Using a 401k loan to buy sfh rental property outright,then doing a refi to pay off 401k laon. Anybody have experience with this strategy?

[Alan K Auman]

I want to buy a sfh rental using my 401k. Essentially I want to be my own private lender by loaning myself funds out of my 401k to buy the property free and clear and then do a refi 6 or so months down the road in order to pay back the 401k loan in full. If you have done something like this or have any experience with this sort of strategy please chime in. Also if you can think of any pitfalls by doing this feel free to share that as well. I know about the dangers of 401k loans such as losing your job and having the loan due in full within a short time frame after losing your job. Also I'm aware of the other drawbacks of 401k loans so I'm more interested in any potential pit falls of this strategy on the real estate side. One thing I'm especailly concerned with is doing this deal and then not being able to get a refi and being stuck with the 401k loan for 5 yrs. So anyway, please if you have any experience with this method chime in and let me know your take. Thanks

[Doug McLeod]

@Alan K Auman

Do a Google search on Delayed Financing Exception (DFE).  This is a Fannie Mae rule on cash-out refinance that allows you to pay cash (even if funds are borrowed as long as no lien on the property) and do a cash-out refinance almost immediately.  This means you can pull together a 401k loan, refi your car, do a credit card cash advance, and get an unsecured loan from uncle Billy to buy a house and then start the refi process immediately - no seasoning.  In fact, the rule states you MUST close the refi no MORE than 6 months from purchase close.

I did 3 of these in the last 8 months. The catches are: funds must be sourced (ie - any funds not shown on your bank account for the last 60 days (2 statement cycles) need to be explained - a loan is OK as long as no lien on the property); most lenders don't offer all the things Fannie Mae allows, so you'll need to talk to mortgage brokers who work with investors or investor friendly banks until you find one - even fewer allow the funds to be borrowed (within the last 60 days/2 statement cycles before purchase); the refi loan cannot exceed the LTV limit specified for the number of properties you have or the purchase price plus closing costs - whichever is lower, so if you got a great deal but it has significant rehab, you may be better off using hard money so you can maximize your leverage - or wait 6-12 months to season for a regular cash-out if you are not in a hurry to get the cash back out (NOTE: after 4 properties you can't do a regular cash-out, but you can use the DFE through all 10 available Fannie Mae loans - though LTV limits may drop from 80-75-70 along the way).

The deals I used this for were good cash flow (1.2-1.3% rent/price) with relatively low equity capture after rehab and financing (0-10k) and rehab in the range of 8-20k.  ARVs were 95-115k with purchase prices from 72-81k.  

PM me for more details if you want.