Author Topic: Lower contributions to get into REI?  (Read 3066 times)

Zman

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Lower contributions to get into REI?
« on: November 11, 2015, 01:47:09 PM »
Hi everyone... I'm 30 and currently contributing $697/paycheck to 403b and $211/paycheck to a roth IRA to hit my max amounts. However after those things are taken out and rent/food/bills/etc. get paid, I dont have much left. What I do have left I put in a taxable account... which isnt much.

Yay me, right?

BUT,

What if I start to get the Real Estate Investing(REI) bug? Would it be wise to consider lowering some contributions to get into REI?

A coworker of mine has 10+ properties through SoCal and Vegas and rents them out, and he seems to be doing pretty well. So I have started considering trying to follow this path, however the prices here in SoCal are CRAZY!!! so I've been thinking about out of state: Vegas/Ohio/Detroit/Memphis/etc. or in a low cost SoCal area : Inland Empire/Bakersfield.

I know its a lot of work and I'm not going to jump into this stuff with out doing more research obviously, but I wanted to throw it out on the forums before I go too deep. I know Arebelspy has also has experience and success with this stuff, curious to hear from the rest of y'all. Thanks!




Jack

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Re: Lower contributions to get into REI?
« Reply #1 on: November 11, 2015, 03:37:20 PM »
Posting to follow.

Also, marquee in 2015? How... eclectic.

Another Reader

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Re: Lower contributions to get into REI?
« Reply #2 on: November 11, 2015, 03:59:23 PM »
Before you make any rash decisions, check out the pinned list of books at the top of the thread.  After you read a few of those, attend a meeting or two of one (or more) local real estate investors' associations/groups.  Do some reading on Bigger Pockets, especially the articles about the basics.

Once you have an idea of the benefits and risks from reading and the meetings, start chatting up some local investors.  Get a feel for what's involved in the day to day business and what the risks and pitfalls are.  Start evaluating properties in your area to see if the numbers make sense.

As you go along, you may decide this is not for you.  If you still think you want to invest, then figure out from where the money will be drawn.

andyp2010

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Re: Lower contributions to get into REI?
« Reply #3 on: November 11, 2015, 04:57:04 PM »
It's a really great investment if done well but that's the key - if done well.

 I spent about 2 years reading and learning, scouring stats and meeting like minded people before jumping into it head first. It does really differ from shares in that your 1 house (at first, assuming you're wanting to grow much bigger) is a really huge part of whether the whole gambit works or not. If it doesn't appreciate and stays vacant 30% of the time, you won't be expanding. Even more important when you're not close to it. If you're not in town to do renovations, this adds a whole legion of costs.

You've got to be comfortable with large amounts of debt, which, at the risk of being stabbed, a lot of non-property investors on this forum, aren't.

If it's a passive investment you're looking for, try REIT's, very seldom is property investing completely passive.

Read property books until every book feels like it's repeating itself. Eventually you'll know a good deal just by rough numbers.

Zman

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Re: Lower contributions to get into REI?
« Reply #4 on: November 11, 2015, 07:16:13 PM »
Seems like the recommendation is to start by reading. I've got these two books lined up and ready to read:

--Building Wealth One House at a Time: Making it Big on Little Deals
Schaub , John
--Investing in Duplexes, Triplexes, and Quads: The Fastest and Safest Way to Real Estate Wealth
Loftis, Larry B.

And then the next step is networking/REI clubs. But what are these like? Is it ok for me to just be a fly on the wall for a couple sessions? I ask this because I feel a little uncomfortable going, since I dont have much rei knowledge.

Also, does anyone have advice on reducing retirement contributions in order to save up capital for this? I am not going to rush into this, i'll take my time. But I dont want to reduce 401k and miss out on tax advantages, or reduce the IRA and miss out on taxfree growth, if its going to end up being a crap idea/investment.

Another Reader

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Re: Lower contributions to get into REI?
« Reply #5 on: November 11, 2015, 08:57:39 PM »
In your shoes, I would keep maxing out your tax advantaged accounts and studying.  If you still have the bug in a couple of months, start diverting the money going to the taxable account. 

