Next Deal Financing Advice

[Jeff Solberg]

I just bought my first rental property and I am already looking for my next one. There are so many opportunities right now I am just very excited to get into the next one.

I need to come up with the 20% down payment + I need to pay for rehab and closing. I could wait until next summer to have funds saved up again but I am wondering peoples thoughts on borrowing from my 401k and then pay it back next summer? All the numbers look good (using the 50% rule) even with the 401k loan and conventional loan payments.

Also, another option is my family. They have money in CDs and earn basically nothing. I asked them about their thoughts on loaning me the money instead, for more interest, and they are all for it. Their loans would be backed by my 401k if necessary. What kind of documents to do I need to write up if I went this route?

Or do you think I should just relax and save up the funds then buy?

Thanks in advance :)

[Mark Updegraff]

Jeff,

Is your first rehab / hold in service with tenants? There are LOTS of deals in this market, and every once in a while there is a GREAT deal. If you want to be able to snatch up the GREAT deal before other investors or owner-occupies (OOs) you need to have things lined up ahead of time. And that means financing. Don't be scared to declare that you are a OO to get government owned property preference on offers, especially if you're in a position to do so. Many great deals are on the governmints books, and they want you , the OO, to have them first.

If you have not researched Self-Directed IRAs (SDIRA's) that can hold real property as part of your retirement, you may want to move that route. There is info on BP as well as google, Pensco is a company you can research, though I have not set one up anywhere. A combination of 401k, loan from family, and saved up capital could work for your situation. You will need a CPA to keep everything straight as the percentage that is contained in the SDIRA will be subject to different accounting practices and the Unrelated Business Income Tax (UBIT). Also, checks must be cut from separate accounts.

I actually liquidated my IRA when I switched jobs, paid the penalty and used the money to purchase RE. If I remember correct there was a threshold of equity needed to make the SDIRA worth it when all the trust fees were totaled.

Congratulations on your first investment property!
And good luck on your path ahead!!
Cheers,
Mark