I have been really interested in real estate investing for several years now. I've read multiple books and lurked on different blogs/forums (mostly biggerpockets).The market I live in seems to be pretty unique and I don't see rental properties being worth my time. You would be hard pressed to find a home that meets the 2% rule in my area.With rental properties out of the question, I've been watching distressed homes for possible flips over the last 2 years or so and in that time I have seen maybe 2-3 that would meet the 70% ARV - Repairs rule.
It's gotten to the point that I would like to jump in and attempt to make some money off a flip in the next year or so, and continue flipping on the side if it ends up being profitable. I have started laying out various steps that I need to take in order to peruse this. I have an agent to work with but still need to find a good General Contractor. My main concern is financing. I have talked to a mortgage broker that specializes in rehab loans and said he can finance up to 85% of the purchase + repairs needed. At the price point we are targeting, we would need about 37-45k down for purchase/closing.
This is where it gets a little interesting. We have been "good" mustachians the last several years which means we have a sizable amount of money put away. The issue is the majority of our money is stocked in taxed advantages accounts (401k's, IRA's, HSA's) that we cannot access easily for flipping. However, recently I started looking into 401k loans to possible finance part of the flip and what I found was pretty interesting. Below is a quick look at my companies 401k loan structure.
Loan amount = 50,000 or 50% of 401k balance, whichever is less.
Interest rate = 4.75% (both principle and interest payments are paid directly into your 401k account)
Fees = 181.25 (5 year loan with 50.00 set up fee and 6.25 quarterly maintenance fee)
Contribution restrictions = None (You can continue to contribute and receive matches while making 401k loan payments)
Gotch ya's = Miss out on returns. If you leave your company, 100% of the outstanding balance is due.
Bi-Monthly Payment = 468.52
Brief summary of our current financial status.
Non tax sheltered savings = 21,000 (Money we could use towards a flip)
Tax Sheltered Investments = 203,000
Home Equity/Other = 55,000
Total Net Worth = 278,000
Current gross income = 120-130k/yr (Before taxes, insurance, HSA contributions, and two 401k account contributions.)
Our current savings rate is around 60-70% which allows us to max our 401k's, HSA's, and IRA's. Our high savings rate does give us flexibility in our budget. If things went wrong we could easily cash-flow the 401k loan repayment. Obviously there are risks involved but the 401k loan is starting to look like a pretty good deal for accessing tax sheltered investments for short term non tax sheltered investing (House Flipping).
I would love to know your thoughts on this situation and if you would take advantage of the 401k loan. Please point out any disadvantages that I am missing.
Also, we are in our mid 20's if that helps anyone...
Thanks in advance!