Author Topic: Reduce 401K contributions to buy rentals  (Read 5741 times)

jmusic

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Reduce 401K contributions to buy rentals
« on: January 29, 2015, 10:07:16 AM »
Hello, I'm interested in buying up some rental properties.  Before I begin my question/discussion, here's some background info:

I'm a Navy Officer, and my current assets are:
22K in TSP
5K in Roth
5K in Traditional
22K in after-tax savings accounts (suboptimal I know, but I am wary of current stock market valuations)
$7k-ish hatchback free and clear, no debt.
I rent an apartment right now in San Diego (prices are crazy here!), and I'll be moving to Norfolk in August where I'm considering renting as well.
My gross taxable income is $71K before IRA contributions (which doesn't include allowances).  I contributed $9500 to TSP in 2014 and am set to max it out ($18K) during 2015. 

I'm also saving about $2k/mo outside of TSP. 



Anyway, after all of that discussion, I'm interested in buying properties in San Antonio, because my parents live there and if I needed to visit I'd have a place to stay, and I'd still have a reason to go to if I'm not in the military.  I realize that I probably am in position to buy a property right now in San Antonio, but my question is this:

Should I reduce my 401K contributions to be able to buy more rental properties? 

I'm looking at foreclosures right now in the $70-100K range that will need a bit of rehab.  After fixing up they should rent for around $1000-1200/mo so they'd meet the 1% rule of thumb, and they'd also have a bit of equity.

waltworks

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Re: Reduce 401K contributions to buy rentals
« Reply #1 on: January 29, 2015, 10:33:33 AM »
Probably a dumb idea. Maxing the tax advantaged stuff is basically a no-brainer - a guaranteed return. Middling 1% rule properties that you have to rehab and manage remotely and will have to *really* stretch to buy/finance are not going to beat maxing your TSP/tIRA/Roth/etc (in whatever order/way you do them), probably.

You can buy real estate someday, but you gotta walk before you can run, and maxing your tax advantaged accounts is the bare minimum you should be doing if you're single and have $71k/year coming in.

-W


Thomas007

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Re: Reduce 401K contributions to buy rentals
« Reply #2 on: January 29, 2015, 01:44:26 PM »
Generally I'd agree with the max out your tax advantaged accounts first. However, I did stop contributing to 401k for 1 year in my mid 20s to build up my down payment for my 1st house. I was living on Long Island and working in Manhattan so, given the high cost of housing in this area, one must make certain concessions in order to get over that 1st down payment wall. I bought my first house in 2003 for $359,000 and sold it just in the nick of time 3 years later for $430,000. This gain was far more than the tax savings I would have amassed in the 1 year period I stopped my 401k contribution.

In this case I was lucky enough to ride the tail end of the housing boom and get out just before the bust. Moral of the story - if you think your housing market is on an upswing and you, TEMPORARILY, need to divert $$ from a 401k to a real estate investment - it can work to your advantage. But, it's also true that the cost of housing in San Antonio poses a much lower barrier to entry. It's also questionable if it's on the upswing - but you would know better. 

Mazzinator

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Re: Reduce 401K contributions to buy rentals
« Reply #3 on: January 29, 2015, 02:14:46 PM »
Quote
I'm also saving about $2k/mo outside of TSP. 

How much per year are you able to save including all tsp/ira/after tax/etc?

Could you front load/back load your tsp and/ira?

For example, (my numbers may be off, but you get the idea)
Max out your tsp/ira by June (6mth) then the last 6mths of 2015 save the "cash"
Then, the first 6mths of 2016 keep saving "cash" then max out your tsp/ira the last 6mths of 2016.

That way, you're still getting the tax benefits of the tsp/ira each year, while you save the cash for an investment property in a shorter time frame?

Fwiw, my husband is army officer with similar pay and this is our plan.

jmusic

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Re: Reduce 401K contributions to buy rentals
« Reply #4 on: January 30, 2015, 10:47:10 AM »

How much per year are you able to save including all tsp/ira/after tax/etc?

I haven't really calculated it.  I just try to avoid spending money, then each paycheck pay bills/payoff spending CC and shift the rest into savings.  TSP is currently 25% of pay which I calculated to have me topped off at $18k by December.

