Should I invest using my 401K or home equity NOW or WAIT?

Question

Hi all, I'm new to BP, and I have some questions about investing NOW or WAIT.

I wish to have some advice; first should I focus on pay debt and wait and then save for invest in more properties, or should I start now, with some equity on my house?   What about 401K transfers towards investments?

Barry H. · Answer

JOSUE - There is no right answer.  If you can get a HELOC on your home for say 4% - you will NEVER get that kind of capital from a Private Lender (like me), but using OPM (other people's money) can be attractive because you are sharing risk, especially when you can get Hard Money and get into a deal for no money down.  If you feel you really know your way around a deal, you WILL start building wealth quicker with fewer deals using your own money at low interest.

That said, if you feel you are inexperienced, you may be better suited with OPM (Hard Money) as you cut your teeth.  Seasoned lenders are not likely to let you make a mistake when THEIR money is on the line and not yours.  It's like a built-in "stupid control" meter.  :-)

As for the 401-K question, in MOST cases, you cannot roll it into a Self-Directed IRA while you are still employed.  AND.....If you have an employer match on your contributions, you have a guaranteed 100% ROI and you will not beat that anywhere - so leave it in your 401K (while you are still working).  IF you have stale low-performing IRAs from old employers, etc, by all means, get those converted to SD-IRAs and start unleashing your capital on REI (Real Estate Investing).  I have no dog in the fight, but I created 2 SD-IRAs and have a good resource if you want to do it.

Good luck on your journey into REI  !!

James McCard · Answer

Oh I am not suggesting that you buy it all cash - only that I paid off everything I could before I started. I will be getting a HELOC rather than go in all with cash.

Coco Zuniga · Answer

I just called Fidelity this last week to see if I could transfer funds from my traditional 401k to a self - directed 401k. They do not allow in - service distributions while I'm still employed so I would have to quit to get those funds.

Coco Zuniga · Answer

Yes, I have considered this option. My plan does allow it.  I still might move forward with it when the timing is right!

Josue Vargas · Answer

@James McCard

My initial plan is to wait and get some debt paid off by 2019 then save for down payment, rehab cost, lending fees/points, etc.  I understand this strategy for some investors is not the priority, and they want to get the no money down - or low -  and go from there.  That's why I'm asking and seeking some advice from people that have done it and maybe they can explain how they have actually done it using equity on their properties or other accounts.

While I have three properties, none of them were actually acquired thinking on REI or rental properties, it just happened that way for some life's circumstances.

Bottom line, yes I could buy a property in the next 4-5 years all-cash and have a very good cash-flow, but then I will have to wait again to get some capital for investing and continue on.  Not to mention the seasoning period to get the rental income count toward the future loans.  Still, an option, but considering not to pay the next property all-cash.

Josue Vargas · Answer

@Barry H.

Thanks for the advice.  How this money could be of any advantage to me without taking it form the account.  In other words, conventional loans or even Private Lenders take any of that money in consideration for equity?  My company matches 8% and I'm of course maxing out and splitting it on traditional and Roth.  Quitting my job is definitely not an option, except when the time is right (actually investing in the company shares... its an Employee Owned Company in the Defense-Engineering industry).

I thought that 401K (at least a % of my contributions to the plan) could be used as a line of credit somehow?

James McCard · Answer

As mentioned above there is not one correct answer. You just have to pick the one that makes you feel most comfortable. I knew for me that just from a comfort stand point I wanted to be debt free (aside from my primary residence mortgage which is house hack to cover most of).

I do not have a car payment but I did have some credit card debt etc. Before investing I decided to pay that all off. Now around me the market is hot a two family in a good neighborhood was under contract in less than a week. Now that I am debt free (see above) I am saving a lot of money every month. I am content socking away that 500 a month that was going towards debt payments into an investment account until the market around me cools a bit at which point I am coming from a stronger financial position anyway.

My way isn't the best way for everyone I am sure but just figured I would share!

Bernard Reisz · Answer

@Coco Zuniga Did you inquire about a loan from your 401k? You may able to borrow up to $50k from it. Although allowed by the tax law, your plan doesn't have to offer it...but it may.

Should I invest using my 401K or home equity NOW or WAIT?

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