401K and Cash-Flow Confusion
Hello, I am dealing with what looks like a great deal and here are the particulars:
- Duplex converted from SF Bungalo
- $170k for property in $180k-200k neighbohood
- Downpayment from 401k - average return is 6% normally, but this loan makes me pay 5% back to myself.
- PITI = ~$1100
- Rental Potential = Low-End $1600/month or High-End $2000/month. Could go higher, but these are more realistic numbers for the area
- Looking to get electric & gas lines split to add additional meters and sub-meter water - to pass all utilities on to tenants
- Monthly NOI (before utilities are figured out) $500-800
- Monthly 401k Payment = $840 for 60 months
So, I realize that the utilities could kill this deal and I am having those vetted during the 7-10 inspection period. I am willing to make a small investment upfront ($1k-$3k) in order to know that my utilities are taken care of by the tenants going forward forever.
My question, not to keep drawing it out - is it a good idea to use "no money down" in the form of a 401k and then to have a monthly payment of $40-$340 per month in order to save having to put $40k in capital down at one-time? I know the idea is to make money off the investment, but technically, I am not actually putting any money down and the investment will also be helping me pay back my 401k.
I am also aware that I will have an opportunity to refi down the road and pull cash out, as this market is not slowing down in the rental area, anytime soon.
Thanks in advance for your honesty!
Most Popular Reply
@David Hicks I think you have a pretty good idea of the 401k loan option already, but I just want to jump in and add that the loan is also limited to 50% of the 401k value. If 50% of your 401k is less than $50,000, you can't borrow up to that limit. Stay within the limit and follow the payment schedule, and there is no tax and penalty for the loan.
Other investors have gone this route. It can work as long as you can keep up with the loan payments, and are confident about staying with the same employer during the loan period (if you leave the job, the loan becomes due in full).