Loans from retirement fund

[ngordonmd]

I have a somewhat complex scenario that I will sum up quickly before asking my question. I am a resident physician looking to buy a duplex/triplex. I have lived at home for the first 2 years of residency to save money for the purchase. My original plan was to take out an FHA loan and put 10% down. However, the market where I am looking is so competitive for rental properties, that they are being bought up immediately by all cash offers.

So the new plan is to borrow from my father so I can make a cash offer, and then do a full refinance to pay him back. The only source of money he has available in that amount is his retirement fund. The first option that we explored was taking the money straight out and then putting it back it, however we found out that he would only have 60 days to put the money back in before he would be taxed on it, which would be cutting it too close. The other option would be for him to borrow from the fund, but that has a $50,000 cap and the property would likely run $250,00-$300,000.

We spoke with his accountant who said there was another option that included loaning the money to a third party who could not be an immediate relative who could then endorse the check to me. The third party would have a promissory note saying they would pay the money back with interest within 5 years and I would also sign a note saying that I would make payments to third party. I have not been able to find any information on such a transaction. My questions are:

1. Is this transaction possible?

2. Is there also a $50,000 cap on the amount

Thanks for any information/advice.

[artwest]

In my opinion none of these options are wise.

First, borrowing from a relative (even if it is a parent) will cause a strain on the relationship.

Second, borrowing from a retirement account is a terrible idea. As you have discovered, if you do not put the money back in 60 days you will e charged a 10% penalty (if the borrower is under age 59 1/2) for early withdrawal plus you must pay taxes on that money. You will also lose the interest that money may have earned over the time that it was out of the account.

Third, adding a third party would only make things more complicated and increase risk. That is never a good idea.

In my opinion, your best bet is to continue to save cash. If a property becomes available, make an offer, if it is accepted, take out a loan from a bank or credit union like you normally would. If you are meant to have a property, you will get it. Be patient, you seem to have "house fever".

[bjl584]

Originally Posted by ngordonmd

I have a somewhat complex scenario that I will sum up quickly before asking my question. I am a resident physician looking to buy a duplex/triplex. I have lived at home for the first 2 years of residency to save money for the purchase. My original plan was to take out an FHA loan and put 10% down. However, the market where I am looking is so competitive for rental properties, that they are being bought up immediately by all cash offers.

So the new plan is to borrow from my father so I can make a cash offer, and then do a full refinance to pay him back. The only source of money he has available in that amount is his retirement fund. The first option that we explored was taking the money straight out and then putting it back it, however we found out that he would only have 60 days to put the money back in before he would be taxed on it, which would be cutting it too close. The other option would be for him to borrow from the fund, but that has a $50,000 cap and the property would likely run $250,00-$300,000.

We spoke with his accountant who said there was another option that included loaning the money to a third party who could not be an immediate relative who could then endorse the check to me. The third party would have a promissory note saying they would pay the money back with interest within 5 years and I would also sign a note saying that I would make payments to third party. I have not been able to find any information on such a transaction. My questions are:

1. Is this transaction possible?

2. Is there also a $50,000 cap on the amount

Thanks for any information/advice.

I would not pursue this plan. Why do you want to buy rental properties when you don't have any capital or even a primary residence of your own?

Do you know anything about owning rental properties? Do you have a cash reserve for inevitable vacancies and repairs?

I would forget this idea and just save up money to buy your own place first. Rental properties isn't something that you want to get involved with until your financial picture looks a lot better.

[dczech09]

You have house fever as the previous person stated. And house fever is never a good mindset to be making decisions.

The fact that you have to choose from three complex options should be a sign that this is not a good idea. The acqusition of a home should never be this complicated.

Do not borrow from your relative; I personally believe that oweing money to a relative is worse than oweing a bank money.

Your dad should not borrow from the retirement account. The only time it is every wise to borrow from a retirement account is to avoid bankruptcy. Even still, thats a last resort.

Do not get a third party involved. Yes there are options of this kind out there. What it sounds like is peer to peer lending which is VERY risky as the amount of accountability is rather low.

Take your time. Justify your decision logically and allow yourself to get over this "high." Save your money for the down payment and stick to your original plan.

