Break even point for TSP real estate loan?

[VirginiaBob]

Anyone ever figure out above what mortgage interest rate will result in a financial benefit in using a TSP loan for a home mortgage. It obviously will vary based on your tax bracket, but lets assume 15%.

Probably a calculator could be made showing (total payments to TSP loan) vs. (total payments to mortgage loan - tax benefit) and final TSP account balances in both scenarious assuming an 8% rate of return on TSP account.

 

[SkyPilot]

That would be a really useful tool!

 

[ChemEng]

Its more than just the factors you mention...

You also have to consider the opportunity cost of not having your money in the TSP. This can be as high as 15-20% a year it "costs" to take a loan from your TSP. Add to it the cost of repaying the loan in after tax dollars, and the opportunities get slimmer.

The only way that I think the number would agree with this is if either the market is in a serious bear mode like 2001 OR your investment's guaranteed rate of return is extremely high. Im guessing around 30% or so.

 

[VirginiaBob]

The goal would be to do better than average returns (8%), not 15-20% returns. Since a mortgage is pretty much for the long term, this is not a completely unreasonable assumption. And even if the markets did average 15-20% returns, the other 50%+ of your account funds that are still in the TSP (the matching funds) would be more than enough to fund your retirement. It's all about risk analysis.

 

[ChemEng]

My point was that the money you borrow from your TSP account would need to generate those high rates of returns to compensate for *not* having it in the account.

There may be "good" reasons to do a TSP loan, but I think from a returns perspective youll find that it rarely makes sense.

Ill run the numbers tomorrow, and we can go from there.

 

[VirginiaBob]

My point was that the money you borrow from your TSP account would need to generate those high rates of returns to compensate for *not* having it in the account.

There may be "good" reasons to do a TSP loan, but I think from a returns perspective youll find that it rarely makes sense.

Ill run the numbers tomorrow, and we can go from there.

Which is all fine and good and we could debate the merits of whether it is a good idea or not to take out a TSP loan for days or months or weeks or years, but that is not the purpose of this thread. That debate is already taking place on countless other threads.
The purpose of this thread is to develop a calculator to determine what the benefit or loss is for taking out a TSP real estate loan, given a certain TSP loan interest rate, given a certain tax bracket, given a certain expected TSP return rate, and given a certain loan amount, a certain mortgage interest rate all as inputs into a calculator.

 

[ChemEng]

Heres the spreadsheet I set up to work the problem.

The variables that you can change are highlighted in yellow.

To determine the break even point, use the goalseek function in excel as described in the spreadsheet.

I couldnt remember whether home loans were 10 or 15 year notes, so I ran the simulation for both. (The answer is the same either way.)

View attachment 1768

 

[VirginiaBob]

Thanks for the calculator.

Another thing to add would be to consider if TSP/Mortgage payment is lower than the non-TSP/Mortgage payment, then investing the difference in a taxable account.

 

[ChemEng]

Im not tracking what you mean by TSP/Mortgage versus non-TSP/Mortgage. Can you clarify?

 

[VirginiaBob]

TSP/mortgage is the amount that you are paying per month towards the $50000 TSP loan

non-TSP/mortgage is the amount that you would have paid if the $50000 was on your mortgage instead.

For example, let's say the payments to your TSP loan are $400 per month. Your other choice would be to use a conventional mortgage instead of a TSP loan, which let's say are $500 per month. The difference between the 2 is $100 which the disciplined investor would put in a taxable account.

 

[VirginiaBob]

Ok, I wrote a calculator, and the break even point for my scenario above ($50K, 15 years, 15% tax bracket, 8% interest in TSP and taxable account) is a mortgage interest rate of 9.75%. My calculator is rough around the edges, but mathmatically correct. Feel free to clean it up if you want.

 

[ChemEng]

Ok, I wrote a calculator, and the break even point for my scenario above ($50K, 15 years, 15% tax bracket, 8% interest in TSP and taxable account) is a mortgage interest rate of 9.75%. My calculator is rough around the edges, but mathmatically correct. Feel free to clean it up if you want.

Im not sure about some things with your spreadsheet, but there must be a fundamental difference in our methodology to yeild such different results.

Just some quick observations:
1. You didnt account for the property tax you would have to pay with the additional property purchase.
2. You also didnt account for the equity accrual in your equation. I would think this would be a big reason for making this choice.
3. Why did you assume only an 8% TSP return? That is awfully low estimate considering the 15 year investment perspective...

