How to calculate ROI with multiple loans on purchase property?

Question

I recently purchased a duplex for $450,000 with 20% down. However I pulled $50,000 out of a 401k loan with a 10.5% interest rate to be part of the $90,000 down payment. The 10.5% interest on the 401k loan is likely higher than I would have been getting otherwise with no risk of downturn. How should I calculate the ROI considering I really only put $40,000 in the deal with out of pocket cash and my 401k loan is like a hard money loan on the side? Does Bigger Pockets have a calculator that can accommodate other loans that are part of a purchase transaction on top of the mortgage to calculate ROI? i.e. hard money, friend/family money, 401k loan. The 401k loan has a 5 year payback period so I'd really like to see the ROI with $40,000 down and 401k loan payments and mortgage payments running simultaneously.

Alecia Loveless · Answer

@Ben O'Neill I have a second, and for a short while a third loan on a property.

I put the first, largest mortgage in under the loan option in the BP calculator.

Then I added the payments for the second and third mortgages under the additional expenses so that I could accurately calculate my cash flow.

I know this won’t give CoC or IRR or other metrics like this but would at least give accurate cash flow.

I think it’s a great idea for BP to add a second and third loan option on the calculator as with prices and interest rates being higher I bet a lot of people are using these options now.

Dan Deppen · Answer

My suggestion is to build a spreadsheet and include the net cash flow to you for every month of the deal, then use the IRR function to figure out your return.

Dominic Mazzarella · Answer

Great response, Dennis! To add to your excellent points, it’s also important to consider the tax implications of a 401k loan. If it isn’t repaid, it can be treated as a taxable distribution, which adds to the risk. Additionally, don’t overlook the opportunity cost of pulling money from your 401k—those funds could have been compounding in the market.

I’d also suggest stress testing your ROI by running scenarios with higher expenses or lower rents to see how resilient the investment is. Lastly, having a reserve fund is key to offsetting unexpected costs, especially with reduced cash flow from the loan repayments.

Hope this helps, and congrats on tackling creative financing!

Emily O'Neill · Answer

Dennis, thank you for the thorough reply! Yep I look at it this scenario like issuing a hard money loan to myself since I recoup the interest in the 401k. I ran the numbers on the deal knowing that I would break even on cash flow in the first year with minimal rent increases but significant cash flow in year 6 when the 401k loan is paid off. (Close on the payment calculation! It is $539.89 x 119 payments over five years. I guess it has to be fully paid back within 5 years from the distribution so you basically skip the first payment.)I vote that @Dave Meyer does a quick upgrade to the rental property calculator to include scenarios with simultaneous loans! I'm sure he already has it programmed on an excel sheet somewhere.

Dennis Bragg · Answer

Hi Ben,

First off, congrats on your duplex purchase! Diving into creative financing options like you’ve done shows initiative, and you're clearly thinking about the big picture. Let’s unpack your ROI question in a way that reflects the reality of your financing setup.

When calculating ROI with multiple loans, you’ll want to include all financing components in your cash flow analysis. Here's a framework I’ve used with clients and in my own deals:

Understand Your Total Investment:Break down your actual contributions: $40,000 from cash, $50,000 from the 401k loan, and any additional transaction costs. The 401k loand might feel like "cheap" money, but that 10.5% interest rate means it's more like a short-term hard money loan. Consider adding this cost into your annual expenses, as it directly impacts your ROI.

Incorporate Your 401k Loan Payments:Treat the 401k repayment like any other loan. For example, if you're repaying $50,000 over 5 years at 10.5%, your monthly payment is approximately $1,074. This will reduce your monthly cash flow from the property, impacting your ROI.

Break It Down with a Calculator:While BiggerPockets calculators are fantastic for many scenarios, they don't currently allow you to input multiple simultaneous loans (e.g., mortgage + hard money). You could supliment this by creating a simple spreadsheet to track your total cash flow, including your mortgage and 401k loan payments. For something more robust, tools like Excel or online calculators from financial planning sites might better suit your needs.

Your ROI Formula:ROI = (Net Cash Flow ÷ Total Out-of-Pocket Investment) × 100

For your scenario:

Net Cash Flow = Annual Rental Income - (Mortgage Payment + 401k Loan Payment + Other Expenses)

Total Out-of-Pocket Investment = $40,000 cash + $50,000 loan payments over 5 years.

I came across a piece in Bloomberg recently discussing creative financing, and they touched on ROI calculations for multiple loans.

Personal anecdote: A buddy of mine leveraged a 401k loan for a fourplex. His mistake was underestimating how much the loan repayment would eat into his cash flow. Adjusting for it allowed him to realize his property’s ROI was still positive but not as high as initially hoped. That adjustment helped him plan better for future deals.

Lastly, don’t underestimate the psychological aspect of leveraging retirement funds. Some investors I know have second-guessed pulling from their 401k when markets rebounded stronger than expected. It’s worth having a Plan B for unexpected shortfalls if you can, like setting aside reserves.

From what I’ve seen, markets like San Diego, Chicago, or Austin also offer creative financing opportunities you can explore further.