TSP Loans - Current Pros and Cons
Joseph O'SullivanPro Member
New to Real Estate · NE Florida · Member since 2023 · 45 posts · 21 votesTSP Loans - Current Pros and Cons
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Josh St LaurentBusiness Member
Financial Advisor · Stateline, NV · Member since 2023 · 131 posts · 122 votesGood question Joe, the nice thing about a TSP loan is that you are borrowing your own money, paying it back to yourself (with interest), and with no taxes or penalties so long as you pay it back. Usually, these are tied to your paycheck too which makes the payback simple as long as you are working at that company during the entire payback period. The max Uncle Sam allows is 50k if you haven't taken a TSP loan in the last year.
I've seen both good and bad experiences with this but at the end of the day it's no different from any other type of loan, you are just your own bank in a sense.
The downside or risk is that you lose your job, your property isn't cash flowing, are unable to pay back the loan, and your retirement account suffers since the loan essentially turns into a withdrawal.
The upside or best case is you have the loan for less than a year, your BRRRR pays off the loan, and you pay yourself interest 5% interest.
The opportunity cost is if the stock market goes up 20% and you were only paying yourself 5% interest you'll miss out on the excess returns. Then again, if the market is down 20% you actually benefit from sheltering the 50k from the downturn, earning 5%, and using it to invest in RE.
Hope this helps
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11 Replies
- 2yJosh St LaurentBusiness MemberFinancial Advisor · Stateline, NV · Member since 2023 · 131 posts · 122 votes
Good question Joe, the nice thing about a TSP loan is that you are borrowing your own money, paying it back to yourself (with interest), and with no taxes or penalties so long as you pay it back. Usually, these are tied to your paycheck too which makes the payback simple as long as you are working at that company during the entire payback period. The max Uncle Sam allows is 50k if you haven't taken a TSP loan in the last year.
I've seen both good and bad experiences with this but at the end of the day it's no different from any other type of loan, you are just your own bank in a sense.The downside or risk is that you lose your job, your property isn't cash flowing, are unable to pay back the loan, and your retirement account suffers since the loan essentially turns into a withdrawal.
The upside or best case is you have the loan for less than a year, your BRRRR pays off the loan, and you pay yourself interest 5% interest.
The opportunity cost is if the stock market goes up 20% and you were only paying yourself 5% interest you'll miss out on the excess returns. Then again, if the market is down 20% you actually benefit from sheltering the 50k from the downturn, earning 5%, and using it to invest in RE.
Hope this helpsWealth In Yourself57 Reviews - New to Real Estate · NE Florida · Member since 2023 · 45 posts · 21 votes2y
Quote from @Josh St Laurent:
Good question Joe, the nice thing about a TSP loan is that you are borrowing your own money, paying it back to yourself (with interest), and with no taxes or penalties so long as you pay it back. Usually, these are tied to your paycheck too which makes the payback simple as long as you are working at that company during the entire payback period. The max Uncle Sam allows is 50k if you haven't taken a TSP loan in the last year.
I've seen both good and bad experiences with this but at the end of the day it's no different from any other type of loan, you are just your own bank in a sense.The downside or risk is that you lose your job, your property isn't cash flowing, are unable to pay back the loan, and your retirement account suffers since the loan essentially turns into a withdrawal.
The upside or best case is you have the loan for less than a year, your BRRRR pays off the loan, and you pay yourself interest 5% interest.
The opportunity cost is if the stock market goes up 20% and you were only paying yourself 5% interest you'll miss out on the excess returns. Then again, if the market is down 20% you actually benefit from sheltering the 50k from the downturn, earning 5%, and using it to invest in RE.
Hope this helpsGreat advice and insight Josh,
Thanks for the feedback.
Sincerely,
Joe
- Accountant · Bryn Mawr, PA · Member since 2023 · 409 posts · 321 votes2y
What type of deal?
What are your other options for liquidity ?
Why real estate?
Not an interrogation but so much to unpack here....
No judgement either, I have borrowed from qualified plans and have done early withdrawals too.
Jon Bock, CPA/PFS
- New to Real Estate · NE Florida · Member since 2023 · 45 posts · 21 votes2y
Quote from @Jonathan Bock:
What type of deal?
What are your other options for liquidity ?
Why real estate?
Not an interrogation but so much to unpack here....
No judgement either, I have borrowed from qualified plans and have done early withdrawals too.
Jon Bock, CPA/PFS
Thanks for the note Jon.
Great questions and to the point.
No particular deal, just trying to assess all my options, so I have a good grasp on my financial resources ahead of finding the first deal.
