I might take out a $30,000 401k loan just to piss some of you off.

If you’ve been reading PDITF for longer than, say five minutes, you’ll know I’m not necessarily the smartest PF blogger of the bunch. But what I lack in brains I make up for in crappy stick figure drawings…right?

yes

Over the years I’ve read a handful of articles about 401k loans. Most articles pretty much say the same thing, “They’re really dumb, so don’t do it.”

So for that reason, I’ve decided to consider taking out a 401k loan.

How you like them apples counterintuitive personal finance?!

Okay, I’m not necessarily considering taking out a 401k loan, as much as I am trying to figure out the reasons why I should not take one out.

A few things to note….

  • Girl Ninja and I have just shy of $100,000 in our savings account.
  • When we finally find a house worth buying, it will probably be priced between $350k and $400k.
  • We will put 20% down (so looking at about $70k to $80k).
  • My govt job is stable (instead of facing furloughs I am working mandatory overtime)

So now that you know those basic things about me, allow me to try and explain why I’m flirting with the idea of using a 401k loan as part of my down payment.

I logged on to the TSP website (the government version of a 401k) and played around with their loan calculator. I ran some numbers based off a $30,000 TSP loan (to be used for part of our 20% down payment) being paid back over 3 years.

According to the calculator I’d be charged 1.75% interest on the loan, and would have bi-weekly payments of $395 taken out of my paycheck to pay it back. Over the course of the three-year payback period, I’d have paid a total of $810 in interest, or $22/month. There would also be a $50 administration fee charged upfront.

The cool thing (is cool the right word?) about a 401k loan is that, although I would have to pay $22/month in interest on the loan, that interest gets paid to my 401k balance. So I’m just paying myself interest, not the bank, not the government, just myself. Essentially I borrow $30,000 from myself and pay myself back $30,810 over the course of three years.

I’m failing to understand why this is a terrible decision? 

The reality is the stock market has gone gang busters the last couple years.

DJI

What’s more, I didn’t start investing until 2007/2008. This means I missed the 2002 to 2007 bubble. Virtually all of my 401k investments were made while the market was “on sale”. This makes for some pretty incredible returns, not because I’m awesome at investing, but I didn’t have money to invest until the Dow was trading sub 10,000. Dumb luck I guess. 

While it’s true the market could continue to go higher and higher for the next couple years, I don’t think it’s necessarily a bad choice to lock in a 25% YOY appreciation. Especially when I’m cashing out at HISTORIC HIGHS in the stock market to take advantage of mortgage interest rates that are still near HISTORIC LOWS.

What am I missing here? 

There are only two things I can think of that make this 401k loan option potentially stupid…

    1. The markets continue to go gang busters for the next three years. I will be paying myself 1.75% interest on the loan which is a heck of a lot better than my savings account currently pays, but if the stock market goes up 20% a year for the next three years that will be painful to watch. My gut says this scenario is unlikely and the bull market will cool (especially as the fed lightens up on Quantitative Easing), but it is still a possibility and something to consider.
    2. If I get fired or quit my job I have to pay the loan back in full within 60 days. This is definitely the most popular reason PF bloggers advocate AGAINST 401k loans. But isn’t this because most people who take out 401k loans don’t have the cash on hand? I’ll have more than the loan amount in my savings account, so in the unlikely event I got canned, I could pay the loan in full no issue. Remember, I’m a firm believer “liquidity is king” so why not keep the cash in hand?

Okay, so like I said. I’m not the smartest kid in the room. Have I done all my homework? What am I overlooking?

Note: If you think this decision is really stupid (which it totally might be) I just ask that use realistic numbers and analysis in your rebuttal as I’ve tried to do in this post. Not just a  comment like “401k loans are for idiots.”

Thursday Poll: Housing

Coming at you with another poll. These seem to be wildly popular and that makes me happy. It’s one less day I have to think about writing and one more day you all get to see how you fare against the masses. Since we’ve done debt and income, figured we could use this poll to explore housing. Likely, the biggest money suck you have.

