borrow from 401k or pay with saving accounts.. help with your suggestions

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borrow from 401k or pay with saving accounts.. help with your suggestions

Tom Server
Member since 2023 · 118 posts · 26 votes

Hello, 

So, I'm looking to pick your brains for a bit. 

I'm about to purchase an investment property. I need to put down 60k for my down payment. I'm trying to decide what is the best strategy.

Not sure which route to go. 

1- I have 60k sitting in a saving accounts collecting a 4.60% interest each month. I get about $230 a month just sitting in my account 

2- I could borrow as a loan with my 401k, which I would have to repay myself back. The longest load is 60 months, with a 9.5% interest rate.. which gets paid back to myself.. roughly pay myself back 75k over 5 years... payment would be $1160 a month taking out of my check .

3. I only gross $5600.. after taxes, benefits, 401k. its only  $3800 a month.. and if I take the 401k loan that's another $1160 out of my check 

4. So I'm a little of unsure how to go about this.. I might be able to set up a repayment of the 401k loan out of my savings each month. or i can set up a transfer from my savings for $1160 to my checking to making up the differences.

So not sure if I should just lay out the whole 60k out of my savings and not worry about any repayment. Or take the 401k loan.. collect some of the interest from the savings and just pay it off but as the payments go down less interest i will get back 

Any other suggestions or ideas ?

thanks 

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Andrew PostellPro Member
Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
2y

@Tom Server it very rarely makes sense to borrow 100% of the value on an investment property.  You would be bleeding money on that property each month.  I would highly advise to use your savings to execute.

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  • Andrew PostellPro Member
    Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
    2y

    @Tom Server it very rarely makes sense to borrow 100% of the value on an investment property.  You would be bleeding money on that property each month.  I would highly advise to use your savings to execute.

    2Reply
  • Tom Server
    OP
    Member since 2023 · 118 posts · 26 votes
    2y
    Quote from @Andrew Postell:

    @Tom Server it very rarely makes sense to borrow 100% of the value on an investment propei rty.  You would be bleeding money on that property each month.  I would highly advise to use your savings to execute.

     
    I dont understand , why doesnt it make sense, and how would i be bleeding money ??
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  • Andrew PostellPro Member
    Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
    2y

    @Tom Server you would be losing money because the rents wouldn't be enough to counter the two loan payments you have on the property. Currently, we aren't cashflowing with 25% down...so if you are borrowing 100% of the value...you would be way in the hole each month.

    Hope that makes more sense.

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  • Tom Server
    OP
    Member since 2023 · 118 posts · 26 votes
    2y

    @Andrew Postell

    The 60k 401k loan would be paid by my savings account each month. 

    and the mortgage would be paid by the rents. 

    Only reason I'm thinking of getting the 401k loan is 

    1 I borrow from myself and pay myself back with interest 15k over 5 years

    2 I'm making interest over the 5 years of holding the 60k in my saving accounts at a 4.60% monthly rate. 

    the only question is how much money I would make over 5 years of that 60k sitting in my 401k

    over the 5 years of interest paying off the 401k loan

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  • Matthew Kwan
    Lender · Seattle, WA · Member since 2022 · 482 posts · 768 votes
    2y

    Yes, try to avoid burning/using your money from your savings account unless it's you have extra savings to spare. You never know that you might need those funds to fix/repair the house once you acquire it. Besides borrowing money from 401k, you can open a line of credit on you Primary house and lenders can typically lend up to 90% CLTV or 70 investment properties. Even cash out can get you up to 75% if needed for investment properties.

    Do you have any stocks to pledge and get it leveraged?

    @Albert Bui @Carlos Valencia

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  • Tom Server
    OP
    Member since 2023 · 118 posts · 26 votes
    2y
    Quote from @Matthew Kwan:

    Yes, try to avoid burning/using your money from your savings account unless it's you have extra savings to spare. You never know that you might need those funds to fix/repair the house once you acquire it. Besides borrowing money from 401k, you can open a line of credit on you Primary house and lenders can typically lend up to 90% CLTV or 70 investment properties. Even cash out can get you up to 75% if needed for investment properties.

    Do you have any stocks to pledge and get it leveraged?

    @Albert Bui @Carlos Valencia


    Im not fimilar with stocks to pledge and leverage.. I do have a lot of my company stock 

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  • Andrew PostellPro Member
    Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
    2y

    @Tom Server some investment companies will allow you to borrower against your holdings.  This is a very advanced technique and if your financial company allows this make sure you speak to them about the risk of your holdings/loan being called if you go this route.

    Also, keep in mind that if that 2nd loan is paid by your savings account, your checking account, a HELOC, another loan...it still means you are net negative on that property. So, if you make $200 in cashflow with the first mortgage, and then have to payback $300 for your 2nd loan, that means you are negative.

    It would be very difficult to forecast the net gain on your accounts here.  What will be the interest rate of that savings account when rates decrease?  We try to achieve 7% returns on any stock/mutual fund investments because if we hit 7%, then we double our money every 10 years.  I would also ask to factor in any matching your company provides as well.  Maybe your company doesn't match...but if they do, then that match should be factored into the projection.  Again, this will be pretty challenging at any level.  If any of use knew what the market would do...we wouldn't be talking about real estate.  We'd be on Wall Street and manage some hedge fund making billions.

    I'm a 20+ year investor...and a lender...and I don't want you to borrow in this fashion.  At least think about it some more please.

    1Reply
  • Tom Server
    OP
    Member since 2023 · 118 posts · 26 votes
    2y

    @Andrew Postell im trying to understand what youre saying here

    Also, keep in mind that if that 2nd loan is paid by your savings account, your checking account, a HELOC, another loan...it still means you are net negative on that property. So, if you make $200 in cashflow with the first mortgage, and then have to payback $300 for your 2nd loan, that means you are negative.

    am i still in the negative? if I'm taking my own 401k money and using it as the down payment, and then just repaying myself back over 5 years?... i still will have 60k equity in the home, I'm paying myself 401k back to myself at 9% interest rate.. so I'm adding to my 401k.. and I'm making 4.60 interest from the money in my saving accounts that Ill be using to pay back the 401k loan.. 

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  • Andrew PostellPro Member
    Lender · Fort Worth, TX · Member since 2016 · 8k+ posts · 6k+ votes
    2y

    @Tom Server yes, you are still negative.

    Let's try it a different way with a more extreme example.

    Let's remove the interest rates entirely.  Let's say you took out a loan and had to pay it back.  Would that make your budget more positive or negative?  Negative, right?  It's easy to see it in that way.  The concept is the same.  Your monthly budget will change because you have a loan.  This will make your monthly outlay larger because you have a payment.

    If you want to have some fun, take that loan amount and figure out what the interest you would be paying towards your 401K would be.  Next, just pay your 401K that interest without having a loan.  Your monthly outlay would be larger...your bills are more.  You are still paying yourself in that scenario.  It's the same concept.  

    Some other concepts to understand is that inflation is 3% currently.  So, that 4.5% you are earning?  In reality, it's only 1.5%.  Once rates fall, you won't be making 4.5% either.  That is likely to happen towards the end of this year.  What were interest rates for savings account pre-pandemic?  Less than 1%.  That income you are making now, is already being eroded by inflation and will continue to be eroded as rates fall.

    The answer to all of our financial problems is cash.  Why not save more?  Why not put more money into my 401k?  Why not buy more properties?  Because we don't have the cash to do so.  Try buying 15 homes and have 9% rates on all of them.  Even if you were paying yourself that would be a HUGE outlay of capital.  It wouldn't be possible.

    Maybe some of that makes more sense?  

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