[ngordonmd]

Thank you for the response, however it didn't exactly answer my questions. Just to clarify a few things....I have already been approved for an FHA loan, which according to my lender, will have the same requirements as the FHA refinance that I plan on doing. So the loan from his retirement will only be for a max of 6 months. I plan to buy the property with cash and immediately get the FHA refinance and pay him back. In the mean time, we agreed to set the interest rate of the loan to match what his retirement fund is making. According to his financial adviser, this is between 4-5%, so that is the interest I will be paying him, so that he is does not lose a cent through this process.

It's not so much that I have "house fever." I am 31 years old and need to move out of my parents house. I plan on staying in this area indefinitely, so buying a rental that I can occupy half of and rent the other half is a good investment for me. As in most places, the housing market is down here, but the rental market in the area that I want to buy is still very good. Most of the places that I have looked at are priced so that I would be able to live in half of the property and cover almost the entire monthly mortgage with rent from the other half. I know other people that have tried to buy with a conventional loan, but have failed because all cash buyers come in and their offers get accepted over a financed offer.

[bjl584]

Originally Posted by ngordonmd

Thank you for the response, however it didn't exactly answer my questions. Just to clarify a few things....I have already been approved for an FHA loan, which according to my lender, will have the same requirements as the FHA refinance that I plan on doing. So the loan from his retirement will only be for a max of 6 months. I plan to buy the property with cash and immediately get the FHA refinance and pay him back. In the mean time, we agreed to set the interest rate of the loan to match what his retirement fund is making. According to his financial adviser, this is between 4-5%, so that is the interest I will be paying him, so that he is does not lose a cent through this process.

It's not so much that I have "house fever." I am 31 years old and need to move out of my parents house. I plan on staying in this area indefinitely, so buying a rental that I can occupy half of and rent the other half is a good investment for me. As in most places, the housing market is down here, but the rental market in the area that I want to buy is still very good. Most of the places that I have looked at are priced so that I would be able to live in half of the property and cover almost the entire monthly mortgage with rent from the other half. I know other people that have tried to buy with a conventional loan, but have failed because all cash buyers come in and their offers get accepted over a financed offer.

General rule for buying a home is 20% down with conventional financing (15 or 30 year note) plus a 6 month emergency fund in place. If you have to go through FHA it probably means that you don't have the above criteria.

If you absolutely want out of your parents' home, I would:

Go get an apartment while saving up for a traditional single family home (less chance of a cash offer coming from a real estate investor with this type of home.) Then, after you get yourself established financially, look into rental properties.

[ngordonmd]

So this is what I do not understand.....many of my family members, including my dad, bought a duplex for their first home. How is this considered a bad investment? My parents currently own 2 duplexes in roughly the same area. One of them recently became vacant. In the first 2 days they had 50 calls to rent the apartment and were actually offered more rent money from one person than advertised. So here's the scenario.....the last property that I looked at (which was bought in 2 days of being on the market by a cash investor) was selling for $260,000. It was a triplex with a large 1700 sqr ft 2 bedroom on top, which I would live in and 2 single bedroom apartments on the bottom floor. The singles were renting for $1000 each. My mortgage with 10% down would have been between $1600-1700. So essentially I would live for free and come out a little on top each month.

As far as borrowing from the retirement fund, I am not talking about a 5 year loan but more likely a 5 month loan. Like I said, I have already been approved for an FHA full refinance, so I will be able to get that done within a couple of months of buying the house. FHA seems the best route for me as the interest rate I am getting is 3.75%, which is better than the conventional loan. I could put the full 20% down, but why would I if I can afford the mortgage payments with only 10% down.

I know that there are risks with a duplex/triplex, but I think if you take all the necessary steps to minimize your risk, e.g. getting a good house inspection before buying, buying with renters already occupying the other half, it can be a good investment. I realize that I am inexperienced, but its hard to argue with the numbers.

[bjl584]

Originally Posted by ngordonmd

So this is what I do not understand.....many of my family members, including my dad, bought a duplex for their first home. How is this considered a bad investment? My parents currently own 2 duplexes in roughly the same area. One of them recently became vacant. In the first 2 days they had 50 calls to rent the apartment and were actually offered more rent money from one person than advertised. So here's the scenario.....the last property that I looked at (which was bought in 2 days of being on the market by a cash investor) was selling for $260,000. It was a triplex with a large 1700 sqr ft 2 bedroom on top, which I would live in and 2 single bedroom apartments on the bottom floor. The singles were renting for $1000 each. My mortgage with 10% down would have been between $1600-1700. So essentially I would live for free and come out a little on top each month.