Only got one rule before we get to it…

  • Factor in ALL of your monthly housing costs (PITI/rent, utilities, HOA’s, etc).

[poll id=”5″]

For extra credit, drop a comment reiterating what your ALL IN housing costs are, if you rent or own, what general geographic area you live in (obviously important for perspective), how many people covered under this payment, and what percent of your NET household income this gobbles up. I’ll go first…

  1. My all in housing costs: $1,175
  2. Renter
  3. Just outside of Seattle
  4. Just me and Girl Ninja
  5. 19.62% of our take home pay goes to housing

 You can see all previous polls here

The vehicle litmus test.

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Got a comment on my most recent blog post that I think speaks a lot of truth. Here’s that comment:

I don’t think many people buy (homes), expecting to move in less than 5 years. But it happens a lot, due to job changes, family changes, etc. […]

Exactly!!!! My hunch is that most prospective homebuyers buy their first place with the best of intentions. They imagine spending decades in their future abode, establishing roots, and engaging in their community.

But then life happens.

They have more kids than they originally thought they wanted, they get a job offer somewhere else, a loved one gets sick and needs constant care, or maybe they still love their house but hate their neighbors. The numbers say it all, most people in their 20’s and 30’s, who buy homes, don’t live in said homes long enough to realize much of a financial benefit. They kiss their profits goodbye when they eat the 10% sellers fees. They were nothing more than glorified renters who could paint their walls.

….awkward transition…

I’d like to introduce you to this simple little test I’ve created. I call it the Vehicle Litmus Test.

Unless you live in the heart of a major metropolitan area (San Fran, NYC), I’m going to assume you own a car. If you don’t, this whole post is pretty much a waste of your time. My bad.

Alright, let’s start the test. Ready? Begin…

How long have you owned your current car? And how long did you own your previous car?

/End Test

It seems about 99% of people who buy new, or even new-to-them, cars always say something like “Oh, I’m going to drive this car in to the ground. I’ll have it at least 10 years.”

You probably said, or thought, something similar. Didn’t you? DIDN’T YOU!!!!!

But did you actually follow through with that promise?

How you answer that question says a lot. You bought a car thinking you would drive it in to the ground, but then made a total 180 and justified a change for something more fuel-efficient, more modern, larger, smaller, newer, cheaper, faster.

I get it. Your priorities and desires changed. That is exactly why you should use the vehicle litmus test as a resource before you buy your first (or next) house.

Are you really going to stay in the house long enough to make buying worth it? You like to think you will, but does your track record say otherwise?

Drop a comment below with your answers to the litmus test, the responses should be interesting!

My answers to the vehicle litmus test…

Car 1: Bought my Scion tC in 2006 brand new. Seven years later, still love it and have no plans to sell.

Car 2: Our 2006 Honda Pilot purchased in 2012 with 70k miles on it. Bought with intentions to drive to 150,000 miles.

Previous car: Girl Ninja’s 2005 Corolla she bought in 2006. Sold after six years so we could buy the Pilot. An upgrade we fully recognize was unnecessary.

American Dream or American Scheme?

American Dream

Over 80 years ago, James Adams said “life should be better and richer and fuller for everyone, with opportunity for each according to ability or achievement”. This is known as the American Dream. Buying a home has also long been called the American Dream, probably because it gives one a great sense of accomplishment. After a lot of hard work, and intentional saving, one is able to purchase a little slice of American soil. A slice they can call home.

My, how things have changed.

My grandparents lived in one house for 30+ years, and they worked for the same company for 30+ years, but this lifestyle is now the exception, not the norm. The average length of home ownership now is about eight years.

It’s like we’ve been brainwashed by America circa 1940. We’re told The Dream is to own a home, so we buy one. But did you know that you are nearly 10% underwater the second you buy your home? No really you are. Check out this example…

  • Todd has been saving like a mad man and pays cash for a $300,000 house. He decides three months later to take a job in a new city. He no longer wants this home, so he puts it on the market for $300,000. He gets a full-asking price offer, but after Todd pays 3% commission to the buyer’s agent, 3% commission to the sellers agent, and another 3%-ish in fees Todd only has $270,000 in his pocket. He lost 30 grand even though he sold the house for exactly what he paid for it.

