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Started By
Message
401k loan to fund a potentially profitable investment
Posted on 6/11/13 at 9:50 am
Posted on 6/11/13 at 9:50 am
Yes, I know there is another 401k loan thread, but I wanted to start this one as it pertains to a particular scenario.
Let's say that my company offers an investment into equipment that we own/operate. My friend invested into one of these programs three years ago, $15k, and within three years it has paid back roughly 58%. He is in five of these investment options and this is the worst paying one. The equipment is financed for 10yrs, so barring any catastrophes or major expenses the revenue should be flowing in pretty nicely by then. He showed me one of his investments that was over 10yrs old, and with a $15k investment he made $40k in the past three years. On average the life of the equipment is 30yrs.
So my question is if you were able to participate in such a situation, would you take out at least $10k from your 401k to fund an investment like this? My plan is to stop contributions for 8-9mos; which will unfortunately increase my taxable income, but I want to pay the loan back quickly. The investments generally offer a loss for the first year or two, so my return will likely be very large, thus allowing me to pay the loan off after just +/- 8mos.
Let's say that my company offers an investment into equipment that we own/operate. My friend invested into one of these programs three years ago, $15k, and within three years it has paid back roughly 58%. He is in five of these investment options and this is the worst paying one. The equipment is financed for 10yrs, so barring any catastrophes or major expenses the revenue should be flowing in pretty nicely by then. He showed me one of his investments that was over 10yrs old, and with a $15k investment he made $40k in the past three years. On average the life of the equipment is 30yrs.
So my question is if you were able to participate in such a situation, would you take out at least $10k from your 401k to fund an investment like this? My plan is to stop contributions for 8-9mos; which will unfortunately increase my taxable income, but I want to pay the loan back quickly. The investments generally offer a loss for the first year or two, so my return will likely be very large, thus allowing me to pay the loan off after just +/- 8mos.
This post was edited on 6/11/13 at 9:54 am
4
Posted on 6/11/13 at 10:22 am to TheWiz
What is investment sector?
You aren't being straight up with us? What is the equipment?
How is he turning profit?
Will you be competing against him?
You aren't being straight up with us? What is the equipment?
How is he turning profit?
Will you be competing against him?
Posted on 6/11/13 at 10:23 am to TheWiz
I can make it simple for you.
If your expected average annual return is greater than your interest rate on the loan, then you generally have a project with an expected profit.
Now I know nothing about the project, equipment, or risk with the project, so take this with a grain of salt.
If your expected average annual return is greater than your interest rate on the loan, then you generally have a project with an expected profit.
Now I know nothing about the project, equipment, or risk with the project, so take this with a grain of salt.
Posted on 6/11/13 at 10:35 am to L S Usetheforce
quote:
What is investment sector?
Petrochemical Transportation
quote:
What is the equipment?
Barge & Tugboats. Two 30k hot oil barges. Two 30k clean barges. One tugboat.
quote:
How is he turning profit?
Based on the example I provided from one investment, he has made 60% of his initial investment back within three years. Keep in mind that this is the lowest performing investment yielding roughly 18.5%. The other example I provided has the equipment paid off in it, I assume he has made his money back of $15k (probably several times) and based on the past three years alone he has made roughly $40k. He operates all of these by just snowballing the money into the next investment. He said based off of his other barge investments, he was able to put $85k into the last one. This yielded him a $24k loss on his taxes which offsets the taxable gains from the other investments.
quote:
Will you be competing against him?
Yes & No. I guess technically we're all cutting into the same pie; however, participation varies with each investment group.
This post was edited on 6/11/13 at 10:36 am
Posted on 6/11/13 at 10:44 am to TheWiz
quote:
Petrochemical Transportation
Without going any further, I'd tell you hell yes.....
I've met and had beers with too many rich men in this sector than I'd care to brag about.
