TSP Loan for Investing?

17 Replies

I've got about $45k in my TSP and had been considering pulling some out via a TSP loan to use as a down payment on a potential flip. I'm not retiring any time soon so I've got plenty of time to repay myself, and I'm fine with giving up the interest I'd be getting in exchange for the potential REI profits. Any potential downsides I'm missing? Anyone have experience leveraging TSP for REI?

@Andrew Ellis

I have used TSP loans on three different occasions to purchase investment properties. If you have never done it before here are a couple of things I learned.

If you are buying a property as a primary residence, you can repay the loan over a 15 year term. I went this route on one of my purchases when I "house hacked" a 4-plex that I used to live in. The payment was super low and the numbers worked even though I bought the place with essentially 100% financing. I also used an FHA loan and 3.5% down payment. This honestly was the absolute least amount of money anyone could have used and gotten into a 4 unit property.

If you are buying it as an investment property, the term is maximum 5 years (general purpose loan). This can cut into your cash flow a lot if you are a buy and hold investor. I used this method once, but limited it to only half of the actual down payment amount so that I actually would still have cash flow.

My most recent purchase is a rehab and I bought it cash with 2/3 of the money coming from a TSP loan. I like this method far better than using hard money as you are only paying yourself back and the interest rate is far lower. Still the cut from your pay check (I pay over $850/month for the full $50,000 TSP loan) is quite noticeable.

One of my biggest problems with the TSP loan is that you can not borrow more than $50,000. I have a substantial amount of money in my TSP, but that is the max. So no matter what, I have a lot of money sitting in there that can't be accessed.

Another issue I found out about after I paid my first two TSP loans back early is that I was unable to again borrow the full $50,000 from my TSP for a full year after I paid it off. They essentially are holding your money hostage so you aren't constantly taking out new loans. Had I known that before hand, I would not have paid off the loans early and instead just banked my cash to buy more real estate.

Keeping that in mind I am not paying off my most recent loan early. I am still going to refinance the property after my rehab is complete, but I am then going to use that money to buy more real estate rather than repay the TSP loan.

@Andrew Ellis , I just posted a similar question in the general financing and tax forum -- there were some great insights from folks that you should check out.

But I'm planning to do the same thing for the first time very soon. The "payment" on the loan for the max amount is above $850/month, but you're paying back your own money -- even the interest goes to you. So while I hear the argument about that cutting into your cash flow month to month, I would argue that so long as you keep working that money isn't cash flowing out of your wallet. In that case, is it really a cash outflow? I don't think so.

Some say that you get "double taxed" as the money you pay back from your paycheck is NOT tax free. However I don't think that's accurate. Track each dollar that goes in or out. The dollars you're using to invest were potentially tax free to start with (if you were traditional rather than Roth). You replace that dollar with a taxed dollar in repaying the loan. To do otherwise would mean you got two tax free dollars for each one you withdrew for a loan. So in fairness to the process, you're only getting the tax free benefit once.

Bottom line, I think it's a great way to start so long as you plan to keep working for the government.

@Andrew Ellis

In addition to what you have already addressed, the only other item to consider is the result if you can't pay the loan back which would generally result in the loan going into default so taxes and penalties would be owed.

Andrew, I was in a very similar position as you and took out a TSP loan as part of the down payment on my last rental. The way I saw it, I was saving more than what the monthly payment was anyway, so taking out the loan allowed me to buy the property 15 months earlier than if I had just continued to save. I plan to rinse and repeat in the future and I'm fine missing out on the potential market returns of the loan balance while I have the loan because it fits into my overall financial plan.

Anthony is right in that you cannot borrow more than $50k, or a total $50k in a calendar year, but since your balance is at $45k, the max loan you'll be able to take out is 50% of your balance. Once you paid it off, 60 days later, you'd be able to take out $50k minus your highest outstanding loan balance during the last 12 months. So, theoretically, if you took out a $22.5k loan, once you paid it off and waited 60 days, you'd be able to take out another TSP loan up to $27.5k or 50% of your TSP balance, whichever is less.

The only downside I see is potentially missing out on market returns (mitigated by earning a return through the real estate investment) and if you somehow end up leaving federal service, you owe the full balance within 90 days (pretty sure it's 90) or else any remaining balance is treated as a distribution and subject to income tax and an early withdrawal penalty. The way I see it is being able to pull future savings to today to purchase property and start the clock sooner on having someone else pay down a mortgage and add cash flow to my investing portfolio. If the cash flow covers the TSP payment, too, even better.

My conversion from a TSP investor to a real estate investor was fueled by the TSP General Loan. You just need to do a comparison between returns to see if it is what you want to do. The interest goes back to yourself, so your opportunity cost is pretty much the lost growth on the fund.

Thanks for all of the responses everyone!  This one bears some consideration for sure... I just got my annual statement back and I averaged about 18.29% over the last 12 months, way better than I expected.  I know those rates won’t last (especially after the huge dump the market took the other day) but it’s enough to make me pause for a minute!

Originally posted by @Anthony Gayden :

@Andrew Ellis

I have used TSP loans on three different occasions to purchase investment properties. If you have never done it before here are a couple of things I learned.

