Author Topic: Help with Situation  (Read 2079 times)

FI Curious

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Help with Situation
« on: February 13, 2018, 07:41:46 PM »
So we made maybe not the best decision.  We purchased a piece of land with the intent to build a home on 1/5 and use the rest for a side hustle.  We put half down but we needed a loan for half.  The loan is set at a fixed rate for 3 years and then adjusts (I know, I KNOW).   When we purchased we thought we'd move pretty quickly into a construction loan but since our day jobs are insane progress has been very slow.  At this point I would rather just pay off the land loan and then build. 

The good news is we have good income and can throw a lot of extra towards it. I was also thinking of getting a 401k loan which is a fixed rate for 15 years and using it to pay off the land.  If we do this, we can pretty easily pay off the land in 1.5 years.  We would then pay off the 401k loans in the next year or two.  I like this idea because the loan is a fixed low rate and adjustable rates scare the crap out of me.  Please let me know if this is a really bad idea.  I feel pretty confident that we will have our current jobs for the next several years because business is booming.  We could still contribute to our 401ks under this scenario.

Just to explain a little more, a large lot like this is extremely rare to find in my high cost of living area.  It is close enough to commute to the city.  Also, I would welcome ideas for making money off of the land until we build. I have some ideas but would love to hear others.

MDM

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Re: Help with Situation
« Reply #1 on: February 13, 2018, 07:53:40 PM »
Knee-jerk reaction is "401k loan = bad idea".

You have to look at the details to see how it applies to your specific situation.

Mr. Green

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Re: Help with Situation
« Reply #2 on: February 13, 2018, 09:11:12 PM »
What would the fixed low rate on the 401k loan be? If the property is exceptionally rare it could be worth it under the right circumstances.

What is the side hustle you planned on the property? Do you know how the property is done? Do you know what the county or municipality's allowed uses are for that done? You need to be sure your plan doesn't run afoul of zoning regulations.

AMandM

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Re: Help with Situation
« Reply #3 on: February 13, 2018, 09:16:35 PM »
I'm a little confused. If you can pay off the land in 1.5 years, why not just do that on the current loan?

As for side hustles that are based on land, I can't think of any that don't require a lot of time, and it sounds like you don't have any of that to spare. Maybe rent it out airbnb-style to campers?

SC93

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Re: Help with Situation
« Reply #4 on: February 13, 2018, 09:43:34 PM »
I don't have any experience with it but the danger of a 401k loan is that if you leave the company you will need to repay the loan in full within 60 days. Pretty confident does not tell the future and no one knows 100% for sure. It's a risk, just like any other loan. Some people do it and it turns out fine but there are those that wish they had never done it. I say either cut back and pay the loan off if it is THAT important or sell it if you aren't willing to cut back.

Valhalla

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Re: Help with Situation
« Reply #5 on: February 14, 2018, 01:23:48 AM »
Pay as aggressively on the loan for 3 years while rate is low.  Then consider doing a 401k towards the end if the rates jack up too high, or refinance.

former player

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Re: Help with Situation
« Reply #6 on: February 14, 2018, 02:49:12 AM »
The reference to slow progress on the build suggests to me that the initial 3 year period is close to running out, so that advice to pay aggressively for the three years is probably not applicable.

The first thing to do is a full evaluation on keeping the land at all.  The failure to make progress, coupled with the question about making money off the land as it currently is means that the build is not an immediate priority.    Also, the fact that the loan just to buy the land is creating a financial issue makes me wonder about where the money for the build would be coming from.   In those circumstances the need is to make a serious plan for getting the build done, including financing and time allocation.  If there isn't a way to make it work in a known time span the better option could be to sell the land and try again when finances and time issues permit.

If OP is serious about keeping the land even without being able to get on with the build, they need to crunch the numbers as to how much it is going to cost them to keep it over say the next 5 years.  What's the new rate on the existing loan?  What are the costs of getting a new commercial loan, both the interest rate and the closing costs?   The problem with the 401(k) loan is partly the need to pay it off immediately if you leave your jobs and partly the fact that you are taking your money out of investments for it, which means that the cost is the compounding loss of market returns on that money over the period of the loan.  It's a hidden cost compared to a commercial loan which is why it looks to be potentially a better deal: it really isn't.

FI Curious

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Re: Help with Situation
« Reply #7 on: February 14, 2018, 06:22:30 AM »
I'm a little confused. If you can pay off the land in 1.5 years, why not just do that on the current loan?

As for side hustles that are based on land, I can't think of any that don't require a lot of time, and it sounds like you don't have any of that to spare. Maybe rent it out airbnb-style to campers?

We can pay off the land in 1.5 years only once we apply the 401k loan amount to principal.  We might be able to manage paying off the land loan in 3-4 years without a 401k loan but doing the 401k loan gives me more peace about it since it is longer term and a lower fixed rate.