Posted on 6/11/13 at 10:52 am to L S Usetheforce
quote:
Without going any further, I'd tell you hell yes
That's what I was thinking. Also, I'm only 29. Stopping 401k contributions for 1/2 to 3/4 of a year is not really going to impact me too greatly. I was looking yesterday and I'm only getting about an 11% return. The 401k loan is only prime + 1 point and I guess an origination fee. I feel like I would be an idiot not to get into this. Another plus is that once you're in, you're in. With proper management of the money coming in, I should be able to continually fund further investments. Even if it's just $5k. The way I see it, these will probably fund my kid's private school tuition. If we have any...
Posted on 6/11/13 at 10:58 am to L S Usetheforce
Got busy and didnt reply earlier, BUT I was going to ask a few things and give an example I know of similar to what you are saying.
Is this the companies idea of trying to utilize employees retirement $ as capital expenditures?
Who owns the equipment if the company goes out of business?
Is the company trying to bolster employees retirement plans more by having them do this? Is their line of thought since they will be charting the equipment irrespective of who owns it, why not pay your employees retirement accts?
The example I was going to use is I know some guys (my grandfathers friends) who own tugs and barges on the river and have done very well company A. In order to pass on $ from the company they created another company with only the grand kids as owners company B. Company B got a big loan from a bank with a written contract to charter so many barges at a certain rate from Company A. Company B then purchased the barges and now exclusively lease to company A.
It passes on the wealth to the grand kids, avoids any gift taxes, whatever else they can think of.
If I were in your situation after reading your other responses I'd probably do it the investment.
Is this the companies idea of trying to utilize employees retirement $ as capital expenditures?
Who owns the equipment if the company goes out of business?
Is the company trying to bolster employees retirement plans more by having them do this? Is their line of thought since they will be charting the equipment irrespective of who owns it, why not pay your employees retirement accts?
The example I was going to use is I know some guys (my grandfathers friends) who own tugs and barges on the river and have done very well company A. In order to pass on $ from the company they created another company with only the grand kids as owners company B. Company B got a big loan from a bank with a written contract to charter so many barges at a certain rate from Company A. Company B then purchased the barges and now exclusively lease to company A.
It passes on the wealth to the grand kids, avoids any gift taxes, whatever else they can think of.
If I were in your situation after reading your other responses I'd probably do it the investment.
This post was edited on 6/11/13 at 11:00 am
Posted on 6/11/13 at 11:03 am to eng08
Whiz, also look at who else is investing? If the CEO owner or whomever else runs the company is putting $ into it, then it will probably pay off.
Posted on 6/11/13 at 11:03 am to eng08
quote:
The example I was going to use is I know some guys (my grandfathers friends) who own tugs and barges on the river and have done very well company A. In order to pass on $ from the company they created another company with only the grand kids as owners company B. Company B got a big loan from a bank with a written contract to charter so many barges at a certain rate from Company A. Company B then purchased the barges and now exclusively lease to company A.
Essentially yes. Company A is the operating company. The investment group will be formed into an LLC with the mentioned equipment.
I really don't know why the company started doing it. We are still only medium sized, private, and as cliche as it is, we are like family. I guess you could call it profit sharing; however, I guess in all reality you are "technically" an owner.
This post was edited on 6/11/13 at 11:09 am
Posted on 6/11/13 at 11:05 am to TheWiz
Yeah that's a no brainer to me. I'd do it.
Posted on 6/11/13 at 11:08 am to eng08
quote:
If the CEO owner or whomever else runs the company
You cannot invest more than the President, 50%.
Posted on 6/11/13 at 2:30 pm to TheWiz
If you are going to be at the company for a while, then go for it.
However, keep in mind that the loan payment will probably come off the top of your paycheck. So if you are barely scraping by every month, that could be a problem until the cash flow from the investment kicks in.
Also, don't stop 401k contributions completely. At a minimum, put in enough to get the maximum company match. Otherwise you are leaving free money on the table.
Best of luck.
However, keep in mind that the loan payment will probably come off the top of your paycheck. So if you are barely scraping by every month, that could be a problem until the cash flow from the investment kicks in.
Also, don't stop 401k contributions completely. At a minimum, put in enough to get the maximum company match. Otherwise you are leaving free money on the table.
Best of luck.
Posted on 6/11/13 at 4:08 pm to TheWiz
I guess that's a thought. Just drop my contribution from 14% to the 4% match.
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