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Co-ops generally need 20% down and say 2 years of maintenance+mortgage worth of liquidity in bank balance. Can 401k count towards it, given that you can borrow against it, and it's your own money? I heard somewhere that 401k might not count as 2 yeras of liquidity required post-closing, in that case can you use money borrowed from your own 401k towards down payment instead, to use the bank cash towards 2 year liquidity? Thanks in advance!
Unless you're of retirement age, any respectable co-op will not view your 401k as liquid by any means...neither will a lender.
When you think about it, should they? Do you really want to approve a borrower/shareholder who may have to rely on his/her 401k before they qualify for to withdraw without penalty?
As a borrower, I know if feels like it should be included since it's technically "liquid," though you'd be stung by some big penalties if you had to withdraw funds early. The borrowing against it argument is a bad one, cause that would be debt...
realdeal: I concur with NYC. The short answer is "no."
it's looked at, but not counted. so if you're borderline and you have $200K+ in 401K, it will push you through. $50K won't do anything.
Recently discussed on the Street Easy blog here:
Just went through this recently for a condo purchase where we needed to show 1 year's liquidity. We had enough in assets, but the lender miscalculated and said we were borderline by about 7K. Our 401K assets are sizable, but were no help at all for a 7K deficiency. Don't know if coop standards are more flexible, though.
Coop standards are tougher, generally. 401k savings can flesh out a picture of a financially well positioned and responsible prospective buyer, but e account is not typically considered as an accessible asset by admissions committees in a coop.
How about using 401k fund for the down payment? That way you can have a larger bank balance to meet post-closing liquidity requirements. Does this work?
401K accounts are exempt from attachment in a court judgment. In NYS, so is life insurance, nonqualified deferrals, IRAs and certain trust accounts. If the asset cannot be attached upon judgment it will not count from both a lender and a co-op board perspective. Agree they may be a factor in a "close" situation.
Also, to clarify, this is about borrowing from 401k (not withdrawing) and paying the interest to yourself.
You can only borrow 50% of your 401(k), up to $50,000. (These are IRS rules) That won't get you very far, but yes it could fund a down payment.
WEEKEND INVESTORUpdated February 15, 2013, 6:13 p.m. ET.Is It Time to Hock the Art?
By JULIE STEINBERG
Amassing wealth is terrific—as long as you can tap into it when you need to.
But what if many of your assets are illiquid?
That is a common problem among some wealthier investors. When the perfect investment opportunity comes along—say, a real-estate project or private-equity fund—these investors are unable to redeploy funds quickly.
To combat the problem, investors increasingly are turning to low-interest-rate loans from private banks or wealth-management firms to tap anywhere from $75,000 to hundreds of millions of dollars. They use a pool of their own securities, artwork or even aircraft as collateral.
Corporate executives have borrowed against their stock holdings for years using such loans. Known as "structured lending" or "borrowing against holdings," the practice grew more popular among smaller investors in 2012, say executives at wealth-management firms and private banks.
At Raymond James Bank, a subsidiary of Raymond James Financial, RJF -0.44%a St. Petersburg, Fla.-based financial-services company, securities-based loans outstanding rose to $414 million at the end of 2012 from $41 million in March.
"People are feeling a lot more comfortable and want to re-enter business transactions," says Anne McCosker, co-head of credit products at the Wealth and Investment Management division of Barclays BCS -0.10%. "At the same time, banks are generally increasing their appetite for credit again."
Securities-based loans, or loans made against pools of securities, are increasingly attractive to clients because of their low interest rates and flexibility, says Jordan Waxman, a managing director and partner at HighTower's HSW Advisors, which has about $1 billion under management. Currently, annual interest rates fluctuate between 1% and 2%. He says loan liabilities comprise $60 million of assets under management at his practice.
Clients have been using the loans for opportunistic investments that should return more than the cost of borrowing the capital to invest, Mr. Waxman says. Depending on the loan, there might also be no set "due date" for when clients have to repay the loans.
The loans carry advantages and drawbacks.
On the positive side, the loans let people keep their portfolios intact, without having to forsake future profits in the market and having to incur capital gains, says Andrew Kaiser, chief operating officer of Goldman Sachs Bank USA, a unit of Goldman Sachs Group GS -0.60%.
Borrowers should remember they must pay back the loan with interest—and might end up having to sell of a portion of their securities to do so if the value of the securities declines, warns Bill Geis, executive vice president of retail lending at Raymond James Bank. Typically, clients use the income generated by the investments made possible by the loan to pay it back. But if those investments sour, the borrower still is on the hook.
The interest rate on the loans tends to be floating, says Mike McPartland, head of investment finance for North America at Citi Private Bank, a unit of Citigroup C -1.08%. The rate is typically tied to the 30-day London interbank offered rate. If the interest rate is Libor plus one percentage point and the 30 day-Libor is 0.25%, then the interest rate on the loan would be 1.25%. Some firms offer fixed rates as well, says Ms. McCosker of Barclays.
Loans differ depending on the nature of the collateral, Mr. McPartland says. For example, securities that are less volatile, like municipal bonds and Treasurys, will on average command an "advance rate" of 85%. So, if you put up $50 million worth of securities, you would receive a loan worth $43 million. The advance rate would be lower if the securities were noninvestment grade.
Banks are more likely to lend against more liquid offerings, like securities, than against assets like interests in a hedge fund or private-equity fund that are harder to value, says Mindy Rosenthal, executive director of the Institute for Private Investors, a New York group for high-net-worth families.
Still, Stephen Brodie, a partner at law firm Herrick, Feinstein in New York who represents six different private banks in lending to high-net-worth individuals, says art loans are "far more common" today than they were three or four years ago.
Works of art can be tough to sell quickly, and usually have advance rates from 40% to 50% of a conservative value estimate, Mr. Brodie says. Interest rates on those loans might be Libor plus two or three percentage points, says Scott Milleisen, a capital adviser at J.P. Morgan Private Bank, a unit of J.P. Morgan Chase JPM -0.69%.
To use art as collateral, clients also must pay appraisal fees to the bank—but they usually get to keep the art on their walls.