Why real estate? I guess because it makes sense to me. I have read about it over the years and while is seemed a big far-fetched when I was younger, I am now at a place where I can see the logic of the expansion over multiple properties - I think it was the BRRRR method that really sold me - where each property can contribute to the down payment of the next property (Still have a lot to learns about the mechanics of that and the balance of the extra monthly payment cost of the cash out re-finance, but I can visualize the logic of the concept).
Sincerely,
Joe
- Rental Property Investor · Raleigh, NC · Member since 2016 · 393 posts · 995 votes2y
As Joe mentioned, you are paying the interest back into your TSP account, so you aren't "losing" money by paying interest which is very nice. With only a $50 or $100 origination fee, and "essentially" not losing any money to an interest rate, TSP loans are probably one of your cheaper loan options out there.
I just took out a 40+k loan from my TSP to invest in other ventures and it was a very simple and straightforward process. My only problem was that the longest repayment period you can choose is only 60 months, which means that your monthly payments on a 40-50k loan is probably in the $700-$1000 range per month.
This means that it will be extremely likely that you will be cashflow negative from whatever investment you are looking to buy and will need to be able to cover that monthly spread out of pocket. Having a mortgage payment plus needing to pay an extra $1k/mo towards this TSP loan will crush any cashflow you had hoped for.In some cases this can still be a good option, just be cognizant of how high the monthly payments will be due to the short duration that these loans are for.
- New to Real Estate · NE Florida · Member since 2023 · 45 posts · 21 votes2yBen,
Quote from @Ben Zimmerman:
As Joe mentioned, you are paying the interest back into your TSP account, so you aren't "losing" money by paying interest which is very nice. With only a $50 or $100 origination fee, and "essentially" not losing any money to an interest rate, TSP loans are probably one of your cheaper loan options out there.
I just took out a 40+k loan from my TSP to invest in other ventures and it was a very simple and straightforward process. My only problem was that the longest repayment period you can choose is only 60 months, which means that your monthly payments on a 40-50k loan is probably in the $700-$1000 range per month.
This means that it will be extremely likely that you will be cashflow negative from whatever investment you are looking to buy and will need to be able to cover that monthly spread out of pocket. Having a mortgage payment plus needing to pay an extra $1k/mo towards this TSP loan will crush any cashflow you had hoped for.In some cases this can still be a good option, just be cognizant of how high the monthly payments will be due to the short duration that these loans are for.
Thanks for that feedback. What you explained about your experience with negative cash flow makes total sense. I was envisioning a two part calculation for the monthly mortgage payment - I see it as a VA loan analogy with no money down but the loan structured with two interest rates (one for the TSP down payment and one for the 30 yr fixed rate mortgage).
I guess the real question to ask myself (using your situation as the model, assuming positive cash flow once TSP is repaid) is whether I am okay tolerating the potential 60 months of negative cash flow to get to the positive cash flow after 5 years.
- Maybe if it gets the deal going and leads to a cash out refinance before the 5 year mark that allows me to speed up the TSP pay off.
Wow - Great food for thought. Thanks again for sharing...I'm taking notes and learning !!! :-)
Sincerely,
Joe - Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes2y
Its a matter of opportunity cost... You realize that if you were in the C fund last year, you'd be up ~27%? Yes, the market goes up and down (and that example is one fantastic year, although we've had a lot of them)... I know this is a real estate forum, but just realize that you'd have missed that AND lost 5% since you have to pay yourself the G fund rate, vs. the G fund paying you.
I'm not anti-real estate, but I don't prefer it when people take extra risks with their retirement. You can still lose money in real estate. Look at any graph youwant, but just realize what really matters is what your "ONE" property is worth.
5yr term isn't bad, but you need to have a solid plan to get that paid back.
brrr is a great strategy, however, its difficult to pull off 100%. We had a long thread about that a while back, before rates shot up. So, it'll be even harder now. Lets face it, a brrr is basically a flip you don't sell. Who really thinks making a profit on a flip isn't risky??
Don't forget that the tsp repayment will be counted against your DTI when looking at conforming loans.
Otherwise, it seems like you understand the risks. Its up to your investing strategy and goals. Depends on how you want to look at it: opportunity cost? diversification? education?
Hope this helps. Happy to chat. Good luck.
- Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes2y
You what comes to mind... I would use it for a short term loan to yourself. Maybe if you were doing a reno, or the brrr. get the tsp loan after purchase (so its easier to qualify for the loan). But, have an exit strategy to pay it back/off quickly.
Its still risky, but I think better than using it as part of your money down....
- New to Real Estate · NE Florida · Member since 2023 · 45 posts · 21 votes2y
Quote from @David M.:
Its a matter of opportunity cost... You realize that if you were in the C fund last year, you'd be up ~27%? Yes, the market goes up and down (and that example is one fantastic year, although we've had a lot of them)... I know this is a real estate forum, but just realize that you'd have missed that AND lost 5% since you have to pay yourself the G fund rate, vs. the G fund paying you.
