Amid a Flurry of Potential Policy Changes Around Real Estate—The White House Has Walked Back Its 401(k) Downpayment Proposal

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President Donald Trump has been accused of many things recently. Being short of ideas—whether good or bad—is not one of them.

However, after touting 50-year mortgages, proposing to stop large institutional investors from buying single-family homes, and urging Freddie Mac and Fannie Mae to buy mortgage-backed securities to lower interest rates, it turns out that his latest housing affordability fix—allowing buyers to tap their 401(k) plans for a down payment on a personal home—wasn’t actually his idea. It was an advisor’s. And what’s more, the president decided he’s not on board.

“I’m not a huge fan. Other people like it…One of the reasons I don’t like it is their 401(k)s are doing so well,” he told reporters Thursday on Air Force One on his way back to Washington, D.C., from the World Economic Forum in Davos, Switzerland. “The housing market is good, but the 401(k)s are doing much better than the housing market.”

Clearly, someone spoke out of turn: Kevin Hassett, director of the National Economic Council, who said on Fox Business that Trump would announce at Davos a plan to allow Americans with 401(k) plans to access funds for a down payment on a house. The idea was short on details, and after input from other advisors, Trump was quick to throw Hassett under the bus.

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The main reasons were likely the tax implications of withdrawing money from a 401(k), and the fact that a workaround already exists: 401(k) plans allow employees to borrow against their accounts, repay the loan, and avoid tax liabilities. Additionally, certain types of IRAs allow holders to take out $10,000 penalty-free for a first-time home purchase.  

While many real estate investors eschew traditional investing due to stock market volatility and the lack of control that comes with owning shares, there’s no doubt that certain tech stocks —Nvidia, Broadcom, and Taiwan Semiconductor Manufacturing come to mind—have blown real estate out of the water with their returns in recent years. Therefore, diversification is the safe play: building up a 401(k) from a W-2 job while investing in real estate.

That’s why Sergio Altomare, CEO of real estate private equity and development firm Hearthfire Holdings, told Nexstar’s NewsNation that the proposed 401(k) down payment idea came with a downside. “What are the ramifications of hitting your 401(k) early? Maybe adding some limits to it, so people don’t deplete it to buy their dream home too soon,” he added.

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1031 exchanges

Assuming you want to invest in real estate without going into your 401(k), there are workarounds, particularly if you already own a home. Bloomberg notes that financial advisors suggest drawing on taxable brokerage accounts or using 401(k) loan provisions. 

However, if you already own properties, 1031 exchanges are the gift that keeps on giving, offering a tax deferral mechanism to roll one property into another. In the process, you increase your net worth and cash flow.

Low-cost capital

Down payment assistance has become a “growing tool” for first-time homebuyers during the affordability crisis, extending to one-to-four-family homes, thus allowing house hacking to offset mortgage payments and possibly turn a profit, the New York Times reports.

State Housing Finance Agency (HFA) First-Mortgage Programs

These programs, such as the State of New York Mortgage Agency (SONYMA)’s Achieving The Dream, are funded by governments, nonprofits, and private real estate firms, layering grants or forgivable loans on top of primary mortgages. They allow low interest rates and down payment assistance.

Such programs are offered through State Housing Finance Agency (HFA) first mortgage programs, available in 30 states and for owner-occupied one-to-four-unit homes.

State and local down-payment and closing-cost assistance programs

Here is a state-by-state guide to down payment assistance (DPA) programs, cataloging grants, forgivable loans, and low-interest second mortgages across the U.S., many of which can be used on a one-to-four-family home. The Mortgage Reports is an invaluable resource.

Additionally, Down Payment Resource’s Homeownership Program Index tracks more than 2,600 homebuyer assistance programs nationwide and provides a searchable, state-level list, including city and county offerings, for 30-year fixed-rate first mortgages.

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HUD’s homebuyer program hub links to each state’s homeowner and assistance programs, many of which are designed for one-to four-family existing and new properties.

Bankrate and Rocket Mortgage also maintain updated guides to down payment assistance, cataloging grants, deferred payment second mortgages, and below-market first mortgage programs that can be layered on FHA, VA, USDA, and conventional loans for one-to-four-unit homes, where allowed.

Homebuyer.com is another good resource for programs that reduce upfront costs for one- to four-unit owner-occupied homes.

Creative refinancing

For current homeowners and investors, the modest decline in interest rates has created wiggle room for creative refinancing to reposition funds and take advantage of lower rates. 

Here are a few strategies you can employ to make the most of what you’ve got for investment purposes:

Use savings from a refi to save for a down payment: Refinance a primary residence to lower the interest rate (ARMs are most favorable in the short term), and use the freed-up monthly savings to build up a down payment fund for an investment, as outlined in BiggerPockets. The refi break-even analysis from Neighbors Bank helps you see how best to utilize a small rate drop to save cash flow and reinvest.

Take out a mortgage on a free-and-clear primary residence to buy an investment property for cash: This old-school technique is an evergreen move because a mortgage on a primary residence has a lower interest rate than an investment loan. Additionally, an all-cash offer on an investment allows you to be aggressive and negotiate for a deal that makes sense.

Do a cash-out refi from existing rentals: This is a risky move in the best of times, because it can lead to overleveraging. However, when executed properly, making sure to keep mortgage payments affordable while increasing monthly cash flow, it’s another perennial winner.

Final Thoughts

Dealing with tenants, repairs, city inspectors, lenders, and more can wear down even the most experienced, deep-pocketed real estate investors. This is why it’s always good to have some “safe” money socked away in a stable investment.

While many people balk at 401(k)s and the stock market, Trump’s rationale for not using them for real estate is solid. These investment vehicles are performing well, and the last thing you want to do is deplete a well-performing asset for one that doesn’t perform at all, which is what a personal home is. 

However, there are a slew of down payment assistance programs for new homeowners who want to become investors as well. The downward interest rate movement means that for the first time in a while, you have options to plan your next move.