Just starting out - should i invest $40k now or ...

[Jason Aurelius Sawicki]

Hello BP Community!

I'm just starting out and I'm looking for some opinions from experienced investors -

Q: I have $40k to invest (can pull out as a 401k loan), should I invest this now or wait a year when I'll have a total of $80k to invest with? 

Next June I will be selling my first rental investment, which should clear $40k or so after everything. Just for background, this home was one we lived in for a year (FHA loan) before moving across the country for work. It was a decent deal based on equity but does not cash flow very well and now that I'm learning more I know I can use the money better.

My goals are to purchase single family / multi-family buy and hold real estate in the mid-west and other good markets for the long term.

I appreciate any insight, thanks!

Jason

[Clayton Mobley]

@Jason Aurelius Sawicki I second those here who are skeptical about taking the loan. Remember that you will need to repay that loan within five years, using 'substantially equal' payments, at least quarterly. So let's assume your interest rate is around 4.25%, that means you'd need to be able to make quarterly payments of about $2649 in order to satisfy the terms of the loan. If you don't repay the loan in five years or less, it becomes a deemed distribution for which you will be taxed. So to even consider this option, you'd need to be absolutely sure, without a shadow of doubt, that you could make those payments without any problems. 

Of course, even if you could handle the payments, I generally advise new investors never to take money from retirement to fund their investments. Any investment is a gamble - not as risky as the craps table, but never guaranteed - and you shouldn't be gambling with your future. Plus, unless you're taking way way less than the allowable amount as a loan, you're cutting your retirement savings in half (the maximum amount you can take, or $50k, whichever is greater). 

I'd say wait until you sell the property, save up the quarterly payments you would be making to pay off your loan anyway (so in a year, about $10,600). Then you can leverage that money (approx $50k) to purchase solid properties with financing. You could get 2 solid B/B+ cash flow rentals in Birmingham with 20% down and have some cash left over as reserves. 

What i definitely would not advise doing is using the money to go all-in on a lower tier, sub-50k property just because that's what you can afford in cash. New investors are well-advised to steer clear of C/D properties - the turnover, evictions, and Section 8 red tape are a hassle even for more experienced investors and the returns are rarely as good in real life as they look on paper, especially if you have to pay for a PM to manage an out of state investment. This advice is doubly true if you're using your retirement savings to fund the investment. 

You're definitely not alone in feeling the itch to get started right now, but be patient, preserve your retirement savings, and use your money to purchase reliable investments in solid areas with a great PM/turnkey provider.

Best of luck!

Clayton