I'm not anti-real estate, but I don't prefer it when people take extra risks with their retirement. You can still lose money in real estate. Look at any graph youwant, but just realize what really matters is what your "ONE" property is worth.
5yr term isn't bad, but you need to have a solid plan to get that paid back.
brrr is a great strategy, however, its difficult to pull off 100%. We had a long thread about that a while back, before rates shot up. So, it'll be even harder now. Lets face it, a brrr is basically a flip you don't sell. Who really thinks making a profit on a flip isn't risky??
Don't forget that the tsp repayment will be counted against your DTI when looking at conforming loans.
Otherwise, it seems like you understand the risks. Its up to your investing strategy and goals. Depends on how you want to look at it: opportunity cost? diversification? education?
Hope this helps. Happy to chat. Good luck.
Thanks for that great insight David!
I appreciate you sharing some specifics on the risks with a real life example ( I have not been paying attention to that detail, so that is good education for me).
I do get the idea that if it's a good year, I am missing out on good TSP compounding due to a loan for real estate. My thought was more that the real estate may not pay as much immediately, but to start building a portfolio, it might pay out bigger in the long term, if it becomes the stepping stone to start the process of buying multiple properties over time.
Of course, this is all conceptual and I can see the possibility that it might not play out like that due to unforeseen market conditions, etc. Right now I am in the study and evaluation phase and I may not need the TSP loan by the time I get to the first deal, but just trying to soak in the pro and cons of all options.
Your feedback is definitely some strong food for thought on why it might be preferrable to avoid a TSP loan or keep it as a last resort when I am sure I can pay it back quickly.
Thanks again for the thoughtful comment.
Sincerely,
Joe
- 2yJohn BurkePro MemberLender · Temple, Texas/Nationwide · Member since 2024 · 85 posts · 24 votesThis is not true for conforming/conventional, FHA, VA or USDA loans.
Quote from @David M.:
Don't forget that the tsp repayment will be counted against your DTI when looking at conforming loans.
https://selling-guide.fanniemae.com/Underwriting-Borrowers/L...
Loans Secured by Financial AssetsWhen a borrower uses their financial assets—life insurance policies, 401(k) accounts, individual retirement accounts, certificates of deposit, stocks, bonds, etc.—as security for a loan, the borrower has a contingent liability.
The lender is not required to include this contingent liability as part of the borrower’s recurring monthly debt obligations provided the lender obtains a copy of the applicable loan instrument that shows the borrower’s financial asset as collateral for the loan. If the borrower intends to use the same asset to satisfy financial reserve requirements, the lender must reduce the value of the asset (the account balance, in most cases) by the proceeds from the secured loan and any related fees to determine whether the borrower has sufficient reserves.
Note: Payment on any debt secured by virtual currency is an exception to the above policy and must be included when calculating the debt-to-income ratio.
- 2yJosh St LaurentBusiness MemberFinancial Advisor · Stateline, NV · Member since 2023 · 131 posts · 122 votes
Quote from @John Burke:
This is not true for conforming/conventional, FHA, VA or USDA loans.Quote from @David M.:
Don't forget that the tsp repayment will be counted against your DTI when looking at conforming loans.
https://selling-guide.fanniemae.com/Underwriting-Borrowers/L...
Loans Secured by Financial AssetsWhen a borrower uses their financial assets—life insurance policies, 401(k) accounts, individual retirement accounts, certificates of deposit, stocks, bonds, etc.—as security for a loan, the borrower has a contingent liability.
The lender is not required to include this contingent liability as part of the borrower’s recurring monthly debt obligations provided the lender obtains a copy of the applicable loan instrument that shows the borrower’s financial asset as collateral for the loan. If the borrower intends to use the same asset to satisfy financial reserve requirements, the lender must reduce the value of the asset (the account balance, in most cases) by the proceeds from the secured loan and any related fees to determine whether the borrower has sufficient reserves.
Note: Payment on any debt secured by virtual currency is an exception to the above policy and must be included when calculating the debt-to-income ratio.
Glad you went there John, I was going to point out the same thing. @Joseph O'Sullivan really your "best-case" scenario with the TSP and a BRRRR strategy is that you're able to refinance, pay off your TSP loan, and immediately be cash flow positive. Like others have mentioned this is harder than ever with interest rates where they are, but you'll also be able to refinance when interest rates drop. 12 months later (Again this is a rose-colored glasses situation) you'll have access to another 50k from your TSP and potentially a HELOC from the property you purchased, now you have a pile of cash you can use to buy other BRRRRs.
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