Not sure where you are, but in a lot of markets, deals are hard to find right now.  Buying right is critical to your success.  Once you can analyze properties and you have a feel for your market, you will have a better understanding of how much capital you will need, as well as how long it might take to find a property that meets your criteria. 

andyp2010

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Re: Lower contributions to get into REI?
« Reply #6 on: November 12, 2015, 05:58:47 AM »
I was put off by my local PI meeting as I went to a taster and it was 50 old people moaning about insurance. Not useful to anyone, whatsoever. However, if you can find someone to go on the journey with you or at least be there when you need to ask things, it's invaluable. I found someone like that, I think he's just proud of his achievements and liked somebody to listen to him. I was happy to oblige.

Also, my local one costs $250 per year and gets me roughly 10% off at hardware stores and a few other places. I spend about $10k+ per year there if I buy one house a year soooo, no brainer.

I'm not so sure on the US but from where I'm sitting, it's all getting a little bubbly for my liking. Could be advantageous to wait. Don't let FOMO or anything else irrational bring your decision forward.

zinethstache

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Re: Lower contributions to get into REI?
« Reply #7 on: November 12, 2015, 01:45:58 PM »
DH and I embarked on the REI journey in 2011. We researched and read for a little over a year. Our financial options kept changing as we scoured the land for that elusive down payment. We looked outside the box and for our first property we found (and still have) a silent partner.

The caveat to your down payment is that you need your money to be seasoned at least 90 days. You cannot call your dad and say hey I need 25k for this awesome investment, you said I could borrow it and I am ready for it now. So, be sure to round up your $$ sources well in advance to make your underwriting process go smoothly.

So for instance. In the middle of our 3rd property purchase I sold an RV and horse trailer, We did NOT think and just tossed that money in our savings account, alas it was the account already documented on our loan as our down payment proceeds account. While in underwriting I had to go dredge up "proof" of where those funds came from, and the amounts were well over and above the amount of the down which we already had record of much longer than 90 days. Some underwriters are very, very picky.

Property #2 was financed by (don't shoot me) DH's 401k. He hates the stock market, he had no interest in managing it and at the time we were too heavy on the stocks side (I have a substantial 401k). Reluctantly I agreed. He took the 10% penalty hit. As a result we net $1200/mo from that property. Technically that 10% penalty took 8 months to pay off.

We were buying at the tail end of the crash and properties were priced very well. They went so fast it was a feeding frenzy and each property felt like a battle to end up being "chosen" as the winner of a signed PSA.

Your market will be different. You might do all this research and decide to hold on a serious property search. Our market is in a bubble right now and after buying in 3 consecutive years, we decided to hold off this year.

Property #3 was not as sweet a deal as the first two, and it is an odd configuration with a shop that took forever to rent. We used a heloc to fund this property. With that shop rented it cash flows as well as #1 (not quite as well as #2) so it does have a weakness I would rather not have to deal with.

Ok, so I've covered financing. Now as far as mentors go. I highly recommend you get to know a great realtor, a trusted clever mortgage broker who can make your financing as painless as possible and fellow investors to run ideas by. I was fortunate in that I already had real estate investors in the family, a close friend and unbeknownst to me, my cubie neighbor at work. I found him to be the most helpful because he owns multiple properties, all sizes and has had them for a decade (he won't tell me how many, but he has spoken specifically about five, I just need to keep digging for more stories I guess). I still like to swap stories with him. I never did go to a local investor's group. I still read all the case studies and war stories on the Bigger Pockets forum, this forum and any other forum I can find.

The best of luck to you!


Jack

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Re: Lower contributions to get into REI?
« Reply #8 on: November 12, 2015, 01:54:35 PM »
Property #2 was financed by (don't shoot me) DH's 401k. He hates the stock market, he had no interest in managing it and at the time we were too heavy on the stocks side (I have a substantial 401k). Reluctantly I agreed. He took the 10% penalty hit. As a result we net $1200/mo from that property. Technically that 10% penalty took 8 months to pay off.

Couldn't you have gone for a 401K loan instead? I mean, 401K loans are a bad idea in general because of the possibility of losing your job and having to pay the 10% penalty, but that's still better than certainly paying the 10% penalty!

AnEDO

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Re: Lower contributions to get into REI?
« Reply #9 on: November 13, 2015, 04:35:47 PM »
My wife and I did just that for a few years in order to acquire 3 rental properties.  We are back to maxing out the tax shelters again.  A huge advantage to what you are thinking of doing is that your RE investments won't be in harder to access 401k or IRA accounts.  This helps a lot if you want to retire well before 59.5.  Tax shelters are an awesome way to build wealth but they have the problem of accessing your money when you're 40.

