How should I invest a $100K mixed between a 401K and a HELOC?

Question

Hi everyone,

I'm a new investor (zero properties) in Denver and I've been reading books, the forums and listening to the podcasts like crazy for about 6 months. I'm almost ready to buy my first property but I'm not sure entirely on how to start. I know there have been some great posts about how to start with $100K cash and the like but I'm wondering how you would start if you had $100K mixed between borrowing against a 401(k) and using a HELOC on my primary residence. The 401(k) I can borrow at a 4.5% interest rate and the HELOC is at 5.39% on a 10 year draw.

I wanted to start small (to minimize my risk) and do the BRRR strategy which led me to looking into purchasing my first property in Indiana. I feel the Colorado market is too prohibitive based on the cost for someone just starting out. But at the same time I think doing the BRRR from out-of-state for a newbie will be extremely tough.

Ultimately, I would love to buy two properties this year with the intent of refinancing in a year or two to repay my 401K/HELOC and then repeat.

I guess this is a really long way to ask, how would your strategy change if you had $100K 401K/HELOC instead of cash?

Thanks everyone!

Travis Sperr · Answer

I personally wouldn't borrow against a retirement account but do see people do it all the time. The Heloc is a little easier to make sense of, assuming you don't plan to move to a different primary where you need the equity.

When I have used borrowed funds to purchase a buy and hold property, I make sure the plan to repay the borrowed funds is very clear and in a time frame I am comfortable with. Regardless of where the money comes from you don't want the loans out for ever.

Curious why you think Denver won't work? Using roughly the same amount of money you described from a 1031 exchange, I was able to buy two cash flowing properties right here in Denver this month.

Before believing this market won't work for you, I encourage you to spend the time learning what is available with a fair amount of work and dilligence. If you find it best to buy in other markets you may want to get enough properties to cover a dog in your portfolio.

Best of luck!

Garry C. · Answer

You really need to do some research before thinking about self-directed IRAs, there are some important rules to follow. Better yet, consult with a CPA. Borrowing from 401k may not be a bad idea though, depending upon your situation. If you have to pay back a loan, it's nice to be paying yourself. But again, research it.

You might want to look for a partner on a deal, since you're just starting out. Good way to learn the ropes and also get into something with a lower outlay of cash.

Daniel Krug · Answer

One thing you might want to look into is the ability to transfer the 401k out of your company (that's if it is still with your company). Some administrators will allow that. If you have already separated from that employer, it should be able to have control. Some people do self directed IRAs and there's even self trustee IRAs. This will allow you to use the full amount instead of 50% with max $50k.

How should I invest a $100K mixed between a 401K and a HELOC?

How should I invest a $100K mixed between a 401K and a HELOC?

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