Use TSP for first home, any penalty to rent after one year?

Question

Currently, my wife, our 3 children and I live with her parents. We sat down with our RE agent for the first time yesterday to discuss our goals with REI. Our plan is to finance our first home with at least a 20% DP, fulfill the residential loan requirement of living there for a year then rent out the property. I'm trying to come up with creative avenues to finance this first property since we are very eager to get our feet wet. I've read online that using our TSP is an option. We could use up to $50,000 or 50% of the total amount, as long as it doesn't exceed $50k. My question is, if we use $50k of our TSP, pay it back over the course of 5-15 years, but decide to rent out the property after one year, will TSP penalize us for doing so since we no longer live there? Thanks in advance. Aloha!

Justin Young · Answer

Thanks @Kevin Hunter for the advice bro, I welcome everyones opinion. Would you mind explaining the 50-50 rule? Trying to come up with the finances along with thinking about acquiring our next property/investment is slightly overwhelming. Wishing I had made better financial decisions back in the day but having our kids is what got me to thinking about our future, not only for my wife and I but also for our kids. Guess I'm trying really hard to get something started now with interest rates so low.

Bill Gulley · Answer

That 50% rule is pretty much for investors who can't really analyze a property disregarding things like appreciation, taxes, ability to change use, influence neighborhood markets, principal reduction and better management techniques lowering you actual expenses over time. In other words, for those who really don't want to know real estate.

@Justin Young

Trust me, one thing you can be assured of here, you'll get bad advice asking financial questions from those that think they know!

First it depends on the type of account, which system you're under, you mentioned $50,000 which is the maximum loan under the CSRS and FERS programs, these are loans.

If your deduction contributions are tax deferred then, paying in with pre tax dollars, you will have a tax liability as income for amounts that are not repaid.

You may borrow for your residence based on a repayment over 15 years, for other reasons you will have a 5 year payback requirement. Use of funds is declared for tax purposes and your repayment schedule. A loan for a residence justifies the 15 year term, knowing you will move out and change the use of those funds is walking a fine line to fraud as your intent is for non-residence status.  You repayment is also payroll deducted if you are still employed.

You do not have a "plan administrator" as other funds are administered, that comes under the Office of The Comptroller and your employee benefits officer, (EBO) who will know of your moving, obviously you address changes for admin and tax purposes.

As to the mortgage requirement, all residential mortgages made under secondary market guidelines or under federal agency requirements will use 12 month residency as your initial intent for your loan application, your EBO may or may not, but my guess is they would also.

The 12 month requirement can be waived under several circumstances such as loss of job, moving to a new job, death in the family or family care being required of you or other unforeseen events that cause a hardship.

What they are looking at is your intended use of funds and actual use matching that type of loan or withdraw applied for. Are you lying on your loan application? If they believe you did, you have problems!

You should investigate your specific program through the Office of The Comptroller and your EBO. Good luck :)

Justin Young · Answer

Wow thank you so much @Bill Gulley for that explanation. So I looked into it more and I definitely want to stay within the regulations so a general purpose loan would fit that. It doesn't look like I'll take out the full amount of $50k but at least I have options to do so if I choose.

I'm still trying to find strategies to finance our investments without getting too ahead of ourselves. I appreciate every comment here. Gotta love BP!

Richard Capers Jr · Answer

@Justin Young

I'm assuming you are a government employee, veteran, or service member.

They should not be able to go after you due to the fact that you will be leaving/moving sooner or later.  I also considered using my TSP as a down payment but decided to use my VA Loan to purchase our home.

The problem I had with using the TSP loan is being able to pay it off fast enough to be able to use it on the next deal.  For some reason TSP requires borrowers to wait 60 days after paying off the loan to be able to take out a new one.  One idea is to buy the home right (at a discount), use the TSP down payment, live in it for a year, try to refinance, and pay off most if not all of your TSP loan.

One benefit is that you pay yourself back with 2% interest.  TSP payments come directly from your pay as indicated on your LES (pay stub) every pay period (2 weeks).  I'm not sure if you'd be willing to have 50K tied up for 5 - 15 years.

Hope this helps with your decision!

Richard Capers Jr.

David Dachtera · Answer

@Justin Young,

Checked into that a bit deeper and Bill's right - if that is your intent, you'll want to take the General Purpose Loan option to avoid issues.

Now, that does change things a bit. For example, the maximum term for a GPL is only five years. If you took the full $50,000 (assuming you can), that would require you to repay $834 a month, plus interest.

Approach with caution. Stay within the law!

Kevin Hunter · Answer

@Justin Young, one more clarifying point.  The 50-50 rule is one that helps you buy the house at the right price. Add up your projected mortgage costs(principal, interest, tax, insurance((PITI))), maintenance fees/CAPEX (10%), and vacancies(10%) and you will arrive at a monthly cost.  That cost should not exceed 50% of comparable rents.

Example:

Rental Comp for the property you are looking at = $1200

PITI, maintenance, vacancy should add up to no more than 50% of monthly rent collected, in this case $600.

At 10% for maintenance and vacancy ($120 each), my mortgage needs to be $360/month or less. **notice this does not include management fees or a HOA.  If a property has a HOA or you don't plan to manage it yourself, you will need to plan for those costs.

It can seem a bit daunting at first.  This is just a stepping of point and you can tailor it to your particular area, comfort level, and experience.   It will help you to start looking for properties at the right price.

Feel free to PM and we can talk through it more in depth if you like.

Kevin Hunter · Answer

50-50 rule is a baseline. It makes the assumption that 50 percent of all rents collected will go to PITI, maintenance fees, management fees, and all other capital expenditures.  This, for planning purposes, allows you to be extremely conservative when evaluating an investment property.  In reality, I usually see much less than that, when I buy at the right price in the right area, etc....   Often times, if a property is bought at the wrong price, or the plan for vacancy or maintenance costs are wished away, then the actual(realized) profit comes it at much less than expected.  The 50-50 rule helps you to avoid this scenario.  Every situation is different, and you can tailor this numbers to whatever you are comfortable with, but if you use this as a stepping off point, it will help you to avoid making an emotional purchase.  Hope this helps.

Blaine Bacon · Answer

No, I'm still living there.

David Dachtera · Answer

@Justin Young,

I rather doubt that the TSP administrator really cares what you do with the money - it's borrowed "from yourself". So, there should not be any restrictions of the kind you mentioned.

As long as you pay it back, you should be good.

Verify that with the SPD and the plan administrator might be a good idea, though...

My $0.02...

David J Dachtera

Justin Young · Answer

Just curious, so after the one year of residing there, you rented it out and they haven't checked up you? I'm just trying to make sure there are no stipulations that we actually have to reside there until the loan is paid off.

Use TSP for first home, any penalty to rent after one year?

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