Genevieve

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Re: Lower contributions to get into REI?
« Reply #10 on: November 13, 2015, 06:32:38 PM »
I've run the calculations for myself, and you only need a 2-3% cash on cash return that's more than what you'd make in the stock market to make up for losing out on the one year of tax benefit. So it can make sense to lower those contributions.

Throwing money into a 401(k) is so easy though. My husband and I plan to max out one 401(k), and then save the rest while we educate ourselves on real estate.

Zman

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Re: Lower contributions to get into REI?
« Reply #11 on: November 13, 2015, 07:40:48 PM »
Ive cut the 403b contributions in half for now ... and will put $5500 into 2016 IRA throughout next year but not invest it, that way if i decide to not go through with REI, I will at least have stashed the $5500 for 2016, right?

I love the idea of maxing out tax shelter though, so it's going to be extra motivation to hurry up and get the money piled up for the first down payment! Hopefully i dont have to sit on cash for long if things are "Too Bubbly"

Also, going to think about the 401K loan idea for additional capital. Might be worth checking out if the right deal arises.

Starting first book now...

arebelspy

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Re: Lower contributions to get into REI?
« Reply #12 on: November 15, 2015, 03:29:19 AM »
Before you make any rash decisions, check out the pinned list of books at the top of the thread.  After you read a few of those, attend a meeting or two of one (or more) local real estate investors' associations/groups.  Do some reading on Bigger Pockets, especially the articles about the basics.

Once you have an idea of the benefits and risks from reading and the meetings, start chatting up some local investors.  Get a feel for what's involved in the day to day business and what the risks and pitfalls are.  Start evaluating properties in your area to see if the numbers make sense.

As you go along, you may decide this is not for you.  If you still think you want to invest, then figure out from where the money will be drawn.

In your shoes, I would keep maxing out your tax advantaged accounts and studying.  If you still have the bug in a couple of months, start diverting the money going to the taxable account. 

Not sure where you are, but in a lot of markets, deals are hard to find right now.  Buying right is critical to your success.  Once you can analyze properties and you have a feel for your market, you will have a better understanding of how much capital you will need, as well as how long it might take to find a property that meets your criteria.

I 100% agree with AR's two posts.

Real estate is not something to rush into.  Read, and learn.  Keep maxing out your tax advantaged accounts for now.

Later you can divert funds to start RE investing, but for now take advantage of what you can.

I didn't contribute enough to tax advantaged accounts early, because I was sending it all to RE, and I wouldn't advise that.  Those accounts are great.  And if you have access to a 403b, check if you have access to a 457b as well.

Real estate is awesome, but worth approaching cautiously/slowly.  :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Zman

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Re: Lower contributions to get into REI?
« Reply #13 on: November 15, 2015, 07:14:07 PM »
Before you make any rash decisions, check out the pinned list of books at the top of the thread.  After you read a few of those, attend a meeting or two of one (or more) local real estate investors' associations/groups.  Do some reading on Bigger Pockets, especially the articles about the basics.

Once you have an idea of the benefits and risks from reading and the meetings, start chatting up some local investors.  Get a feel for what's involved in the day to day business and what the risks and pitfalls are.  Start evaluating properties in your area to see if the numbers make sense.

As you go along, you may decide this is not for you.  If you still think you want to invest, then figure out from where the money will be drawn.

In your shoes, I would keep maxing out your tax advantaged accounts and studying.  If you still have the bug in a couple of months, start diverting the money going to the taxable account. 

Not sure where you are, but in a lot of markets, deals are hard to find right now.  Buying right is critical to your success.  Once you can analyze properties and you have a feel for your market, you will have a better understanding of how much capital you will need, as well as how long it might take to find a property that meets your criteria.

I 100% agree with AR's two posts.

Real estate is not something to rush into.  Read, and learn.  Keep maxing out your tax advantaged accounts for now.

Later you can divert funds to start RE investing, but for now take advantage of what you can.

I didn't contribute enough to tax advantaged accounts early, because I was sending it all to RE, and I wouldn't advise that.  Those accounts are great.  And if you have access to a 403b, check if you have access to a 457b as well.

Real estate is awesome, but worth approaching cautiously/slowly.  :)


Damnit, you guys are probably right... i'm getting over 28% by putting that money in tax advantaged accounts arent I? It just seems like it would take me forever to save up enough to REI without cutting contributions. Hell, I might even FIRE before I have enough ;-)

Oh and for the record, i dont make enough to qualify for the 457b.. I think I would need to make $208K per year according to HR. And I dont make nearly that much.