| Posted by: martin Oct 12 2002, 07:10 PM |
I would like to purchase an income rental property.
Should i use money from ny 401k at 5% for four years or use the equity from my home at 6% for 15 years.
Ive heard you should never take loans out on the roof over you own head just in case you run into financial trouble and ive heard you get a better tax write off when using yore home equity.
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| Posted by: loanuniverse Oct 12 2002, 11:41 PM |
There is no general answer to the question and it really depends on your tolerance for risk and your personal preference. If I were in your position, I would come up with some kind of checklist and depending on my answers I would decide which way to go. But first, I got to tell you that borrowing against the equity in your personal residence is most of the times tax deductible, which could mean a substantial discount when compared to other types of borrowing such as from your 401k.
Now to the questions.
1- How much money can you borrow against your house and your 401k? (Is either of them enough) Some of the 401k plans also have certain restrictions on borrowing. Check with your plan administrator, you might not even have to make a choice.
2- What kind of mortgage do you have and at what kind of pricing? Rates are at an all time low, if your current mortgage rate is high enough, you could combine your need of funds for investment with a refinancing.
3- If you are thinking home equity loan, is the rate fixed or is it adjustable? (15 years is a long time and I don't think 4.75% prime will be around during all that time).
4- On one hand you have a four year amortization on the other you have a fifteen year amortization. Can you make the payments on the four year one without affecting your lifestyle?
5- If you are not currently paying Private Mortgage Insurance (PMI) will additional borrowing take you to the point where you will need it again? (This will increase the cost of funds).
6- When you borrow from your 401k, you are replacing your investments in the retirement plan with a loan to yourself. Do you think that your investments will make more than 5% a year? I understand that 5% looks pretty good because everyone's 401k has been hurting lately, but you got to think future not past performance.
I hope that this helps you somewhat. Thanks for the visit. If I think of anything else, I will post it here.
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| Posted by: martin Oct 13 2002, 06:47 PM |
First i would like to thank you for information you sent in your reply.
1) I want to borrow $20,000 for a forclosed house which i could rent out for $800.00 a month through the government section 8 program.
The loan from my 401k would be a personal loan for 4 years. I understand that loan will not be tax deductable the payment would be $500 a month .
after 4 years the loan is paid by the tenant. If i take an equity loan out the payment would be less each month for the same amount borrowed over 15 years. I wonder if im better off paying the loan off in four years with no loan tax write off or spreading the payments out over 15 years with tax deductable interest.? I ask these question because if the tenant is paying the loan for me in 4 years i coild take out another personal loan and have two houses paud for free and clear in no time which would give me extra income for retirement. down the rd. If this is not the way investors do it i would appreciate any guidance Thanks Martin
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| Posted by: loanuniverse Oct 14 2002, 02:51 PM |
The whole situation sounds good if you can afford to cover the shortage during the first 4 years:
Assuming a $100,000 house (let's work with those numbers).
Income: $800 a month or $9,600 a year
Expenses:
Taxes: $1,800 a year (remember no homestead exemption)
Insurance: $1,500 a year
Borrowing from 401k at 5% for 4 years: $5,520
Borrowing $80,000 at 6% for 25 years: $6,180
Repairs & Maintenance (estimated): $1,000
Total expenses: $16,000
Take into consideration that we are not even adjusting the income to reflect vacancies and I find it difficult to see this as a good investment. You have the real estate appreciation working for you, and you can count on the building of equity also, but you will be out about $6,000 every year for the first four years. On the other hand, I agree that you could end up with 4 houses in 16 years if you were to buy one every four years as the tenant can probably cover the debt service alone after the fourth year.
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| Posted by: martin Oct 15 2002, 07:04 AM |
Thanks for info.
As you can tell i want to educate myself in the investment rental property arena. If its not against the rules to ask, out of all the information and scams out there what direction could you guide me in to learn about investing in rental property. I looked at how you crunched the numbers for me in your reply.
and in doing so was able to determine cash flow after expenses. I want to be on the right path to learn and not spend money on scams.
Also would you be able to finance rental property. If so where would i fill out your loan application. |
| Posted by: loanuniverse Oct 15 2002, 08:49 AM |
Investing in rental property is not that hard to figure out. As long as you don’t pay more than a fair price for the property, have the right attitude to deal with tenants and know enough about repairs not to get overcharged by repairman, you can be successful at this. Before you start, you should do the following:
1) Get yourself familiar with Analyzing the debt Repayment ability of Income Producing Property. Go over the information in http://www.loanuniverse.com/rental.html .
2) Using the information in that page practice with some real life examples in your area and see if they make sense.
3) Decide if you are going to create a legal entity to hold your rental property.
4) Remember that getting financing will depend on the ability of the rental income to pay for the property. If after doing the math you see that the debt service coverage is not adequate and you still want to get the property you could ask that your personal income is taken into consideration as a source of repayment. You can do this by simply writing on the part of the loan application that asks for source of repayment the following: “rental income supplemented by personal income of borrower (or guarantor if you created a corporation)”
Regarding being able to help you get a loan, I will have to quote my FAQ ……. I am not really in the business of giving loans, I am in the business of assessing the risk associated with those loans, and I would prefer to keep this website and my work at the bank separate. If you need help, I can give you a rough idea of your chances or advice on preparation and the most effective route to take in order to get a loan, but not get involved in the actual approval of the loan.
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