All Forum Posts by: Ryland Taniguchi

If you don't care about the fact that you're pulling from your retirement account (A lot of people will argue you should never touch that money for any reason), it's a perfectly viable option.  You are borrowing from your 401k.  You can't deduct the interest, but again, it's your money, so the interest goes back to your 401k account.  You just can't touch it until 59.5 years old without penalty.

With all that being said, I would perform this one check on yourself before doing it.  If the worst case happens and you can't rent the property, will the payment on your 401k and expenses on the house break you?  If you can "afford" (notice I said afford, not like) that scenario, then borrowing from your 401k could be a great source of capital.  If you are depending on the performance of the property to be able to pay that loan, it could be dangerous.  Your 401k loan isn't secured by the property so it has to be paid regardless.

@Ryland Taniguchi

to further this thought think of it this way as a HML and as a rehabber.

You have a lender that will require 10% equity total and 70% ARV.. ( you don't want to buy anything as the flipper with a higher ARV anyway usually)

and for those terms your lender is a little more like a Veristone or East side or Iron bridge take your pick ( or like me in my day)

So say your 10% down lender is  3 and 12

And say your lender like Lending home ( were like you I can qualify based on my volume for their absolute lowest rate which is 2 and 7. something.) but they want 30% cash into the deal for that rate.

Now say you want to do this for a living.. and say like most projects for us west coast folks its 6 to 9 months to cycle start to finish ( IE the properties are so competitive you need to close but it can take a few months to many months just to get your plans and permits not at all like flipping little dinger in other areas of the country)

So you do your average deal we do here at 500k  your local guy is at 10% equity that's 50k..

your cheaper lender is at 150k equity.

your cost of capital is 9k  2 points  and say 12% for 9 months is 40k so total cost of capital is 50k.

your property sells for 30% more or 650k... minus commish ( if your smart like me you have your own RE license so you don't pay list side in high price markets  LOL). so 20k for commish.. another 20k in taxs and various other things.. so 50k + 20k + 20K = 90 k   or 590k all in so you net 60k

same scenario with 150k down 350k X 2 points is 7k   lets use your number of 9% for 9 months. 23k

so total of 30k and a savings of 20k for that 9 month project... so net 80k

Now lets assume you can do 3 at a time in the same nine month period because your great HML ( like me in my day) would give you the leverage.... use the same numbers... 3 X 60 k is 180k over the same time period with the same amount of cash...

So when we as HML allow our borrowers to leverage up and charge a little more we make more by far IE we make 150k in 9 months profit with the same borrower.. and the borrower makes 180k.

If you have unlimited or large amounts of cash to match up to the cheaper rates of course that what you do.. but for COC and to scale to where you can actually make a living and I submit that one 80k deal in 9 months is NOT a living in our area... 180k in the same amount of time you can squeak by on and scale .

So depending on were your at in your fix and flip business searching for the cheapest rate is not always the answer .. Proper leverage IF YOU HAVE DEAL flow is were its at.