All Forum Posts by: Destiny Fargher

I'm curious why you want to convert it into a rental rather than selling it? The only way I can see to make your current house a cash flow positive rental is to do a refi (no cash out) out to a 30 year mortgage while you still live there (so you get owner occ rates). 

My parents rented the same house for 20 years when I was growing up. There were two main reasons:

1. They couldn't afford to pay rent, raise 3 kids, AND save up money for a down payment. Any extra money went towards paying for school supplies, after school activities, and tent camping vacations. Their focus was completely on child-rearing and just surviving month to month.

2. They claimed bankruptcy when they were younger and assumed it would ruin their credit forever. They weren't financially savvy, and didn't realize that you can rebuild your credit over time.

Taking an unqualified early distribution from your 401k is a very expensive source of funds. You will pay your marginal tax rate on the funds you withdraw, plus you'll lose another 10% to penalties. It would probably give you warm fuzzies to pay off the last bit of the mortgage, but they will be expensive warm fuzzies and I see little other benefits.

If your goal is to reduce your monthly expenses and save for buy-and-hold properties may I suggest a cash-out refi on your primary residence? You mention your P&I is $950. You could refi to $65k: $35k of existing mortgage, take out $25k for the down payment on a new rental, roll in $5k of the closing costs. Your new payment would be about $350, saving you $600 a month. The closing costs in this scenario are less than the taxes and penalties you'd pay for the 401k distribution, plus you still get to keep your $55k in tact for retirement, plus you can buy a rental right away, plus you reduce your monthly expenses by $600. Win-win-win?

The "penalties" would come in if he left his job (or was laid off). At that point the loan becomes immediately due. If you can't pay it off right then, it is re-characterized as a distribution with penalties.

I have borrowed from my 401k for four different financed real estate transactions (2 primary residence, 2 rentals), each using a different lender, and not a single one ever questioned it. It is a very common source for a down payment. Yes, the one risk to consider is losing your job and having to pay it back quickly (or take the penalty). But if your job is reasonably secure that is a calculated risk.

Borrowing to take a vacation or buy a new car would be a bad idea. But borrowing to wisely invest? That is totally within the spirit of 401k funds. A rental will add to your net worth, which will aid in your retirement.