Anyone ever use a TSP loan to purchase a rental?

[Drew Vukov]

TSP is the Feds 401K. I have been considering taking a loan out to purchase a rental property free and clear. The problem is loan repayment term is 5 years, which pretty much kills any cash flow. The interest rate is only 2.25% and I would be paying my self back.

I had upped my TSP contribution to the legal limits the last few years in anticipation using the funds to buy a rental at some point, but now I realize I should have kept the contributions at an amount that match employer contributions and saved the rest.

Has anyone used this strategy (TSP or 401K loan) to buy an investment home? Were you still able to cash flow? What was the outcome?

[Presley Reeves]

Andy,

Great idea...another tool to have in the chest.

[Jesse T.]

Originally posted by @Drew Vukov:

TSP is the Feds 401K. I have been considering taking a loan out to purchase a rental property free and clear. The problem is loan repayment term is 5 years, which pretty much kills any cash flow. The interest rate is only 2.25% and I would be paying my self back.

401K(or TSP) loans can be a great source of short-term cash. They have disadvantages for the long term - such as quick repayment term. If you can purchase with a combination of the loan and cash and the property will finance, you should be in a position to pay back the loan and return most of your cash in a year.

If you buy a property for 100K(50K loan/50K cash) that cash flows at $500/month.  Your payment on a 5 year loan will be about $880/month.  So you will have to put in $380/month.  If you refinance after a year - you will be down to about 20K of cash vs. 23K if you start with a 25K down payment,

Where you really can increase the cash on cash return is if you expect a significantly higher appraisal in a year.  If it appraises at 110K, you can borrow 82.5K and you cash on cash return is around 13%.

If you stay with the government and ride out the negative cash flow, you can pull out the cash after 5 years even without any increase in value and get about 120 month in cash flow and 220 in profit(cash flow plus principal reduction).

[James Meyer]

@Elizabeth Colegrove

Elizabeth,

I've seen some of your posts on the forum and you seem very knowledgeable with your investment strategies using your TSP account. I currently have one rental and one primary residence at the moment. However, I'd like to move ahead with my current rental and one primary and maybe further while investing on a flip. My TSP account currently holds $200k and have one Roth IRA of $20k. The one rental is under a VA loan and the primary is under VHA, I believe. Can you provide me with details steps on pursuing a flip and perhaps a TSP strategy on borrowing against that. Just any advice would be greatly appreciated.

v/r

James

[Dane Franta]

@Arthur C. Reserves on-hand depend on the lender you work with. The lender we've worked with in VA Beach only required reserves for us (2 nice W-2 jobs) after 4 mortgages. The requirement was for 6-months (mortgage, taxes, insurance (PITI) and any association (POA/HOA) dues) on-hand. We use either our TSP account or IRA individual accounts as the "reserve" assets to meet the lender's requirement. The lender's calculation is not $1 dollar invested in a IRA = $1 dollar in reserve however. Usually on retirement accounts (IRAs, TSP, 401Ks, etc.), used as the reserve, when calculating the loan officer/underwriter will "discount" our holdings to ~70% of the current value, again depending on the lender. This affords room for market fluctuations and the fact that taxes would apply should the "reserves" need to be tapped to help pay bills. The "reserves" don't have to be in a savings account waiting for the day, just an account you outline during your loan app as "reserves" so they understand your financial footing.

What usually helps most is buying correctly. If you've run your numbers and they check out to afford you covering PITI, property mgmt, HOA dues, and withholds for regular repairs, CAP-EX, and vacancy and you're left with an acceptable cashflow and CoC ROI then you're probably setup for your first couple of deals. Things like reserves come into play later on as "on paper" you start to look less viable in regards to debt-to-income.

[Account Closed]

I purchased one with a 401k loan as 20% down for a conventional 30 year fixed. It is for Primary only. Have to live one year and I just rented to roommates which covered both loans, utils, expenses, and still cash flow $700. Great terms on the 401k loan. 20 years 4.5% fixed. Only cost $50 to set up online, zero hassle, and deposited to my account within a week.

The downside is that portion borrowed out is not vested anymore so my 401k is not compounding and gaining as much as before. The upside is my 401k balance is still more than enough for reserves for the next few houses. I still contribute 10% with 5% company match. Though I may pay off the loan soon so I can keep it 100% vested.

[William Smith]

I am about to use my TSP to buy a rental. Then I am seeking to do a cash out refinance 6-12 months to pay the loan back in full. Otherwise I am not really worried about the cash flow at this point. I will count the out of pocket expense as money that I would be putting aside for the property until I can refi. Worse case scenario is I'll have a paid for rental in 5 years (pending no disaster of course).

[Anthony Gayden]

I have bought three properties using TSP loans. The most recent purchase was an all cash purchase that I am going to refinance.

I personally think this method works best if you are flipping.

Here are a couple of things I learned by using this method.

1. If you buy a personal residence to house hack, you have 15 years to pay the TSP loan back rather than 5 years

2.You can have two TSP loans at the same time, but the maximum amount you can use is the lower of either $50,000 or 50% of your account balance. If you are anything like me and have a far greater amount in your account, you will not be able to touch it, which sucks.

3. If you pay off the loan, you will not be able to take another loan for the full $50,000 for one full year after the payoff date. This hit me hard because I used a lump sum to pay off my first two TSP loans and I couldn't access that money for a long time. I should have just kept the cash and used it to invest while continuing to make payments.

I used to max out my TSP contribution but have realized that it is not the best method for building wealth. I only contribute 5% now which gets me the full government match.

[Dane Franta]

I used a TSP general purpose loan in 2016 at 1.5% interest on half my portfolio, as mentioned above. I was able to get $26K over 5-year repayment which costs me <$4/month in interest and the repayment comes from my paycheck so I never miss it. I can work that amount of interest into my cash-flow calculations rather easily. Current rate is 2.875% plus $50 filing fee.

I also use the account in my reserve calculations as mentioned and when showing my personal financial statement in prep for a loan I show the most recent month's closing position and then take 60% of that amount.  I also include all other IRAs and stock brokerage accounts to demonstrate solvency and ability to cover debts for 6-months.

[Charles Conroy]

I've been tossing around the idea of a tsp loan for a rental. All depends on the cash flow and if the ROI is over the monthly payment (to yourself) and the 2.125% plus whatever loss factored in that, that money would have made for you if kept it parked. I'm thinking forget it, too much variable. I'd find other ways to raise cash for another property outside of a loan from yourself.