The side business is something I'm developing slowly to do when I 'retire'. I was thinking about doing a glamping campsite- that is a possibility.  It feels rural but it is actually close to town and it is on a bike route.

FI Curious

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Re: Help with Situation
« Reply #8 on: February 14, 2018, 06:24:26 AM »
Pay as aggressively on the loan for 3 years while rate is low.  Then consider doing a 401k towards the end if the rates jack up too high, or refinance.

The only issue with this is the rates for the 401k loan are going up.  When I first considered doing this the rate was 3.25 but now it is 4.25.  Land loan is 5.125 (rates for land are typically not as good as for residential loans).

FI Curious

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Re: Help with Situation
« Reply #9 on: February 14, 2018, 06:29:54 AM »
The reference to slow progress on the build suggests to me that the initial 3 year period is close to running out, so that advice to pay aggressively for the three years is probably not applicable.

The first thing to do is a full evaluation on keeping the land at all.  The failure to make progress, coupled with the question about making money off the land as it currently is means that the build is not an immediate priority.    Also, the fact that the loan just to buy the land is creating a financial issue makes me wonder about where the money for the build would be coming from.   In those circumstances the need is to make a serious plan for getting the build done, including financing and time allocation.  If there isn't a way to make it work in a known time span the better option could be to sell the land and try again when finances and time issues permit.

If OP is serious about keeping the land even without being able to get on with the build, they need to crunch the numbers as to how much it is going to cost them to keep it over say the next 5 years.  What's the new rate on the existing loan?  What are the costs of getting a new commercial loan, both the interest rate and the closing costs?   The problem with the 401(k) loan is partly the need to pay it off immediately if you leave your jobs and partly the fact that you are taking your money out of investments for it, which means that the cost is the compounding loss of market returns on that money over the period of the loan.  It's a hidden cost compared to a commercial loan which is why it looks to be potentially a better deal: it really isn't.

We are a little less than one year into the land loan. The thing is that once the land is paid off, we can build a house slowly doing much of the work ourselves and subcontracting out.  This is preferable to us and the spouse has construction experience.  It might not make financial sense in the short term but long term it would work out.  Also the land is being developed slowly for my side business which involves a long term passion of mine.  I don't expect this to be a huge money maker but I do expect to be profitable.
« Last Edit: February 14, 2018, 06:44:47 AM by FI Curious »

FI Curious

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Re: Help with Situation
« Reply #10 on: February 14, 2018, 06:36:53 AM »
What would the fixed low rate on the 401k loan be? If the property is exceptionally rare it could be worth it under the right circumstances.

What is the side hustle you planned on the property? Do you know how the property is done? Do you know what the county or municipality's allowed uses are for that done? You need to be sure your plan doesn't run afoul of zoning regulations.

Property is zoned for agriculture.  I believe I could actually have a campground.  I have checked the zoning but I should probably look at it again to see if it gives me any ideas about something I could do to earn extra cash from the land.  My side business that I'm developing involves agriculture but that will take several years to develop.  I could do a glamping site or rent out to someone with a tiny house.

FI Curious

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Re: Help with Situation
« Reply #11 on: February 14, 2018, 06:41:26 AM »
I don't have any experience with it but the danger of a 401k loan is that if you leave the company you will need to repay the loan in full within 60 days. Pretty confident does not tell the future and no one knows 100% for sure. It's a risk, just like any other loan. Some people do it and it turns out fine but there are those that wish they had never done it. I say either cut back and pay the loan off if it is THAT important or sell it if you aren't willing to cut back.

I agree it is a risk but the hope is that all loans will be paid fully within 3-4 years.  We have a lot of cushion in our retirement accounts if there was a catastrophe and we had to pay back immediately.  It would suck but we'd get through it.

jlcnuke

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Re: Help with Situation
« Reply #12 on: February 14, 2018, 06:48:57 AM »
Doing napkin math, if your potential 401k loan is going to have you pay off the property in 1.5 yrs vs ~4 years, that's 2.5 years earlier with a max of $50k (max loan amount) from your 401k. That equates to a "non-401k loan balance) of ~$40k 1.5 years from now.  You don't say what the loan term is, but even if the rate goes up to 8% or so, are you really going to pay enough in interest (assuming paying it down aggressively) to justify 4 years of reduced 401k growth? I can't imagine it would (especially knowing that your loan's interest rate is well below average historical market returns).

FI Curious

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Re: Help with Situation
« Reply #13 on: February 14, 2018, 06:55:28 AM »
Doing napkin math, if your potential 401k loan is going to have you pay off the property in 1.5 yrs vs ~4 years, that's 2.5 years earlier with a max of $50k (max loan amount) from your 401k. That equates to a "non-401k loan balance) of ~$40k 1.5 years from now.  You don't say what the loan term is, but even if the rate goes up to 8% or so, are you really going to pay enough in interest (assuming paying it down aggressively) to justify 4 years of reduced 401k growth? I can't imagine it would (especially knowing that your loan's interest rate is well below average historical market returns).

