All Forum Posts by: Cory Adams

Is your house zoned for multi-family? You stated you might want to convert it.  If it is zoned for multi-family the property will be worth more than a sfh zoning and as such you might think a little harder about the conversion as it could be a very good return on investment after renovations.

Yes you should.  If something goes south on the deal and you find you need an attorney to mitigate the situation, you will need to find another attorney anyway. 

Thanks for the replies.  The advice regarding a larger earnest money commitment is something that I should have required.  

I recently was in contract to sell a duplex in TX whereby the buyers failed to close and asked for a 2 month extension.  The contract was as is with no financing contingency.  

The buyer's agent stated that the buyers would be unable to come up with the money for reasons that were not well stated other than, "their bank said they have the money but it could not be freed up for several months."  I did not want to tie the property up for that long but did provide a 30 day extension offer for which I have not heard back.

The extensions has not be accepted and after claiming the earnest money deposit as per the liquidated damages clause the buyers are not agreeing to sign it.

The deposit is only 1,000 which is a lesson in and of itself in that I should have requested a higher earnest money amount.

What would you do in this situation?

@Andy I thought I was pretty clear regarding not letting a short sale hit his credit report.  

I'll spell it out - a short sale and or "deed in lieu of foreclosure" will most likely show up on a credit report as “settled for less than the full amount due”.  If you have no late payments associated with the short sale, expect your credit report to be hit by approx 60 points (that was my personal experience).  Expect also that there will be few if any loan products available for up to approximately 3 years.  After that period and perhaps up to 4 to 6 years later you will probably need to explain, in a very detailed manner, what the circumstances were that led to the short sale, etc.  Adding any late payments to that scenario will compound the hit to the credit report.  

Note that the above may not be exactly accurate as loan product requirements shift very often.  

If you want to invest in the near future having a short sale on your credit report is not the way to go.

Long distance rentals are not that bad. You can screen tenants before you leave potentially.  

That sounds great.  I mistook the OPs 4% fee for procuring the loan rather than the interest rate.  My apologies.  My local credit union offers them and they state they may charge(these closing costs may include title insurance, appraisal fee and survey costs)

I do know that if I for some reason can't make the payments on the HELOC or the 401K loan the difference in outcomes will be different. In one case the outcome could be foreclosure on my primary residence where as the other offers a big tax hit payable to the IRS.

@Brian Eastman The black art of Economics dictates that one always ask the question "Compared to what?" when considering whether or not to participate in a particular economic transaction.  

- Assumptions in my case: The money was going to sit in a MMF earning close to nothing (not my entire account but this 50K).  

Let's compare the scenarios with 50K borrowed from a SD 401K vs HELOC:

50K borrowed at 4.25%

Total Interest 5,589

Total Cost with SD 401K:

Loan Setup Fee: $200

Interest 5,589

Total Cost 5,789

Total Cost with HELOC:

Origination Fee (4%) 2,000 (assume 4% includes origination, doc stamps, appraisal)

Interest 5,589

Interest deduction saved at 32% tax bracket = 1788

Total Cost = 5,801

In reality the 5,589 interest goes back to my bottom line returned to the 401K with after tax dollars paid by a renter (in my scenario). The opportunity cost of not doing this deal for me was income I would not have had.  Oh and let's not forget that I have the ability to also shield some of the income from the property acquired with this down payment via depreciation against an income stream for 27.5 years.

If the 401K was not SD and company provided it is very likely that the fees would be higher and that the interest would have gone back to the plan provider instead of my account.  In that case your concerns are valid as the comparative advantages are diminished. 

I challenge any CPA to call themselves qualified if they don't think the above scenario makes economic sense. 

What? When you pay back your HELOC you are paying back principal and interest with after tax dollars. You may be able to write off the interest paid if the HELOC is taken out on your primary residence.

When I pay back my SD 401K loan there are 2 costs: 1) opportunity costs for earning income in the 401K tax deferred (if you think the loan will offer a better return then discount this option) 2) The interest you charge yourself cannot be written off vs the HELOC (for a HELOC secured against primary residence).

The cost difference is the interest that cannot be written off but if you have a SD 401K the interest is going back into your account and presumably somebody else is paying that interest because you used the 50K for a down payment on income property.    

I'll give you an example: for a 50K loan at 4.25% assuming tax bracket of 32%. The first year interest will be 1947.77 and writing off the interest in a similar HELOC would have allowed you to save 1947.77 *.32 = 623.29. The interest drops off as the loan progresses to year 5 which is a couple hundred bucks.

The cost of a SD 401 K loan through my provider (mysolo401k) was negligible.   If you would like to know more of those details reach out to Mark Nolan here on the site.

At the end of the day this is another source of down payment funds which given my situation I believe to be better than a HELOC. My personal reasons: 1) The loan does not show up on your credit report. 2) The interest is going back to my account. 3) It was much cheaper to do and easier than a HELOC to obtain. 4) I thought that this was the highest and best use of these funds as I had the money sitting in a money market fund anyway as I'm a bit timid of the stock and bond market at this time.

Thank you for your replies.  That FL deal fell through.  I'm back to working a deal in the Austin, TX market....