Buying real estate with Retirement account loan???

[aoak]

My wife and I have a year's amount of emergency funds and I do not want to tap into that for a down payment on rental properties so here is my plan:
Continue to max out my wife's and my Thrift Savings Plan (TSP) at $36000/yr, let it compound over a year in conjunction with what we have in our TSP already, $140k, and from now till 15 years from now take out no more than $20,000, total, from TSP accounts to serve as down payments for rental properties.

A net value of $16000/year would go towards our retirement accounts and after 27 years, when we have reached eligible retirement ages, our retirement nest egg will have grown to approximately $2 million and we will have 15 rentals. I plan on using rental properties as my retirement bridge till I reach 57 and can stay withdrawing from TSP...if I even need to.

The going interest rate for the TSP loan is 2% and I would pay the loan back ASAP. I feel that it is better to have my money grow within my tax sheltered retirement account, use the "compounded money" as a down payment, and pay a fixed interest rate 2% loan ASAP. All my research regarding loans through Federal retirement accounts shows that my plan is possible and non penalizing if associated rules are followed.

I feel that my thinking is sound but a second opinion would be much appreciated....

 

[dallas27]

Can you buy the house directly with the TSP the way you can with a self directed IRA? If so, consider that option.


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[pb4uski]

I wouldn't think so dallas... my understanding is it is more akin to a 401k plan.

I know one risk with 401k loans is that if you get laid off or leave the employer that in many cases the 401k loan becomes due and can create a liquidity squeeze for the borrower and if the loan can't be repaid that it is considered to be a substantive early withdrawal and is subject to penalties and tax.

I'm not sure if this is an issue with a TSP though.

 

[unno2002]

TSP loan used as rental down payment, we did it years ago. Worked for us. I believe you will be limited to the five year “general” loan.

 

[jazz4cash]

I used 401k loans to fund a significant portion of dependent tuition expense. I always twitch when I hear about retirement account "loans". The true cost of the loan is not tied to the "interest" rate as much as the opportunity cost (e.g. the return generated if the funds stayed in the account). For that reason I usually adjust my asset allocation so that the funds for the loan come out of the fixed income allocation (as much as possible). That way your opportunity cost is not as high if the market has a good year. I believe with TSP they liquidate all accounts proportionately so you would need to rebalance after taking the "loan".

 

[48Fire]

Seems like a good plan to me. I did something similar, borrowing from 401k for rentals 28 years ago. No regrets there, except the rentals were a pain, and I ended up selling all 7 units - duplex, triplex, and two singles. Just wasn't worth the headaches in our area. But good luck to you! You may be more tolerant than me. I know a lot of people here have been successful with rentals.

 

[Senator]

I would not use a TSP/401K loan...

Keep saving, keep learning. You say you want 15 rentals, yet it appears you have none. There is a reason it is a high reward proposition, it is high risk. Very few people have one rental, let alone 15. It could very well be a losing proposition for you. Most RE investors are speculators, not investors.

Learn how to buy foreclosure properties in your area. They are out there, there are other investors buying them and making a killing. I do not care what the area you live in has appreciated, there are bargains. As long as there are mortgages, divorces, deaths, and low-quality renters, there will be distressed sellers.

Get a side gig if you have to, to accumulate some cash for a down payment. Use your own home equity. You will need 20%+ down to get a rental property, unless you move and rent your current home. I put down a minimum of that, and plan on plenty of fix up. Multifamily is the most profitable, and most work.

The TSP loan is only 2%, but you miss tax deferred gains. You are investing your tax deferred money into an investment that doesn't even beat inflation.

It is not a loan at 2%, it is an investment that you only receive 2% (less loan fees).

 

[Markola]

The true cost of the loan is not tied to the "interest" rate as much as the opportunity cost (e.g. the return generated if the funds stayed in the account).

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[Markola]

+1. Whenever I've thought about buying a rental house with ANY of my assets, I lose interest as soon as I consider a) how much my paper portfolio will increase in a normal year if I don't mess with it, and b) how nearly everyone I know who has gotten into rental real estate wants to get out, unless they have made it a full time career choice. That's just me and YMMV. Good luck!


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[Senator]

+1. Whenever I've thought about buying a rental house with ANY of my assets, I lose interest as soon as I consider a) how much my paper portfolio will increase in a normal year if I don't mess with it, and b) how nearly everyone I know who has gotten into rental real estate wants to get out, unless they have made it a full time career choice. That's just me and YMMV. Good luck!

