Thoughts on 401K loans

[Josh Duncan]

Hello all, I'm working on trying to grow my rental business and looking at different avenues for funding. My situation currently is I have 1 SFH rental that is owned by my LLC and doing well, and also I'm doing a live-in flip on my primary residence. I'd like to add another SFH to the business in the near future with the main goal being grow the business as fast as possible. Been looking at hard money loans, and also looking at doing a 401K loan from my w-2 job. Anybody had any dealings with this?

Thanks!  

Josh Duncan

[Kevin Sobilo]

@Josh Duncan, a few thoughts:

1. In terms of maximizing your returns you want to compare the interest to an alternative. For example is a personal loan from a bank is 7.5 % that you could use as a down payment (after its seasoned), and your 401k loan is 4.5% but the 401k is expected to return 7.5% per year the money you save on one end you miss out on the other end basically and if your 401k returns are 20%, then you lose out significantly.

2. Reserves! You didn't mention having other money available. So, if you don't have reserves you NEED them. The more rentals you have the more risk there is to having a bad situation crop up.

Right now, even if you have no reserve money saved, if a bad situation came up you could tap that 401k to cover the situation.

3. Changing jobs! I believe if you change jobs or leave that job, you have to pay that loan back or else it counts as a distribution. So, it would then potentially cost you a penalty for early withdrawl and also income tax owed on it.

Note: This could happen NOT by your choice with a layoff. So, it is something to be wary of with the liklihood of choppy financial waters ahead.

4. If you are doing a live-in flip why not use that equity for a down payment with a refi or HELOC?

5. If your goal is to grow faster, buying rent ready properties isn't the usual way to do that if you have limited funds to start with. Many investors in that situation look for value-add opportunities. That is why BRRRR (Buy Rehab Rent Refinance Repeat) is so popular.