Most efficient source to pull funds from for a down payment?

Question

I currently own 3 units and looking to add to my portfolio in late spring/early summer of 2025. I'll be in the market for a duplex/triplex in the $400k range that I will owner occupy and use a 5% down loan. I have some of the required funds in a HYSA, but will most likely need to draw from another account and I'm curious which method is the most efficient in terms of taxes/capital gains, penalties, loan repayments, etc.

Based on my previous transactions in the market, I estimate ~$45k cash to close: $20k for the down payment, $15k for closing costs and prepaids, and $10k of starting reserves. I have gotten a seller's credit for my 3 existing units but to be conservative, I will assume I am paying full closing costs here.

At the moment, I have ~$25k in a HYSA and expect to save another $10k from my W-2 before I start putting offers in. That means I have roughly enough for cash to close, but no reserves left over. FYI I do have plenty of reserves for my other units already, but would like to keep each property separate.

My question is, where should I draw funds from to pay the least amount in penalties, taxes, loan interest, etc. from the following sources I have available:

- 20 year 401k loan for a property- Sell a piece of my stock portfolio at 15% capital gains tax- Take a HELOC against an existing property- Private money loan from a trusted partner I have worked with before

Alternatively, I could pool the reserves for all my properties to ensure I can cover anything immediate and know that I could always sell off a piece of my stock portfolio if needed and have the funds within 3 business days or set up a HELOC and only draw from it if needed.

Appreciate any thoughts or what you have done in the past.

Denver McClure · Answer

Hey @Mike Levene, I'd recommend considering a Margin Loan against your stock portfolio. Depends on the brokerage you have, but the one we use currently has a rate at 5.83% at 50% LTV. Use caution when borrowing against your stock portfolio, especially if it's a high volatility portfolio comprised of individual companies. ETFs would be a better option if you use Margin. Happy to explain further if needed.

Tom Thomson · Answer

I love the HELOC option!  It's sometimes a little tougher to get one on an investment property vs. a primary residence but If you can get it I would strongly recommend looking into it.

Paul Novak · Answer

I feel where you are coming from.  I love real estate but keep coming into the same dilemma you have with getting funds to keep it going.  We live in Wisconsin have been at it since 2021 and have 5 properties.

I have 4 options that we have been doing that work for us.  I'll put them in order of what I prefer and why:

1) Save up the cash using cashflow from my current portfolio and W2 income.  While I find this the ideal way to buy more properties it also stunts my growth and I tend to lose patients.  When I see good deals I tend to jump in vs. waiting for this option but I still think this is the best option if you can afford to wait.

2) Take out a loan from my 401K.  Because the balance in both my wife and my 401K's are greater than $100K we have the option to take out loans up to $50K for use on our properties.  The longest terms our plans provide to pay back the money is 5 years and the payments get made automatically through payroll deduction.  What I love the most is two fold, the interest paid back on the loan goes back to you, the fees to do this are extremely minimal.  For my account I pay $10 per quarter while the loan is active so only $40 a year to borrow this money.  For my wife it's a $75 flat fee when she takes out the loan.  I would rather do this and retain my money then give it to the bank as interest.  The opportunity costs is losing the growth while the money is borrowed but this can work both ways.  If the market goes down you don't take the losses either.  I have done the math and this really doesn't stunt the growth of the account much because you are paying back the money with interest.  When I do this I try to pay the money back as fast as possible.  The last loan we took out I paid back in 10 months.  The watch out is if you lose your job or quit you will need to pay the money back in 30-60 days so I always make sure I have cash reserves to cover this if needed.  The other thing to note is that the IRS only lets you have a 401K loan balance of up to $50K over a 365 day period.  This means if you pay back your loan today you can't borrow another $50K tomorrow.  The way we have done it is to borrow from my 401K, when I pay mine back borrow from hers and repeat this cycle so we always have one we can pull from.

3) This option will be controversial but I have taken out private money loans with family and friends.  They know we have rentals and that we are good for the money.  I have told them I would rather pay them interest vs. give it away to the bank.  I took out a loan with one of my friends, wrote up a loan agreement contract that we both signed and paid him the interest on a property early last year.  He turned around and used the interest I paid him back to go on a golf trip with me later that year.  I have also told my grandma who was getting 5% return in a CD that I would give her 6% if she lent me the money for the down payment on the last property I purchased.  This way we both win and I keep the money with family and friends vs. giving it to the bank.  In both cases to keep things clean for underwriting at the bank I used my HELOC to secure the mortgage.  Then I paid the HELOC back within a day or two of closing and paid back the private money I borrowed.

4) The last option I have is our HELCO.  I try to leave this alone and not use it because it costs me interest that I won't get back.  I would pull from it to refund a 401K in an emergency or if something catastrophic happened in the business but I have this there as more of a lifeline then funds to actually use.  As I stated above I have use HELOC funds as a bridge strategy but that is really it.

If you have more questions hit me up and I would be happy to discuss these options in more detail.  Hopefully this helps.

Havital Miltz · Answer

NEVER borrow from a 401K, you are taking pre-taxed dollars and paying it back with after tax dollars, you do not get to return the loan with pre taxed dollars, in addition, some 401K plans do charge interest and maybe even fees, and lastly if you get laid off for some reason, it is a distribution with all the "fun consequences: tax at the last dollar rate, and if you are under 59.5 there is also the additional 10% penalty.

Personally I like the HELOC, however you can also sell stocks and do tax harvesting there to offset gains if that is an option

Dominic Mazzarella · Answer

It’s definitely smart to evaluate the tax and cost implications of your funding options. Here are some thoughts on your choices:

• 401k Loan: This can be a good option since you're borrowing from yourself, but it comes with repayment risk, especially if you leave your job. The opportunity cost of losing potential market gains in your retirement fund should also be considered. I don't think enough people consider this aspect.
• Selling Stock: Selling part of your portfolio could work, but the 15% capital gains tax might make this an expensive choice unless the stock has underperformed or you’re diversifying away from riskier investments.
• HELOC: Using a HELOC on an existing property is a flexible and relatively low-cost option. I believe interest is tax-deductible if used for property improvements or purchases, and it gives you quick access to funds while keeping your stock portfolio intact.
• Private Money Loan: If you have a trusted partner and terms that work well for both parties, this could be an efficient solution without tapping into your other assets. Just ensure the agreement is clear and formalized.

Pooling reserves across properties might make sense if you’re confident in your cash flow and other contingencies. A hybrid approach could also work—perhaps using a HELOC for reserves while saving the stock portfolio and 401k loan as backup options for future opportunities.

Tom Thomson · Answer

80% on primary and 75% on investment property I believe.

Mike Levene · Answer

So far this is looking like a great option for my situation but I've never done one before. Just curious, what is a typical LTV I can draw up to with a HELOC on primary and investment property? Around 80%? I'm sure some local banks will do higher especially with a strong relationship but don't think I will fall into that category.

Most efficient source to pull funds from for a down payment?

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