Max 401k or save for Rental Duplex?

[mhlavac]

Executive Summary:  I need help deciding where to focus my investment dollars in 2016 and 2017.  I feel the housing market is about to encounter one of its cyclical 10-20% downturns, and I'd like to take advantage by investing in a rental property that will continue to produce passive income for when I retire in 10-15 years (sooner if possible).

The details:

Vital Stats: 35, with no plans for kids.  DW works seasonally as a Tax pro, which covers any vacations or family visits
Occupation:  IT Manager for a mid-sized business in a LCOL area
Income:  $135k + up to a 30% bonus based on personal and company performance.  Likely to only get paid out at 10-15% instead of 30% as market share slowly erodes to companies like Amazon.
Vehicles:  Paid off.  Both are likely to last another ~5 years
Existing Rental:  I have an existing rental with a 7/1 ARM (refinanced 2015), that I am applying ~$1300 extra to principal each month.  The goal here is to have it paid off in 2023, by the time the ARM adjusts.  Interest rate is at 3%.  I'd love to find something like a 5-year CD that guarantees 3% or better, but haven't been able to find anything.
Tithe:  $1300/month - non-negotiable.
House:  $931/month in rent with a 15-year mortgage, 13 years remaining @ 3%
401k:  Currently I am saving $1550/month, to max out the 401k.  Current balance between my wife's previous 401k, my 401k's and IRAs is about $350k
Food:  $450/month - My wife and I splurge a bit here and do as much organic as possible
Savings:  $30k, of which $20k is set aside for emergencies.  At this point, I am able to set aside about $1000 per month

I'd love to take advantage of an upcoming dip in the market to purchase a $250-$300k duplex, meaning the down payment would need to be a minimum of $50k plus any repair costs.  I plan to buy and hold these rentals for 30-50 years as a source of income.  Given that I have a sizeable 401k already and 30-years of runway ahead of me until I hit age 65, should I cut back on the contributions to the 401k so that I still get the full company match amount, socking the rest away to put towards a rental?  Are there equations that I can use as a basis to compare the two options?

[Jon Bon]

Nice work, Sounds like you can't lose!

I think both routes sound good but don't undersell the power of leverage.

Currently I put the required 20-25% down and finance the rest. The cash on cash return is pushing me to fire faster than a 401k ever could.

Refinance that arm into a fixed and start shopping for your next property.

Or

Just keep chugging along and you will be there in no time!

Cheers

[AllieVaulter]

I was JUST debating this question with my husband this morning.  I don't have an answer for you, but I would like to point something out that could help you with your decision. 

Based on your low post count and this statement:

Given that I have a sizeable 401k already and 30-years of runway ahead of me until I hit age 65, should I cut back on the contributions to the 401k

It seems like you may not be aware that you can in fact access money stored in 401k's and 403b's before you turn 65.  It's called the Roth Conversion Ladder.  Basically, after you retire, you can transfer $20,600 from your 401k to a Roth IRA.  You leave it sit there for 5 years (and each year transfer another $20.6k) and after it's been in the Roth IRA for 5 years you can withdraw it at any age w/o penalties or taxes. 

It sounds to me like you are much closer to retirement than you even realize. 

Sorry if you already knew this information.  There's a ton of really great information here:  http://forum.mrmoneymustache.com/taxes/the-mustache-tax-guide-(u-s-version)/

[iamlindoro]

It seems like you may not be aware that you can in fact access money stored in 401k's and 403b's before you turn 65.  It's called the Roth Conversion Ladder.  Basically, after you retire, you can transfer $20,600 from your 401k to a Roth IRA.  You leave it sit there for 5 years (and each year transfer another $20.6k) and after it's been in the Roth IRA for 5 years you can withdraw it at any age w/o penalties or taxes. 

Minor correction:  You can transfer as much as you want.  You just pay taxes on whatever amount that is.  20.6K is just the amount you could theoretically transfer without incurring a tax bill.

[iamlindoro]

With 10-15 years ahead of you, I would do both, not one or the other.  Your 401k balance is good, but depending on your expected retirement expenses, it could be a lot higher still for two of you. 

One thing I *would* evaluate critically is whether you really want to spend $250-300K on a duplex.  Absolute bare-minimum, everything-else-is-perfect rent you would want to get in that case is $3K a month.  For me, I'd want to be getting $5-6K, which I'm going to guess is going to be hard wherever you are.  If you have a very good handle on real estate investment numbers, there might be a case to be made for accepting the lower end of this (extremely low tolerance for risk, property is in A/A+ neighborhood) but multifamily properties should really be earning higher than 1% of property value per month, ideally 2%.  Anyway, just a caution to really, really understand the numbers.

I have been buying duplexes under $100K and getting ~2% rents in the midwest (latest duplex rental purchase price is $75K and rents will be $1.4K a month).  I do not live in the markets where I own rentals (and you don't have to either).

[Emergo]

Geez louise. You are really well off. I am really jealous of you.

[Goldy]

I would keep mazing the 401k and slow your roll on the arm payment.  I also have an arm on my house and I have the payments set such that I pay enough extra each month to ensure my payment stays the same assuming my rate increases to the max.  If it were my budget I'd probably cut that extra payment down to 500/mo and save the 800/mo for your next rental.