Could you front load/back load your tsp and/ira?

I suppose I could, but I don't see it making a big difference overall as it really just affects when the savings come in.  I'm also PCSing cross/country in the middle of the year, so I'm glad to have the extra income available if needed.

For example, (my numbers may be off, but you get the idea)
Max out your tsp/ira by June (6mth) then the last 6mths of 2015 save the "cash"
Then, the first 6mths of 2016 keep saving "cash" then max out your tsp/ira the last 6mths of 2016.

That way, you're still getting the tax benefits of the tsp/ira each year, while you save the cash for an investment property in a shorter time frame?

Fwiw, my husband is army officer with similar pay and this is our plan.
[/quote]

dandarc

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Re: Reduce 401K contributions to buy rentals
« Reply #5 on: January 30, 2015, 10:53:03 AM »
Could you front load/back load your tsp and/ira?

There was a thread on here a while back that indicated (to my non-federal-employee eyes) that front or back loading the TSP would result in losing the match.  So you'd only want to do it to the extent you can, and still have the maximum match percentage go in every single check.

jmusic

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Re: Reduce 401K contributions to buy rentals
« Reply #6 on: January 30, 2015, 01:46:31 PM »
Could you front load/back load your tsp and/ira?

There was a thread on here a while back that indicated (to my non-federal-employee eyes) that front or back loading the TSP would result in losing the match.  So you'd only want to do it to the extent you can, and still have the maximum match percentage go in every single check.

I'm Active Duty and don't get a match (and I probably won't get a pension either at the rate I'm going).  I believe GS employees do though.



Anyway, one of the reasons I'm considering San Antonio aside from my parents living there, is that while the area never got super hot in 2006, it also didn't crash too hard either. 

Bobberth

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Re: Reduce 401K contributions to buy rentals
« Reply #7 on: January 30, 2015, 03:32:07 PM »
I have barely put anything into IRAs or 401ks over the last several years in order to plow more money into rental properties.  I'm not claiming it is the best, most efficient and probably not a very mustachian thing to do; but as an individual, I am much closer to FIRE by doing that than if I had been in the stock market-even with all of the gains I missed out on.  My market, situation and goals are different than yours though so take this with a grain of salt.

Mazzinator

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Re: Reduce 401K contributions to buy rentals
« Reply #8 on: January 31, 2015, 10:42:53 AM »
Quote
How much per year are you able to save including all tsp/ira/after tax/etc?

I haven't really calculated it.  I just try to avoid spending money, then each paycheck pay bills/payoff spending CC and shift the rest into savings.  TSP is currently 25% of pay which I calculated to have me topped off at $18k by December.

Could you front load/back load your tsp and/ira?

I suppose I could, but I don't see it making a big difference overall as it really just affects when the savings come in.  I'm also PCSing cross/country in the middle of the year, so I'm glad to have the extra income available if needed.

For my second question...Ok, yes..i guess i wasn't thinking too clearly, sorry... But i'll still say that i think, when saving cash, it's best to do it quick, so you don't have your money sitting idle for too long, but at the same time, you don't want to loose the tax advantage space each year.

Is your (non tsp) $22k sitting as cash in a savings account? Is it your emergency fund? How much of this would you use to buy a rental property?

But, back to the first question, i guess it depends on how much you're actually saving per year.. i see $18k plus ~$2k/mth ($24k)= ~$42k/yr.

How much total do you think you'll need for a down payment (25%) plus reno costs?

Are you married? Kids? (Just trying to get a feel for your taxes) i'm guessing no state taxes.