Good point. I think I need to do some calculations using different possible rates for the adjustable loan after the 3 year period is up to see the outcome vs. going the 401k loan route.  I think it is just the fear of 'adjustable rate' that is driving me to think about the 401k loan.  Not sure how I would factor in potential market gains/losses in the 401k. Seems like we are due for a correction. Either way I'm sure the company that runs the 401k will find a way to screw me over one way or the other.
« Last Edit: February 14, 2018, 07:05:58 AM by FI Curious »

radram

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Re: Help with Situation
« Reply #14 on: February 14, 2018, 07:12:15 AM »
Doing napkin math, if your potential 401k loan is going to have you pay off the property in 1.5 yrs vs ~4 years, that's 2.5 years earlier with a max of $50k (max loan amount) from your 401k. That equates to a "non-401k loan balance) of ~$40k 1.5 years from now.  You don't say what the loan term is, but even if the rate goes up to 8% or so, are you really going to pay enough in interest (assuming paying it down aggressively) to justify 4 years of reduced 401k growth? I can't imagine it would (especially knowing that your loan's interest rate is well below average historical market returns).

I agree with this. We can only only speculate since you have not mentioned what the new rate will be(since you most likely won't know until the increase at the end of the term).

It sounds like you are getting worked up for what might be nothing. If it is a few years, so what if the rate jumps a few points. The risks of market loss, or forced repayment if a job loss for a 401k loan doesn't seem worth it.

You mentioned something about having a cushion if you had to pay the 401k back immediately. Why not just plan to use that to pay the loan if the terms become too steep at the new rate and be done with it?

Maenad

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Re: Help with Situation
« Reply #15 on: February 14, 2018, 07:20:59 AM »
If the land is zoned for agriculture, can you rent it out to farmers? That's a fairly common thing here, but I don't know about your area.

Scandium

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Re: Help with Situation
« Reply #16 on: February 14, 2018, 07:32:15 AM »
The reference to slow progress on the build suggests to me that the initial 3 year period is close to running out, so that advice to pay aggressively for the three years is probably not applicable.

The first thing to do is a full evaluation on keeping the land at all.  The failure to make progress, coupled with the question about making money off the land as it currently is means that the build is not an immediate priority.    Also, the fact that the loan just to buy the land is creating a financial issue makes me wonder about where the money for the build would be coming from.   In those circumstances the need is to make a serious plan for getting the build done, including financing and time allocation.  If there isn't a way to make it work in a known time span the better option could be to sell the land and try again when finances and time issues permit.

If OP is serious about keeping the land even without being able to get on with the build, they need to crunch the numbers as to how much it is going to cost them to keep it over say the next 5 years.  What's the new rate on the existing loan?  What are the costs of getting a new commercial loan, both the interest rate and the closing costs?   The problem with the 401(k) loan is partly the need to pay it off immediately if you leave your jobs and partly the fact that you are taking your money out of investments for it, which means that the cost is the compounding loss of market returns on that money over the period of the loan.  It's a hidden cost compared to a commercial loan which is why it looks to be potentially a better deal: it really isn't.

We are a little less than one year into the land loan. The thing is that once the land is paid off, we can build a house slowly doing much of the work ourselves and subcontracting out.  This is preferable to us and the spouse has construction experience.  It might not make financial sense in the short term but long term it would work out.  Also the land is being developed slowly for my side business which involves a long term passion of mine.  I don't expect this to be a huge money maker but I do expect to be profitable.

So you don't have enough time to star planning building a house, but you will put the house up yourself? oookay... Will you also build, run and maintain a campsite at the same time, or does that come later?
Also, betting your money on running a camp site seems extremely risky to me. Imagine it's somewhat capital expensive, with all the facilities etc you need? If it's glamping it would have to be pretty fancy right? Saunas and stuff? What's the market for this? Are there others around, are they making money? With AirBNB being cheap how many people camp?

If it's zoned for agriculture I think getting int marijuana farming is less risky..

FI Curious

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Re: Help with Situation
« Reply #17 on: February 14, 2018, 07:38:02 AM »
The reference to slow progress on the build suggests to me that the initial 3 year period is close to running out, so that advice to pay aggressively for the three years is probably not applicable.

The first thing to do is a full evaluation on keeping the land at all.  The failure to make progress, coupled with the question about making money off the land as it currently is means that the build is not an immediate priority.    Also, the fact that the loan just to buy the land is creating a financial issue makes me wonder about where the money for the build would be coming from.   In those circumstances the need is to make a serious plan for getting the build done, including financing and time allocation.  If there isn't a way to make it work in a known time span the better option could be to sell the land and try again when finances and time issues permit.

