary residence). There are no prepayment penalties and no restrictions on what you can do with the proceeds of the 401k loan. Please note that you are obligated to pay back their 401k (regardless of the performance of your real estate investment).
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).
If you are self-employed with no full-time employees & you can rollover the funds, you could set up a Solo 401k, rollover the funds and take a 401k loan from the Solo 401k.
Rental Property Investor · Minneapolis · Member since 2019 · 257 posts · 244 votes
7y
please read his question, he is not looking to invest in real estate, but buy a personal residence. These are two very different things. how does a syndicator help this???
Get your logic on the stock market and the chance for it to go down and earning 1% above prime is not bad....but is it a good assumption that Bay Area real estate only goes up? Buying a property with high leverage could also result in a huge net worth hit if prices fell.
There are two thing you need to analyze
1) are you comfortable enough with Bay Area real estate prices to buy?
2) if you buy and house hack how much more can you save per month versus current rent situation?
How much will you need to borrow from your 401k? This amount an answer two will tell you how long to pay back the loan.
Also, how secure is your job? If stock market tanks it most likely be because of a recession and people lose jobs in recession. As previous poster mentioned 40lk loans are due on upon leaving your employer.
1. In fact, my answer addresses the question directly where I stated that the term of the 401k loan can be longer than 5 years if the funds will be used to purchase your primary residence.
2. Regarding the loan being due if you leave your employer, please re-read the following part of my answer which clarifies the new rules on this point:
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).
Rental Property Investor · Minneapolis · Member since 2019 · 257 posts · 244 votes
7y
George, my post was not directed at u. Also, I originally did not read the details that you just reiterated, which is very good info. But even if a person has until their tax filing to repay...if they have a 50k loan, this might not be easy?
Are you saying that a person should not consider long term employment with their 401k employer before making this decision? I want to make sure I understand your point as I considered taking 401k loan in the past and have decided against it for this reason.
Rental Property Investor · Minneapolis · Member since 2019 · 257 posts · 244 votes
7y
I see your point on #1, my point wasn’t really about how long of terms he could get with 401k...I have no idea. My point was as part analyzing his situation that he should understand how much more cash flow he would have because of the house hack versus rent and that he could apply that to paying the loan off faster and thus being back to whole in his 401k and have a personal residence
Buying a personal home is a life style choice not a investment. Chances are for most home buyers once the money goes in it never comes back out. It vanishes never to be seen again. My experience shows that a individual that is not capable of saving to overcome the barrier to entry into personal home ownership, regardless of their market, can not afford to own a home.
George, my post was not directed at u. Also, I originally did not read the details that you just reiterated, which is very good info. But even if a person has until their tax filing to repay...if they have a 50k loan, this might not be easy?
Are you saying that a person should not consider long term employment with their 401k employer before making this decision? I want to make sure I understand your point as I considered taking 401k loan in the past and have decided against it for this reason.
1. Thank you. I simply wanted to be clear.
2. I agree that it might be not be easy to pay back a large loan (even if what amounts to as much a year or more payment holiday) and I am certainly in favor of considering all factors (including long term employment).
I see your point on #1, my point wasn’t really about how long of terms he could get with 401k...I have no idea. My point was as part analyzing his situation that he should understand how much more cash flow he would have because of the house hack versus rent and that he could apply that to paying the loan off faster and thus being back to whole in his 401k and have a personal residence
Your points are good additional considerations. The term of a 401k loan to purchase a primary residence can be 15 years or even longer which is important as it will, of course, impact the monthly/quarterly payment amount.
Rental Property Investor · Minneapolis · Member since 2019 · 257 posts · 244 votes
7y
@Thomas S.
Buying a personal residence should be considered as part of your overall personal financial plan. It is not pure real estate investment, but impacts your personal financial plan. You have benefit of appreciation and principal Paydown and tax benefits that you don’t get as a renter. Now this need to be compared between monthly house payment and rent to make best decision, but house hacking would obviously impact this decision favorably.