Do you get it?!

The numbers don’t lie, real estate is a pretty terrible investment. It barely beats inflation. But that pesky American Dream tricks you in to thinking the house you’re looking to buy is, for some reason, a steal of a deal. You tell yourself it’s under-market value or in an up-and-coming neighborhood, but you ignore the fact that you will probably sell it long before you realize any significant return-on-investment.

Look, I’m not anti-homeownership. Girl Ninja and I are still looking to buy our first place, but I can’t let us get caught up in the American Dream hype. It’s only when one buys a home, and lives in it long enough to either A) no longer have a house payment, or B) realize a substantial appreciation in value, that I think it makes financial sense to take the risk.

Time’s have changed kiddos, whether we choose to acknowledge that or not remains to be seen.

Pedophile free

Let’s play a game shall we. We’ll call it “Let’s see how many pedophiles live by me”. Sounds like a blast doesn’t it!?

Since I am an investigator by trade, I like to gather information on people and my surroundings. Sometimes this means going to a courthouse and pulling public records on people. Other times it means I just Google a person’s name and see what comes up.

As Girl Ninja and I continue to shape our idea of the type of place we want to buy, one thing is becoming evident; We want to live stupidly close to a public school, city park, or other public building.

Our current rental is half a block from an elementary school and we love it. While some might be annoyed by the sounds of little kids running around during the day, or moderate road traffic during pickup/drop-off hours, I view this as a small sacrifice for a much more significant benefit.

No sex offenders can live close to us. 

I mean, we need to really stop and consider where our future home is physically located. If we aren’t near a park or school, there is nothing keeping an offender from moving in right next door. Now I don’t know about you, but I imagine this would significantly diminish a property’s value.

How could it not????? 

I don’t care how cute a house is, if I pull up the offender list and see a bunch of dots around said cute house, I’m not writing an offer. Period. End of story. Now I get that some offenders shouldn’t probably be on the list for life (like 18 year  olds that were in a consensual relationship with a 16-year-old) and maybe some were actually rehabilitated during their jail time, but still, the offender-free zone is going on my list of nonnegotiables.

I’ll take an outdated kitchen or a foundation issue over a pedophile any day of the week. The first two issues can be fixed with time and money, there is nothing I can do about the person that moves in next door.

So, you ready to play the creepiest game of your life? Go to Family Watchdog and punch in your address. By default it will show a mapped view. Instead click on the “List” tab. This is where it will show you the distance between you and the closest offender. Mine is 2.5 miles away. How about you? Anyone else consider the sex-offender issue when you were house/apartment hunting? If not, you’re welcome 😉

 

Why you should buy a house in a bubble.

 

When I almost bought a rental property this weekend, a few readers chimed in saying “Ninja you are supposed to buy low and sell high. Right now you would be buying when the market is booming.” Comments like these are expected, especially when I’m always talking about Seattle Real Estate being in a bubble.

So why do I still check the local MLS listings every day, hoping there will be a place worth looking at? It’s simple really.

I’m not stupid shortsighted. 

If you’ve read any news about real estate over the last six months, it’s clear the market has picked up. Some cities like Phoenix and Las Vegas jumping up 20%+ in the last 12 months. What was a $300,000 house one year ago, now goes for $360,000 after getting multiple cash offers. Same story up here in the Pacific Northwest. Inventory is low, prices are high.

There is no denying 20% year-over-year real estate appreciation is unsustainable. Eventually things will cool off. Maybe to a more normal 3 to 6% YOY growth. Maybe things will go flat for a while. Or, who knows, prices could actually drop. Thinking about the recent boom on an emotional level causes some to shy away (myself included at times). They are waiting for a correction that may never come.

Yes, Seattle prices are up 16% in the last year, but they are still 20% below their 2006/2007 peaks.