 

[VirginiaBob]

Im not sure about some things with your spreadsheet, but there must be a fundamental difference in our methodology to yeild such different results.

Just some quick observations:
1. You didnt account for the property tax you would have to pay with the additional property purchase.
2. You also didnt account for the equity accrual in your equation. I would think this would be a big reason for making this choice.
3. Why did you assume only an 8% TSP return? That is awfully low estimate considering the 15 year investment perspective...

1. My assumption was that I would not be buying a different (more expensive house) with or without the TSP loan. I'd be buying the same house in either case. My goal is not to be mortgaged to the max and additionally have a TSP loan.

2. See answer to 1, it is the same house in either case.

3. You could adjust to different returns in the spreadsheet. I ran the numbers and that is what I would need (8%) to have 85% of my salary when I retire.

 

[VirginiaBob]

FYI, if you were to use the 1928-2006 historical return average of the S&P of 11.77%, the break even point would be a 14.8% mortgage.

 

[pyriel]

Can any of you do a spreadsheet for me since i'm so impressed on how you guys did that. Here are the condition.

50k in TSP. Borrowed 20k to purchase a rental property.
Property was bought for 110k, 6.75% apr, 30 years mortgage, 4k closing, 16k renovation, monthly payment of $713 monthly mortgage, $100 monthly insurance, $87 monthly property tax. Rental monthly is $1500. Vacancy rate of 1 month for every 24 months rented. Appreciation factor of 2% per year. Maintenance rate of $100 per month.

Which is better? Pls dont forget the 4.5% interest for TSP Loan payment that is going back to the lendee. Tnx

P

 

[James48843]

Virbob:
your spreadsheet didn't include:

1.Property taxes, nor the growth in property taxes over the period.
2. Insurance, nor the growth of insurance over the period.
3. Routine maintenance (new roof, water heater, etc).
4. Utilities of any kind. Assume at least the vacant months will fall back on you.
5. Eviction court costs for a bad tenant (been there, done that.)
6. periodic unexpected special assesments from the local govt for various things.
7. Tax rates on capital gains upon sale at the end of the period, accountant fees for tax preparation.

It's a nice thought- but I think there may be a lot more costs involved in rental property than you have put in your spread sheet.

 

[VirginiaBob]

Virbob:
your spreadsheet didn't include:

1.Property taxes, nor the growth in property taxes over the period.
2. Insurance, nor the growth of insurance over the period.
3. Routine maintenance (new roof, water heater, etc).
4. Utilities of any kind. Assume at least the vacant months will fall back on you.
5. Eviction court costs for a bad tenant (been there, done that.)
6. periodic unexpected special assesments from the local govt for various things.
7. Tax rates on capital gains upon sale at the end of the period, accountant fees for tax preparation.

It's a nice thought- but I think there may be a lot more costs involved in rental property than you have put in your spread sheet.

1. The property taxes would go up on the property no matter if I use the TSP loan or a conventional mortgage. As I said before, I'm not advocating using a TSP loan to buy more house than you can afford.

Comments 2 through 7: See response 1.

I think you are interested in a completely different calculator than I proposed.

 

[Aviator_Guy]

I would never recommend taking money out of TSP for any type of loan, especially for Real Estate. My current home mortgage fixed interest is 5.75%. By leaving your TSP alone, that money can work a lot harder for you in TSP vice out.

I withdrew money from my TSP in the early 90’s for a Real Estate down payment, but if I hadn’t done it, I wouldn’t have been able to make the deal. At the time, it seemed like a good idea. But once the dust settles, you think, man, what did I just do? Anyway, that’s my thought on it. Good luck with your TSP investments!

 

[VirginiaBob]

I would never recommend taking money out of TSP for any type of loan, especially for Real Estate. My current home mortgage fixed interest is 5.75%.

Sure, at 5.75% mortgage rate, you are sitting pretty, buy what if rates rise near 17% like in 1981?

 

[ChemEng]

Sure, at 5.75% mortgage rate, you are sitting pretty, buy what if rates rise near 17% like in 1981?

I still think that thats looking at it backwards. The opportunity cost is the missed growth in your TSP and *not* the potential difference in mortgage rates. Theres a big difference between the 2.