As far as borrowing from the retirement fund, I am not talking about a 5 year loan but more likely a 5 month loan. Like I said, I have already been approved for an FHA full refinance, so I will be able to get that done within a couple of months of buying the house. FHA seems the best route for me as the interest rate I am getting is 3.75%, which is better than the conventional loan. I could put the full 20% down, but why would I if I can afford the mortgage payments with only 10% down.

I know that there are risks with a duplex/triplex, but I think if you take all the necessary steps to minimize your risk, e.g. getting a good house inspection before buying, buying with renters already occupying the other half, it can be a good investment. I realize that I am inexperienced, but its hard to argue with the numbers.

Renting is a hot market right now because of the housing crisis. But a few years from now that could change. Just because 50 people called inquiring about a rental unit today, that doesn't mean that the market will be so hot in the future. I'm surprised FHA is granting financing on a rental unit, especially with only 10% down. Would you be able to afford your house if the market turned downward and you had vacant units for several months or longer? You will have to run the numbers. Do you have other debts or plans such as a new car in your future?

[disneysteve]

You are still a resident. That means that you have no idea where you will be working once you complete your training. What if you buy this place now and 2 years from now, you get a job way across town or across the country? When I finished my residency, I took a job about 45 minutes away. I commuted just until I knew I was happy there and then bought a house 20 minutes away. Had I bought the house we were renting originally, I would have been stuck selling it within a year or two of buying it.

I say wait until you are settled in a job.

[ngordonmd]

I am able to get the FHA loan because I will be occupying one half of the property. One of the reasons that I am interested in making this investment is that I can easily cover the mortgage without the rent money from the other half if I need to. As for where I will be living...I plan on doing fellowship at the same hospital that I am at, so will be in the same area for at least another 4.5 years. I also plan on staying here once I graduate.

[riverwed070707]

Originally Posted by ngordonmd

So this is what I do not understand.....many of my family members, including my dad, bought a duplex for their first home. How is this considered a bad investment? My parents currently own 2 duplexes in roughly the same area. One of them recently became vacant. In the first 2 days they had 50 calls to rent the apartment and were actually offered more rent money from one person than advertised. So here's the scenario.....the last property that I looked at (which was bought in 2 days of being on the market by a cash investor) was selling for $260,000. It was a triplex with a large 1700 sqr ft 2 bedroom on top, which I would live in and 2 single bedroom apartments on the bottom floor. The singles were renting for $1000 each. My mortgage with 10% down would have been between $1600-1700. So essentially I would live for free and come out a little on top each month.

As far as borrowing from the retirement fund, I am not talking about a 5 year loan but more likely a 5 month loan. Like I said, I have already been approved for an FHA full refinance, so I will be able to get that done within a couple of months of buying the house. FHA seems the best route for me as the interest rate I am getting is 3.75%, which is better than the conventional loan. I could put the full 20% down, but why would I if I can afford the mortgage payments with only 10% down.

I know that there are risks with a duplex/triplex, but I think if you take all the necessary steps to minimize your risk, e.g. getting a good house inspection before buying, buying with renters already occupying the other half, it can be a good investment. I realize that I am inexperienced, but its hard to argue with the numbers.

Its a bad investment because you can't afford to do it.

Wait until you have the means to buy, then buy. Don't buy just because its a hot market and you think you can get a deal. For me, the risk of having something potentially go wrong and leaving my dad high and dry would be enough for me to pass on that idea and move on to something else. What happens if something goes wrong with the refi and you can't get approved? What if the house doesn't pass inspection (FHA has their own, different from the kind you'd hire from the initial sale) or any number of things that can make a sale fall through and you can't repay the money? You need to have a solid plan that doesn't end with "lets just hope that doesn't happen".

[disneysteve]

Originally Posted by ngordonmd

I plan on doing fellowship at the same hospital that I am at, so will be in the same area for at least another 4.5 years. I also plan on staying here once I graduate.

I would not buy a house that I was only sure I'd be in for 4.5 years. Also, just because you plan to stay there once you finish your program doesn't mean that will happen. You will go where the jobs are at the time. That might be where you are now or it might be somewhere else. No way to know that until the time comes.

I also wouldn't buy a house without 20% down and a nice healthy emergency fund of at least 6 months of expenses including all costs associated with the property if it were to be vacant for a period of time.

[ngordonmd]

It seems to me that most people are discouraging me from doing this based upon the risk associated with the purchase. Here are the best and worse case scenarios that I see....