What’s more, even if real estate is in a bubble right now, it’s a completely different bubble than the last one. In 2006 banks were handing out money like candy. People with no income and no assets were qualifying for $500,000 properties. The market took a dump on it itself when these unqualified homeowners could no longer keep up with their 5-year jumbo ARM payments.

Sure the market is in a frenzy right now, but banks learned their lesson (at least temporarily) and are exponentially more picky in who they lend to. If you don’t have great credit, a significant down payment, and a solid income history, you aren’t getting a loan. Unlike 2006, most of the people buying houses now can actually afford their monthly payments. (random fact: 1 in 4 houses in Seattle receives a full cash offer)

All this is great, but there is really only one reason why Girl Ninja and I are still open to the idea of buying a house in a boom.

We don’t give a crap about price. 

If we find a place we love, I don’t really care if it costs $350,000 or $400,000. All I care about is being able to comfortably afford the monthly payments. Sure, I could buy a house for $400k today, and three years from now it might be worth $375,000. But I’ve ALWAYS said, one shouldn’t buy real estate if they aren’t comfortable with the idea of owning the property for at least 10 years. I look at property values over the long haul, not the short-term. A $10,000 price difference today matters little when the house could be worth double 15 years from now. As long as rates are at all time lows, and prices are below their all-time highs, I say it’s still a good time to buy a house.

What say you?

Did we buy a rental property?

If you saw my post on Friday, you know that Girl Ninja and I were seriously considering going 50/50 on a rental property with my best friend from high school who married one of Girl Ninja’s best friends from high school. Today, I tell if we wrote up an offer, but not until I drag things out a little more 🙂

We viewed the property yesterday morning. It is due to list on Tuesday, so getting to see it pre-market was crucial. We completely expect it to go pending on the first day it lists for full (or above) asking price. Having the opportunity to write an offer, without having to compete with other interested parties, was a pivotal part of making the deal work.

The house appears to be in tip-top shape. It’s only a year old and the appliances, finishes, etc all still shine like they’re brand new. It was clear the owners took pride in their home. There were linoleum floors in the bathrooms and tile on the kitchen counter-tops. This bothered me because I would have preferred higher quality finishings, but at the same time, these are the perfect materials for rental wear-and-tear. The house shows really well and I could totally see a Microsoft employee (Microsoft is 20 minutes away) renting the house for his/her young family.

Okay, so now that you know we liked the place, it’s time to tell you if we wrote up an offer…

Drumroll please….

Nope. Here’s why:

If Girl Ninja and I co-bought this property, we wouldn’t be able to buy our own place for at least two years, since that is about how long banks need to verify stable rental income.

With any partnership there is risk. While I still believe that my friend and I would have been able to make this deal work, we know that everyone probably thinks the same thing. Neither of us could shake the potential issues that could arise when control is shared.

The time sensitive nature of the transaction. This was my biggest hesitation. I felt rushed. An offer had to be made last night in order to give the sellers enough time to respond before it goes to market on Tuesday. There were still a lot of questions I couldn’t yet answer, and while I believe the house is a good buy, I didn’t have enough time to really wrap my brain around all that encompasses being a landlord. Especially when that responsibility is shared with another person.

But ultimately, Girl Ninja and I did not go in on the house for one reason and one reason only. My friend decided to buy the house on his own. I’ve known this was a possibility for the last few days. He sees very little downside and a ton of upside potential. He can afford the risk and no longer has to worry about me dying divorcing, or forcing a sale. I went and viewed the house with him yesterday knowing he was probably going to be the only person writing an offer. It’s a little sad because I want our cash to be invested in something, but I know this is for the best. I’m super pumped for him and I hope his offer gets accepted.

Who knows, maybe Girl Ninja and I will rent from him once we have a kid or two 🙂

p.s. for those that care, here is the spreadsheet that lays out the numbers (click to make images larger)…

Screen shot 2013-04-14 at Apr 14, 2013, 11.45.19 PM

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