zinethstache

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Re: Reduce 401K contributions to buy rentals
« Reply #9 on: January 31, 2015, 06:13:34 PM »
I have a tale to share with you regarding retirement accounts, and it is not a mustachian one. We were even more extreme when DH FIRE'd in 2011. I've always paid in 401k to match + a little. DH had a loosey-goosey match from his small business employer and is very stock market phobic so his contribution stayed very small. His allocations sucked to boot, and there were lots of losses on his account whereas I use Fidelity and picked pretty solid streams that did well. He decided to bet on himself over stocks and created a business plan to use his meager 401ES (VERY unmustachian) to buy our second rental. Today it is our best income producing property. That property nets about 24% of our total living expenses and the result has been a huge psychological building block toward our final FI plans where I get to quit my gravy train day job. (DH handles the rentals and does all those awesome FI things I get to read about!). We've taken some risks which have worked out good for us. We had some great real estate prices here in PNW that forced our hand to pull the trigger to acquire as many good CF properties as our meager funds could bear. It is apparent now that we might have to look in a different region to make the next purchase as I am not seeing anything that passes any kind of test - not even close to 1%. We secured phenomenal interest rates which allowed more leniency with the various % rules out there at the time of acquisition. So, for us, by the time funds are replenished enough for rental #4 the game will have changed. Indeed after using his retirement to fund rental #2 we were able to dip into some home equity to come up with funds for #3.

So back to our rental purchased with retirement funds. That duplex, at the tale end of the lowest point of the real estate slump for our area, was priced for a quick sale by a 1031 exchange owner. We paid $255k and watched that property shoot up every month since we bought it in April 2013 to the current Zillow price of $391k, simply amazing.

It is possible at this point that it could fund rental #4 depending on how the market looks this summer.

I am absolutely NOT endorsing the methods DH chose to proceed, but if you have conviction to pursue real estate, then be sure to think outside the box when looking at ways to get your feet wet.

One more quick inspirational tale... Across the street from our home is this double lot with a tiny home in the front left corner of it. We've lived here 13 years and that property has been a rental the entire time. About 2 months ago on the back opposite side of that land, on the other lot, construction began. At first I thought it was the county building a large garage because it is a strange tall building with only a few windows upstairs and three big garage bays below, the middle a tall one and short ones on either side. They painted last week and I noticed today it MATCHES the paint of the tiny rented house. I also noticed an old red truck there today with a bowed over old man nosing around the lot. You know what... I bet he bought both lots 30 years ago with every intent on building his "retirement" nest years later, he certainly did not build it to sell because it doesn't even look like a house. It will be interesting to see if he backs in a huge 5th wheel into the middle bay after it gets finished... Hah! Real Estate is a wonderful thing:) He is realizing his dream for sure...

I say make a complete business plan and if the numbers work for you, pursue it!

waltworks

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Re: Reduce 401K contributions to buy rentals
« Reply #10 on: January 31, 2015, 07:22:53 PM »
To be fair, anyone and everyone who bought real estate from 2008-2012 or so did pretty great. It was basically all on sale.

Buying now requires a much better thought out plan and much more work to get a decent deal and make money.

-W

Dicey

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Re: Reduce 401K contributions to buy rentals
« Reply #11 on: February 02, 2015, 06:47:21 AM »
Anyway, after all of that discussion, I'm interested in buying properties in San Antonio, because my parents live there and if I needed to visit I'd have a place to stay, and I'd still have a reason to go to if I'm not in the military.

Can you please clarify the section that I've bolded? Do you really intend to let it sit empty on the chance you'll visit? How do you rent it out and stay in it when visiting? I must be missing something.

Full disclosure: I passed on Roth IRA's for a few years while I was amassing the down payment on my first house. It ended up being a good move and I wouldn't be living in a paid-off $1MM house and FIRE'd today if I hadn't taken that risk.

On the face of it, your plan is okay, but I'd recommend waiting. Since SA is fairly stable, I'd wait until you were ready to live there long term. Since you're still active  in the military, you may not want to hassle with a long-distance rental. I'd wait and use the time to amass more savings for a down payment.

jmusic

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Re: Reduce 401K contributions to buy rentals
« Reply #12 on: February 02, 2015, 12:47:27 PM »
Quote
How much per year are you able to save including all tsp/ira/after tax/etc?

I haven't really calculated it.  I just try to avoid spending money, then each paycheck pay bills/payoff spending CC and shift the rest into savings.  TSP is currently 25% of pay which I calculated to have me topped off at $18k by December.

Could you front load/back load your tsp and/ira?

I suppose I could, but I don't see it making a big difference overall as it really just affects when the savings come in.  I'm also PCSing cross/country in the middle of the year, so I'm glad to have the extra income available if needed.