His question comes from the fact in that he lives in the Bay Area and coming up with down payment is bit more challenging than in some parts of the country. He mentioned he is very financially stable, I assume he has good W2 job and is doing something right to have sizable 401k balance.
He need to evaluate how home ownership will impact his personal financial plan to makes this decision and whether he is comfortable with current Bay Area real estate prices
Rental Property Investor · Minneapolis · Member since 2019 · 257 posts · 244 votes
7y
@Victor S.
Good question, will level set everyone who thinks 300k is an expensive house :). Also, how much does he have already saved for a down payment without 401k loan
Lots of great info, everybody! Bummer to hear that 50k is the max for 401k (I feel a little stupid for not already knowing this - but this is why I'm here!) but it's definitely better than nothing.
About my personal finances: income has hockey-sticked up and to the right and will likely stay that way - so I don't have enough saved for a house but feel comfortable with my situation moving forward. About the market here: entry level places start around $500k in San Francisco and I'd be aiming for that ballpark. About my investment and life goals: I intend to stay here for a while and this would be my primary residence. Instead of continuing to stuff money into stocks, I'd really like to diversify while enjoying what (in the long run) is pretty much guaranteed appreciation in this area.
@Victor S. - $1M will get you very different things depending on the area. I'd prefer to get a small 1br condo in a nice area than a decent place (2 bd house?) in a bad area or somewhere far away. This can be had for far less than a million in desirable places. Sadly, it's a very common and accepted practice in SF to turn living rooms into bedrooms - and that's a fantastic way to gain an extra $1500+ per month toward expenses.
I think this is a bad idea. You're getting a lot of advice, so I won't add to it except for this:
Hang out on this forum a little more and see what other people are into. You'll find that there are many options outside of house hacking that provide quite a bit more upside and peace of mind for an aspiring landlord in an out-of-control, coastal market.
Rental Property Investor · Gualala, CA · Member since 2018 · 13 posts · 8 votes
7y
@Aaron Gomez
I strongly recommend borrowing against your 401k (as a loan) to make a purchase in real estate. However, not sure I would make that purchase in the bay area as I just don’t see the increases in real estate being sustainable. In fact, I’d be surprised if you and your neighbors don’t see a market correction in the near future. How near? Nobody knows, but I recommend looking out of state. Throw a map of the US on your wall, throw darts in the middle sections and start researching those areas...
Specialist · Grand Rapids, MI · Member since 2016 · 1k+ posts · 611 votes
7y
@Aaron Gomez Definitely when you borrow from your 401k you grow it with the interest you are paying and then you get to use nontaxed income to invest in whatever you want. Not bad for a small fee as your only out of pocket cost. That and with the stock market where its at the interest you are paying may exceed that.
Rental Property Investor · Iwakuni-Shi, Yamaguchi · Member since 2017 · 48 posts · 17 votes
7y
@Aaron Gomez before using your 401K check out @Amanda Hahn in the BiggerPockets Forum. There is a way to use your 401K to buy the property and avoid a super crazy tax hit. She is a CPA right there in California and works with REIs. The Property would be purchased by the IRA and you personally could not collect the rent but the IRA could. The cash would go back into the IRA. Ok, that is the gist of it. I am not a CPA so I will stop there 😂. But I think you'd definitely get some great advice from her or her podcasts on YouTube.
Congratulations to you on your journey. I’m sure you’ll be super successful.
Rental Property Investor · Minneapolis · Member since 2019 · 257 posts · 244 votes
7y
@Allyn W.
His money is in 401k, not an IRA...I assume it is with his current employer so he mostly cannot roll into self directed IRA. Also, he is looking to buy a personal residence, not invest in real estate. You definitely cannot use a self direct ira to fund a personal residence....and lastly he is looking to take a loan from his 401k, which has no tax consequences if he pays it back.