If OP is serious about keeping the land even without being able to get on with the build, they need to crunch the numbers as to how much it is going to cost them to keep it over say the next 5 years.  What's the new rate on the existing loan?  What are the costs of getting a new commercial loan, both the interest rate and the closing costs?   The problem with the 401(k) loan is partly the need to pay it off immediately if you leave your jobs and partly the fact that you are taking your money out of investments for it, which means that the cost is the compounding loss of market returns on that money over the period of the loan.  It's a hidden cost compared to a commercial loan which is why it looks to be potentially a better deal: it really isn't.

We are a little less than one year into the land loan. The thing is that once the land is paid off, we can build a house slowly doing much of the work ourselves and subcontracting out.  This is preferable to us and the spouse has construction experience.  It might not make financial sense in the short term but long term it would work out.  Also the land is being developed slowly for my side business which involves a long term passion of mine.  I don't expect this to be a huge money maker but I do expect to be profitable.

So you don't have enough time to star planning building a house, but you will put the house up yourself? oookay... Will you also build, run and maintain a campsite at the same time, or does that come later?
Also, betting your money on running a camp site seems extremely risky to me. Imagine it's somewhat capital expensive, with all the facilities etc you need? If it's glamping it would have to be pretty fancy right? Saunas and stuff? What's the market for this? Are there others around, are they making money? With AirBNB being cheap how many people camp?

If it's zoned for agriculture I think getting int marijuana farming is less risky..

House build is planned for later and basically since the land would be paid off we could go as quickly or as slowly as we like.  Spouse has been unusually busy for the past year. I wasn't going to do a full blown campground- it was just something I remembered that was allowed from looking at the zoning.  One glamping site would be doable to set up.  But the easiest would probably be renting out to someone who has a tiny house.  Marijuana might be an option but there are strict rules around that so I'd have to do some research. 

ScreamingHeadGuy

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Re: Help with Situation
« Reply #18 on: February 14, 2018, 02:08:00 PM »
The reference to slow progress on the build suggests to me that the initial 3 year period is close to running out, so that advice to pay aggressively for the three years is probably not applicable.

The first thing to do is a full evaluation on keeping the land at all.  The failure to make progress, coupled with the question about making money off the land as it currently is means that the build is not an immediate priority.    Also, the fact that the loan just to buy the land is creating a financial issue makes me wonder about where the money for the build would be coming from.   In those circumstances the need is to make a serious plan for getting the build done, including financing and time allocation.  If there isn't a way to make it work in a known time span the better option could be to sell the land and try again when finances and time issues permit.

If OP is serious about keeping the land even without being able to get on with the build, they need to crunch the numbers as to how much it is going to cost them to keep it over say the next 5 years.  What's the new rate on the existing loan?  What are the costs of getting a new commercial loan, both the interest rate and the closing costs?   The problem with the 401(k) loan is partly the need to pay it off immediately if you leave your jobs and partly the fact that you are taking your money out of investments for it, which means that the cost is the compounding loss of market returns on that money over the period of the loan.  It's a hidden cost compared to a commercial loan which is why it looks to be potentially a better deal: it really isn't.

We are a little less than one year into the land loan. The thing is that once the land is paid off, we can build a house slowly doing much of the work ourselves and subcontracting out.  This is preferable to us and the spouse has construction experience.  It might not make financial sense in the short term but long term it would work out.  Also the land is being developed slowly for my side business which involves a long term passion of mine.  I don't expect this to be a huge money maker but I do expect to be profitable.

So you don't have enough time to star planning building a house, but you will put the house up yourself? oookay... Will you also build, run and maintain a campsite at the same time, or does that come later?
Also, betting your money on running a camp site seems extremely risky to me. Imagine it's somewhat capital expensive, with all the facilities etc you need? If it's glamping it would have to be pretty fancy right? Saunas and stuff? What's the market for this? Are there others around, are they making money? With AirBNB being cheap how many people camp?

If it's zoned for agriculture I think getting int marijuana farming is less risky..

House build is planned for later and basically since the land would be paid off we could go as quickly or as slowly as we like.  Spouse has been unusually busy for the past year. I wasn't going to do a full blown campground- it was just something I remembered that was allowed from looking at the zoning.  One glamping site would be doable to set up.  But the easiest would probably be renting out to someone who has a tiny house.  Marijuana might be an option but there are strict rules around that so I'd have to do some research.

If you plan to use it for tiny house siting/camping you should investigate requirements for wells and toilet facilities (and any required septic tank, fields, or holding tanks).  A campground sounds like a low up-front cost option, but it can be quite costly if you have "bad" soils.  You do not want to run afoul of zoning and public health ordinances.