For my second question...Ok, yes..i guess i wasn't thinking too clearly, sorry... But i'll still say that i think, when saving cash, it's best to do it quick, so you don't have your money sitting idle for too long, but at the same time, you don't want to loose the tax advantage space each year.

Is your (non tsp) $22k sitting as cash in a savings account? Is it your emergency fund? How much of this would you use to buy a rental property?

But, back to the first question, i guess it depends on how much you're actually saving per year.. i see $18k plus ~$2k/mth ($24k)= ~$42k/yr.

How much total do you think you'll need for a down payment (25%) plus reno costs?

Are you married? Kids? (Just trying to get a feel for your taxes) i'm guessing no state taxes.

I probably already have enough for a down payment on an $80k or so house, but I wouldn't have anything left for reno.  Getting married this year actually. 

Anyway, after all of that discussion, I'm interested in buying properties in San Antonio, because my parents live there and if I needed to visit I'd have a place to stay, and I'd still have a reason to go to if I'm not in the military.

Can you please clarify the section that I've bolded? Do you really intend to let it sit empty on the chance you'll visit? How do you rent it out and stay in it when visiting? I must be missing something.

What I meant was that I'd stay with my parents if there was anything needing my presense with the rental.

jmusic

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Re: Reduce 401K contributions to buy rentals
« Reply #13 on: February 02, 2015, 12:57:00 PM »
On the face of it, your plan is okay, but I'd recommend waiting. Since SA is fairly stable, I'd wait until you were ready to live there long term. Since you're still active  in the military, you may not want to hassle with a long-distance rental. I'd wait and use the time to amass more savings for a down payment.

My other option is to buy a place to live in Norfolk with future rental in mind, but then when I move it would be a true long distance rental.  I agree about needing more funds, hence the thrust of my original question! :)

clarkfan1979

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Re: Reduce 401K contributions to buy rentals
« Reply #14 on: February 02, 2015, 07:16:26 PM »
If you are in a hurry to FIRE, then real estate can help. Considering that you have a government job, I am assuming that you will have to put in X amount of years for your pension and you are not in a hurry. Buying a place near your parents makes sense. You can write off your trips when you visit your parents. Stop by the rental, do some touch up paint and save some money on your tax bill.

Make sure that you have some extra money to make some mistakes on your first rental. I think the profit margin should increase with each one as you learn more. If you make mistakes you can learn from them. You can't learn anything if you never do it.

Mazzinator

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Re: Reduce 401K contributions to buy rentals
« Reply #15 on: February 03, 2015, 12:00:42 AM »
On the face of it, your plan is okay, but I'd recommend waiting. Since SA is fairly stable, I'd wait until you were ready to live there long term. Since you're still active  in the military, you may not want to hassle with a long-distance rental. I'd wait and use the time to amass more savings for a down payment.

My other option is to buy a place to live in Norfolk with future rental in mind, but then when I move it would be a true long distance rental.  I agree about needing more funds, hence the thrust of my original question! :)

I don't know the norfolk market at all...
But, how do you feel about a VA loan for the owner occupied house? 0% downpayment... You could buy both...

adamcollin

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Re: Reduce 401K contributions to buy rentals
« Reply #16 on: February 03, 2015, 01:33:35 AM »
Well, consulting a real estate agent would be a better idea.

jmusic

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Re: Reduce 401K contributions to buy rentals
« Reply #17 on: February 04, 2015, 10:21:14 AM »
UPDATE:  I've decided to stay the course for a bit, and buy a multifamily property in Norfolk with a VA loan when I get there.  I've been looking online for a bit, and there's quite a bit more inventory on the market than San Diego.  Ideally I'll find a 4 unit property that's in a decent area that meets the 1% rule, and as that would likely cover all my housing costs (I'd be required to live in one due to the VA loan terms).

arebelspy

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Re: Reduce 401K contributions to buy rentals
« Reply #18 on: February 04, 2015, 11:14:41 AM »
I purposefully did not take advantage of taxed advantaged accounts in order to invest in RE, and it worked out well.  I also had some good opportunities.  That's what it mostly comes down to - opportunity cost.  Don't reduce the contributions on the hope of investing, but with an actual plan that makes sense numbers-wise.
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