401K loan or HELOC

[Christopher Mooney]

Hi everyone,

I’ve got great credit, good income, but not much liquid for a downpayment.

I'm considering either a 401K loan or a HELOC on my personal residence to raise money to do my first out of state BRRRR.

I’ll have more through the HELOC, but from what I’ve read a 401K loan is likely a lower borrowing rate and the interest gets paid to myself anyway. I’d need to get enough for a downpayment and will use hard money to find the remaining purchase and rehab (if I could find those terms). 

What’s everyone’s take on this? 

[Stacy Raskin]

@Christopher Mooney, the 401K loan will probably give you the better rate and terms but I would check on the terms for your 401K loan compared to a HELOC.

For the purchase and rehab, there are lenders that will work with investors that want to do rehabs with any level of investor experience where the middle mortgage credit score as low as 660. The lenders with lend on non-owner occupied single family and multi family up to 4 units. For newer investors, the lenders will lend on a 75-80% of purchase price (so the buyer/borrower comes in with a 20-25% down payment) and 75-80% of construction loan amount with maximum after repair value LTV 70%. They offer up to 12 month interest only payments.

Your exit plan at that point (or before the 12 months are up) is to finance into a longer term loan if it's going to be a rental such a DSCR loan if you're looking to do a BRRR.

These lenders also do DSCR loans.DSCR loans are based off of down payment, credit score and either actual or market rents so it helps to supercharge an investor's real estate goals and net worth.

Here's a bit more in detail about how rates are calculated for DSCR loans:

1. Credit score- the higher the best. 760+ generally gets best pricing for investment property loans with most lenders

2. Loan to value ratio: The higher the loan to value ratio (LTV) is, pricing takes a hit. So your pricing will be higher for a 80% LTV loan than for a 60% LTV loan.

3. Are you cash flowing the property? Is your DSCR ratio greater than 1-meaning are you cash flowing. Many lenders will not do a DSCR loan unless cash flowing. If they will do a loan with less than 1, the pricing takes a hit.I've included an example below to help illustrate this.

So different lenders have different rates (which do vary even for DSCR loans) but these are factors they all consider.

See example below:

DSCR < 1

Principal + Interest = $1,700

Taxes = $350 Insurance = $100 Association Dues = $50

Total PITIA = $2200

Rent = $2000

DSCR = Rent/PITIA = 2000/2200 = 0.91

Since the DSCR is 0.91, we know the expenses are greater than the income of the property.

DSCR >1

Principal + Interest = $1,500

Taxes = $250, Insurance = $100 Association Dues = $25

Total PITIA = $1875

Rent = $2300

DSCR = Rent/PITIA = 2300/1875 = 1.23

This property cash flows.

Lenders will generally let the DSCR loan be vested in an LLC or individually but most lenders want the rehab loan in an LLC's name.