Best case: I find a duplex for around $250,000. I am able to refinance 1 month after purchase and repay my Dad in full. My mortgage is roughly $1600 per month with 10% down on an FHA loan at 3.75%. I live in half and rent the other half for roughly $1400 and I have few to no months of vacancy (a very real scenario in the area that I am looking). So now the money I have saved is invested in a duplex in an area of town (midnight/downtown) that has the best chance of gaining value over the next 10 years, and I am essentially paying $200/month to live. I still have my emergency funds in place, and I will be able to save considerably each month because most of the mortgage is covered in rent.

Worst case: I buy a duplex for the same amount. I go to refinance and don't meet FHA requirements, so I have to make fixes to the property that costs me $20,000 and takes 6 months. I have to pay interest on the loan from my Dad for those 6 months, but continue to live with the parents in order to save. I am able to save about $2500 per month when I live with them. And lets assume that during those 6 months I had no renters. So I'm making payments to my Dad for $1700 while using some of my savings to do the repairs. I get the refinance after 6 months and am able to pay him back. I then am out $20,000 which would still leave me with a large savings.

I know there are even worse scenarios than that that involve tornadoes, meteors and Godzilla, but I think if I take all the right steps I can minimize the risk. If you look at the best case scenario, I dont know how you can argue with that investment. Even if I do move away and keep the property and am renting out each unit for $1400. I would then be collecting $2800 on a $1600 mortgage. And yes I know that rentals are work, but I don't mind work if it reaps reward.

[bjl584]

Professional real estate investors are buying up properties for cash. Have you researched why? Do you know if any of them have financed through FHA with a downpayment out of a retirement account? If no, do you know why?

You aren't going to get any support for this plan here. Dipping into retirement accounts, especially someone elses is going to be met with negativity. So if obtaining financing through FHA.

Rental properties aren't going anywhere. They will still be there when you are financially ready to buy one.

[BuckyBadger]

I wouldn't dip into my own retirement funds to try and buy a house. And I certainly wouldn't dip into the retirement funds of my parents.

[riverwed070707]

Originally Posted by ngordonmd

It seems to me that most people are discouraging me from doing this based upon the risk associated with the purchase. Here are the best and worse case scenarios that I see....

Best case: I find a duplex for around $250,000. I am able to refinance 1 month after purchase and repay my Dad in full. My mortgage is roughly $1600 per month with 10% down on an FHA loan at 3.75%. I live in half and rent the other half for roughly $1400 and I have few to no months of vacancy (a very real scenario in the area that I am looking). So now the money I have saved is invested in a duplex in an area of town (midnight/downtown) that has the best chance of gaining value over the next 10 years, and I am essentially paying $200/month to live. I still have my emergency funds in place, and I will be able to save considerably each month because most of the mortgage is covered in rent.

Worst case: I buy a duplex for the same amount. I go to refinance and don't meet FHA requirements, so I have to make fixes to the property that costs me $20,000 and takes 6 months. I have to pay interest on the loan from my Dad for those 6 months, but continue to live with the parents in order to save. I am able to save about $2500 per month when I live with them. And lets assume that during those 6 months I had no renters. So I'm making payments to my Dad for $1700 while using some of my savings to do the repairs. I get the refinance after 6 months and am able to pay him back. I then am out $20,000 which would still leave me with a large savings.

I know there are even worse scenarios than that that involve tornadoes, meteors and Godzilla, but I think if I take all the right steps I can minimize the risk. If you look at the best case scenario, I dont know how you can argue with that investment. Even if I do move away and keep the property and am renting out each unit for $1400. I would then be collecting $2800 on a $1600 mortgage. And yes I know that rentals are work, but I don't mind work if it reaps reward.

How large is this "large" savings you have? The way I see it, there is no way every.single.property is being purchased with cash. It might give you a leg up but it doesn't mean its your only option.

Advice you're going to hear over and over -- save 20%, then buy. If you need to get out of your parents house ASAP and you want to break away from mom and dads wing, rent for a while don't jepordize their retirement to get what you want.

[BMEPhDinCO]

I think you get the idea - this isn't the best move.

That said, one other reason to give you, even if you paid off the loan "within 5 months", you/your dad would still have to pay the 10% penalty and taxes on top of what you borrowed...10% of $260k isn't small change!

