Cash out 401(k) to invest in rehab prop?
Would it be a bad idea to cash out my 401(k) which is worth about 23K (I'd walk with only about 17K) for a house that I know I can make about 60K on? I'd need to borrow the 50K purchase price plus another 50-60K on the construction part of the loan. I'd use the 401(k) cash as my down payment and to pay off a 6k student loan. I would be moving into this house and renting out the house I own now.
Is it ever a good idea to cash out a 401(k) to invest in real estate?
krick,
This is a very serious question, and no offense, but I hope no one here gives an answer. This is really something that you would have to decide on you own. Here's some questions that I would answer before I made a decision though.
Can you make money renting out your current house (is the PITI less than the going rent)?
Can you "really" make $60K? It's hard to "know" what you can make. Rehabs especially are hard to gauge.
Do you really know how to rehab a house? Major rehabs are serious stuff, too. Construction overruns, delays, holding costs, and numerous other problems can quickly eat up any amount of potential profit if you're not completely sure of your figures (and a good cushion). Add inexperience and the common problem of over-rehabbing when you live in the property and you've got a possible money pit. CAUTION
Do you have a good exit strategy? How do you plan to sell the property?
After all is done, will you make more on the property than you would have if your money stayed in the 401K (interest/investment income, employer matching, and the tax/penalty hit)?
Don't forget to put the money back (plus a bonus) if you do decide to take it out.
Finally, have you discussed the possibility of just borrowing against the 401K instead? That way, you'd still have it all (no penalty) and your downpayment.
Roger
DISCLAIMER:
DON'T LISTEN TO ME
But, maybe, look into what I say or think about it. I am just a newbie, and don't know a whole lot about REI.
Personnally, I would never cash out my 401K, your penalty for doing so will be huge, especially if it throws you into a new tax bracket. You can borrow against it at little or no interest, but still, I wouldn't sacrifice MY money for a real estate investment when there are so many people dying to give you money to do so... Besides, buying 100% of the value of the current property to make 50% on your investment after repairs sounds like you might as well buy an empty lot and build a whole new house (dependent on where you live of course).
Maybe look into 203(k) programs with HUD, they will give you a good deal on your loan if you are going to be doing major repairs. Also, call some lenders first and ask them if they would give you the loan to buy and fix the place (it can't hurt to ask)...
I just think touching your retirement is silly, that is too big of a risk to take to invest in a risk free market.
My two-cents
Although different, I think both responses above have good information. If you intend to move into the property or can make that part of the plan, 203k loan FHA. If you can't do that, then Purchase and Improvement Loan is the answer, call the local bank.
Look, there is NO substitute for the power that cash gives you while negotiating, but it is a big risk...especially without experience.
Even a seasoned pro would find another way...
hope this helps,
clear2close
[addsig]
Thanks to all for your information and good advice!
We are looking at all our options and will make a decision about this property in the near future.
We are looking into a bank loan for 75% of the appraised (what there is to appraise) value of the property with a variable rate construction loan for 6 months.
Our offer - if we actually make it - is going to be very low, yet fair. We'll see if she takes it and go from there.
Thanks again for the good advice. I really appreciate it.
[addsig]