Real Estate has an almost opposite correlation to the market. When US stocks go down, RE tends to hold it's value. RE is also somewhat inflation protected. There are many tax benefits too, as it is a business and has typical business deductions in addition to depreciation deductions.

I would compare my RE returns with almost any other investors returns, and odds are, my RE returns would crush most other investments.

The problem comes in when you have lazy investors. Investors that rely on a RE agent to find a hands-off RE investment. Or someone that has to buy something, now. Or are an under-capitalized investor. Or are clueless on what returns you should be expecting.

The same issue is true for lazy stock investors, some have no clue what they are doing and cannot even beat the rate of inflation. Like with any investment, you need to diversify. You need stocks in addition to real estate.

I can get solid 6-figure returns on my ~$1.2M investment. If I do some work myself, that figure runs well over $150K, not counting appreciation. I have gained another ~$1M in appreciation over the last 8 years from my purchase price. With my full-time job, I am able to save all of the rental cash flow, plus much of my salary.

My rents are up almost $1,000 a month from a year ago, and still have room to run. Vacancy is almost nil, although I have had several apartment turns.

I do want to sell, or have my places managed at some point. Get to a more 100% hands off portfolio. For now, about 20 hours of work a month makes a great income. It is a much higher risk than a pension, although less risk than the stock market.

If I would have anticipated that much revenue, I may have left my full-time job sooner... With less than a year left, I am now just mentally preparing for FIRE with a low-stress mentality at the job.

 

[ronocnikral]

Real Estate has an almost opposite correlation to the market. When US stocks go down, RE tends to hold it's value.

'08 being the only exception?

 

[Senator]

'08 being the only exception?

In 2008, everything went down. If all you had was stocks, you were doomed. Even dividends were cut.

If you had rentals, the income from them stayed steady. Valuations went down, but a property that has income has an intrinsic value if only for that cash flow stream alone. If you had a 15% ROI before the crash, you had the same (or better) after.

There is no perfect investment, but real estate gives you a chance to be a millionaire faster than the stock market.

 

[ronocnikral]

In 2008, everything went down. If all you had was stocks, you were doomed. Even dividends were cut.

If you had rentals, the income from them stayed steady. Valuations went down, but a property that has income has an intrinsic value if only for that cash flow stream alone. If you had a 15% ROI before the crash, you had the same (or better) after.

There is no perfect investment, but real estate gives you a chance to be a millionaire faster than the stock market.

couldn't the same be said of some bonds? or even "weathering the storm" in the stock market if one isn't interested in generating income right now?

I reached, probably not anymore, the "2 commas" a few months ago at age 32. But, I've only ever had my primary residence. Amount of work to returns seems to be better with the stock market...just saying.

 

[Markola]

couldn't the same be said of some bonds? or even "weathering the storm" in the stock market if one isn't interested in generating income right now?

I reached, probably not anymore, the "2 commas" a few months ago at age 32. But, I've only ever had my primary residence. Amount of work to returns seems to be better with the stock market...just saying.

That's what I'm saying. Doomed? Not if you were properly diversified and waited a few months. I know this thread is like dog people trying to convince cat people of their preferences. I really respect those commenters here who are making it in real estate, and I believe it is a great business to have if you want to spend your time on it and can sleep well using debt leverage. I can only imagine what stock returns would be possible with the high debt leverage/OPM real estate investors routinely use. You say real estate is less risky than my pay-as-you-go mutual funds, which seems debatable, unless you paid cash for your holdings, as I did. But, really, I'm just saying real estate is an active business, like any other, even if part-time. I have no business being in business and want to invest passively and avoid debt, so it isn't for me. That means more good houses for you to buy and rent out, so good luck!


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[Senator]

ronocnikral and Markola

You are both right, RE can be a bit of work. When I see someone who thinks it is a guaranteed way to make money, I see someone who is setting themselves for failure.

I have done quite well, from initially crossing the 2 comma club in 2011. That number has tripled with my RE holdings. Not just in equity, but in investable assets too.

The risk in RE can be mitigated as you can always sell out. You may lose 10%, or a bit more, but the property should hold it's value. With a stock, it can lose a lot more and never come back.

That is why, no matter what investment you choose, have some diversification. And a solid understanding of what you are getting into. With RE, you need a high risk premium.