I understand your desire - my husband and I bought a house, even though we're still in school, and won't necessarly live here past 3-5 years after buying. BUT, we put down 20% (cash we had on hand), we bought a $125k house, and we didn't borrow from family. Plus, we had plenty of cash left and we now have (2.5 years after buying), a 6 mo EF and other savings.

Don't do it your way, but if you can be smart about it, like we did, then consider it.

[ngordonmd]

I am starting to realize that this forum is run on knee jerk reflexes. I think that most people here are fairly conservative and have a set of rules that they set up, and can't think outside of those rules. Here is a fairly simple hypothetical example:

Lets say that I saved 80,000 to buy a house and in this example I am a bachelor. I still have my 6 month emergency money packed away, so the savings is for a down payment only. Now I have a couple of options....I can go find a 2 bedroom/2 bath house for $400,000 and with a 30 year fixed loan at 4.5%, I will pay around $2,000 a month. Now I could also buy a duplex with 2 single bedroom/1 bath for the same price, in which case I would live in half and rent the other half for $1000 per month. So in that scenario, I have sacrificed some luxury by living in a smaller home, but have cut my mortgage in half by renting. These are 2 hypothetical situations, but I believe that on this forum people would urge me to take the first option, because they hear "rental" and freak out. I think sometimes you need to think outside the box and look at the cold hard numbers instead of sticking to some dogma all the time.

I have saved a little over $60,000. Each month that goes by I pack another $3000 away. Why would I put 20% down on a home when I can put 10% and still have good manageable monthly payments and I can use some of that extra money to make improvements to my rental unit that will appreciate the value of the home and bring in more rent each month.

As far as the borrowing from the retirement fund....again another knee jerk reaction. Anyone on this forum hears "take money from retirement" and they automatically dismiss the idea or question. I'm not borrowing the money because I need it. I have already been approved for a loan and have plenty of cash to put down for a required down payment, but the reality is that the market is competitive and every place that I have looked at thus far, has gone to a cash buyer. Why do I think these properties are being bought by cash buyers and not people with FHA loans? Two reasons:
1. buyers will always sell to the cash buyer when the offer is the same.
2. these properties are good investments. Hence the reason they don't stay on the market for more than a week and are being bought by investors.
And yes, ALL OF THEM have gone to cash buyers, or I wouldn't even be entertaining the idea.

Lastly, you are wrong about being taxed on the retirement loan. It is a self directed retirement fund and you can make loans from it to a non immediate family member if it is payed back at an interest rate comparable to the current market. There is no penalty and it is not taxed.

[riverwed070707]

I don't think anyone was dismissing your idea of buying a rental unit. Many people on here are landlords (myself included) and props to you if you can get by living in one of your units.

Borrowing from retirement is a whole other issue -- made 10,000 times worse by the fact that it isn't your retirement to borrow from. Do you really not see any red flags by the fact that you have to involve a third party just to get the money because borrowing it directly from your dad isn't allowed?? If you have to work around the rules, that's your first clue it's a bad idea.

You came here asking for advice on which option to pursue and the answer is none. You're looking for a get rich quick scheme and you're not going to find support for that here -- those who end up well off do so because they are patient and they don't skip any steps along the way.

[skydivingchic]

The problem here isn't the rental aspect. Though I can think of one poster (who hasn't posted to your thread) who would likely discourage being a landlord under any circumstances due to her previous very bad experiences with it, the forum as a whole is not for or against owning rental properties. As riverwed said, there are plenty of landlords on this forum. People here generally will give you the non-rose-colored-glasses stuff to consider before taking this leap, but not flat out discourage the step altogether (assuming the rest of your finances are in order - yours are not).

The problem with your plan is the other stuff. Start with less than 20% down. That's a problem. There are lots and lots of people out there who put less than 20% down on their homes and are now underwater. They are stuck with high interest rates (at least compared to what's currently available) and/or can't sell their homes because of it. You will also have to pay PMI if you have less than 20% down. That is several hundred dollars every month down the drain.

The next HUGE problem with your plan is borrowing from a retirement account to do it. Retirement accounts are for retirement and should not be touched for anything else except under the most dire of circumstances. Call this knee-jerk if you like, but it is good, sound financial management. And this isn't even your retirement you are messing with - its your father's. That is just a bad idea on many levels.

If you have $60k sitting in savings now and can add $3k/month, you are only a few months away from being in a position to put 20% down AND still have adequate emergency funds without touching anyone's retirement. It will just take a little more time and patience.