If you are buying a property as a primary residence, you can repay the loan over a 15 year term. I went this route on one of my purchases when I "house hacked" a 4-plex that I used to live in. The payment was super low and the numbers worked even though I bought the place with essentially 100% financing. I also used an FHA loan and 3.5% down payment. This honestly was the absolute least amount of money anyone could have used and gotten into a 4 unit property.

If you are buying it as an investment property, the term is maximum 5 years (general purpose loan). This can cut into your cash flow a lot if you are a buy and hold investor. I used this method once, but limited it to only half of the actual down payment amount so that I actually would still have cash flow.

My most recent purchase is a rehab and I bought it cash with 2/3 of the money coming from a TSP loan. I like this method far better than using hard money as you are only paying yourself back and the interest rate is far lower. Still the cut from your pay check (I pay over $850/month for the full $50,000 TSP loan) is quite noticeable.

One of my biggest problems with the TSP loan is that you can not borrow more than $50,000. I have a substantial amount of money in my TSP, but that is the max. So no matter what, I have a lot of money sitting in there that can't be accessed.

Another issue I found out about after I paid my first two TSP loans back early is that I was unable to again borrow the full $50,000 from my TSP for a full year after I paid it off. They essentially are holding your money hostage so you aren't constantly taking out new loans. Had I known that before hand, I would not have paid off the loans early and instead just banked my cash to buy more real estate.

Keeping that in mind I am not paying off my most recent loan early. I am still going to refinance the property after my rehab is complete, but I am then going to use that money to buy more real estate rather than repay the TSP loan.

If you were doing delayed financing would you have to use the cash out to repay the TSP loan?

I came across this while back, not sure if I'm reading it correctly..

If the source of funds used to acquire the property was an unsecured loan or a loan secured by an asset other than the subject property (such as a HELOC secured by another property), the settlement statement for the refinance transaction must reflect that all cash-out proceeds be used to pay off or pay down, as applicable, the loan used to purchase the property. Any payments on the balance remaining from the original loan must be included in the debt-to-income ratio calculation for the refinance transaction.

https://www.fanniemae.com/content/guide/selling/b2/1.2/03.html

Great information in this discussion. I am currently looking at tapping into my TSP (roughly 25K) to use as a down payment for a buy and hold MFH.

@Account Closed I had a question about something you said.. If I am planning on getting out of the military in the next 2 years, would you recommend not using the TSP Loan due to the fact I would have to repay the balance in full 90 days after I get out? I am really trying to use some of this money I have sitting around but want to do it smartly. Any inputs are greatly appreciated.

@Sean McDonnell That'll depend on if you can pay off the balance by the time you separate. If you can and taking out a TSP loan is just a means of accessing some cash now to make the purchase earlier, I'd seriously consider it. Again, I was already saving the amount of the would-be payment each month, so for me it was either take the money now and pay that, say $500 for a nice round number, back to my TSP account each month, or transfer that $500/month to a savings account until I had the rest of the down payment saved up 15-18 months down the road. Taking out a TSP loan let me start the clock on paying down the mortgage and getting cash flow that much earlier, and also allowed me to complete the purchase before having to worry about a PCS (and thankfully so, as that turned out to be pretty hectic with only a 5 day heads up). So, win-win in my book.

I actually paid off my TSP loan in a little over a year. Looking at my overall strategy, where my next assignment was taking me, and my next scheduled/potential rental purchase, I decided it made the most sense for me. So, it's definitely doable if your numbers work out. The Real Estate Guys say it all the time: do the math and the math will tell you what to do.

@Andrew Ellis and @Sean McDonnell one thing I haven't seen brought up is the affects of the loan payment on your employee contribution. 

Can't speak to your budgets, but if you are taking this loan then the potential exists for you to contribute less to your TSP, which further reduces the growth of your retirement account beyond the lost earnings from the loan balance. If you have signed up for BRS and drop below 5% contribution you'll also give up free money from Uncle Sam.

Something to add to your calculations when figuring out the costs of the loan.

@Andrew Ellis Congratulations on that, only a few more years to go. 

You only have to account for the amount of lost contributions and gains.

Personally, I wouldn't take loan from TSP since my main enemies in QRP are contribution limits and time. There are ways to invest our of retirement plan too.

I thought you could only use the TSP for your first home, is this not true? If it’s not true I want to get in on this ASAP! Do I call the TSP hotline to get started? Also if I am maxing out my tradition TSP ($18k yearly) to reduce taxable income, will I still be able to pay my my loan back and continue to contribute $18k on top of that.

@Ben Narro

You can pay the loan back and still contribute the full amount.

Also you can use the TSP loan on whatever you want. I have used it three times on real estate.

Originally posted by @Ben Narro :

I thought you could only use the TSP for your first home, is this not true? If it's not true I want to get in on this ASAP! Do I call the TSP hotline to get started? Also if I am maxing out my tradition TSP ($18k yearly) to reduce taxable income, will I still be able to pay my my loan back and continue to contribute $18k on top of that.

There are two types of TSP loans. One you can use for a primary house purchase and amortize up to 15 years. The other is a general loan that you can use for anything. You can take out up to 50% of your balance or $50k, whichever is less, and amortize over 1-5 years. You can do it all online at tsp.gov.

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