I told you so!
It’s been a while since I’ve written a post here, but I had a big life event happen today and I just had to write a little post and give a big fat “I told you so” to a bunch of people who doubted me over 2.5 years ago.
In December of 2012, I wrote a post about how I was taking a $15,000 401k loan to help on the down payment of my first house purchase.
Here are a few quotes from the comments of that post, including a few people who thought my financial decision was so awful that they had to stop reading this blog altogether:
401(k)’s are for retirement and unless it’s an emergency cash need, I just can’t advocate that as a good idea.
I feel more like you’re trying to justify your decision than advocating this as a great choice. I see our financial goals at odds, so I gotta unsub.
I agree with Lindsey. It looks like it’s time for me to unsubscribe as well. It appears that we have completely different financial (and life) goals and I don’t agree with yours.
Fast forward to July 13th, 2015. After buying the house for $200,000 in December of 2012, I closed on the sale of this house for $288,000. To complete the math, we did put about $35,000 into renovations on the home, and also paid a 3% Realtor fee to the buyer’s realtor at the sale. So here’s the final math:
$288,000 Sale Price – $200,000 Purchase Price – 8,640 Buyer Realtor Fees – $300 Seller Realtor Fee (flat fee listing) – $35,000 investment – $5,250 401k withdrawal tax+penalty = $38,810 profit.
259% Return on Investment in 2.5 years
In December of 2012, I had two options. I could either leave my $15k in my 401k and let it grow there, or I could leverage that money to buy a house.
If I had left it in the 401k and invested in the S&P 500, I would have gotten a substantial gain of 48.25%. That’s nothing to be upset with. But instead I bought a house, flipped it, and made a 259% return on investment, even after I did change jobs and had to pay a 25% tax + 10% penalty on the withdrawal.
In personal finance, there are no “right” answers because nobody can tell the future. Personal finance is personal and I certainly don’t have any issue with individuals who would never take a 401k loan to buy a house. That’s a perfectly legitimate financial decision.
However, when looking back you can absolutely determine which of two options had the better financial return, and it’s obvious that I made the decision that had the greatest return over 2.5 years.
Looking Ahead
The next step of my life is to use a big chunk of the profit I made to close on the new house my wife and I are building. We took the equity out of our house and put it back into a bigger, newer house where we plan to raise our family for decades to come.
Even though I’ve gotten a new, better paying job since December of 2012 and we are still being frugal with our money, I never would have had the money to build a dream home for our family if I hadn’t bought and flipped our first home.
Maybe the real estate market will crash and keeping my money invested in my home will make me a loser overall. Or maybe my new home will be worth 2 or 3 times what I paid for it when I look to sell in 10-20 years. I have no idea.
But I do know I made the right decision in taking a 401k loan to buy a house back in 2012.
James Hendrickson is an internet entrepreneur, blogging junky, hunter and personal finance geek. When he’s not lurking in coffee shops in Portland, Oregon, you’ll find him in the Pacific Northwest’s great outdoors. James has a masters degree in Sociology from the University of Maryland at College Park and a Bachelors degree on Sociology from Earlham College. He loves individual stocks, bonds and precious metals.
Wasn’t your 401(k) loan officially paid off when you had to make the 25% plus 10% penalties on it? That is a major risk of 401(k) loans–if you change jobs and have to ante up the money. If you didn’t have the $15k to put into the house, where did you find the over $5k to pay the penalties?
Originally, I would have said a 401(k) loan is a decent idea. But looking at the penalties that were incurred, you would’ve been better off with a cash advance on a credit card….which I never thought I’d say was a “better” option than something else.
Borrowing the money paid off, but I don’t think you’ve got a good “told you so” on this one.
Kevin is posting!!!
Good to see you’re alive! I hope all is well with you and yours. How is your mom?
401k’s are intended to be savings or investment for retirement. Period. That said I think that is what you did. 401k’s have really weird rules designed to protect the average investor from their own ignorance. Sometimes (or maybe often) those rules prevent you from being able to take advantage of some good investment opportunities. When that happens, crack open the 401k and use the funds for the investment. Only caveat is that the money should probably go toward something that will eventually help in retirement not something for current consumption. You did that. The money was used for investment and the profit will go toward housing to make future retirement cheaper. What’s the problem? I’ve done it before to buy rental real estate that cash-flows. So many wealthy people have a large percentage of their wealth in cash-flowing property and businesses it is just bizarre that we can’t use 401k money for these.
Good job. The proof is in the results.