What would you do with my 30k?

Question

I'm not sure how to proceed with the funds I have available and hope to get some advice from all the great minds here on Biggerpockets. I live in the Northern Colorado Fort Collins / Greeley area. I am looking for my first investment opportunity. I have roughly $15,000 in an old 401k and about $15,000 in my current tax return. I'd like to combine these somehow to give myself approximately 30k to work with. My goal is to flip 1 or 2 properties a year in order to purchase buy and hold rentals. With an end goal of 15 to 20 rentals within 10 years. I'm considering rolling my 401k into a self directed IRA and maybe combining that with my tax return that way. I'm no tax expert so I'm not even sure if this is possible. In order to get started, I am open to purchasing a multi-unit and moving into one of the units or flipping a SFU to gain more capital. But on the flip side, I just read that I can't live in anything that I purchase with IRA funds. Does this apply to a multi-unit? So basically how would everyone handle this financial situation? I know it's a lot of questions, so I thank everyone in advance for their patience and input.

Account Closed · Answer

@Ben Cochran First I am not a lawyer and am not giving you legal advice. I am just sharing what I have learned and been taught on this subject. I have a self direct IRA myself and do private lending with it. Actually, I set up an LLC in my self direct IRA and am considered the manger of this LLC. However, 100% of the LLC is owned by my IRA, not me. As I understand it, any RE purchases you make using self directed IRA money are not in your name they are in the name of the IRA or your LLC within the IRA. All of the profits made using IRA money stay within the IRA account. You *cannot* commingle money inside your IRA with you or your money outside your IRA. If you were to purchase a fix n flip say with your IRA, you personally can not lift a hammer or work on it yourself - at all! You would have to hire people to do that. Essentially, that asset belongs to your IRA and not to you personally. Mess with the Government rules of using IRA money for these purposes and the Government could consider it like you took all the money out for your own use prematurely and will tax the entire account and penalize you for early withdrawal. If you do self direct your IRA for these purposes, be sure to check these things out with the custodian of the IRA first. I think companies like Entrust do such things and provide training as well for RE investors.

Michael Evans · Answer

A couple of suggestions:Roll your IRA into a Self-Directed IRA and talk to your custodian about how you can use that money. You can always lend it to a 3rd party company with which you have an "arm's length" relationship (own less than 50% of the 3rd party). So you can establish an LLC with two or three people you trust to where you and at least one other person control at least 51% of the company. You should talk to an attorney about how to set this up, but it's doable and legal.Once you loan the money to the 3rd party company, use that company to fund and manage your real estate investments. I would add my tax return money to this company.Develop your financial goals. Develop 1-year, 5- year and 10-year goals., Based on your 1-year goal, develop objectives that are measurable and have deadlines. Then develop your strategies and tactics to achieve your objectives.There's more I recommend that include developing an investment model based on your risk tolerance, money available to invest, and required ROI, but I don't have time to go into that level of detail here. Look for a future discussion I will start about the topic, or email directly for more information.God Bless You!

Tim E. · Answer

Pulling money out of a 401k is expensive money. First, there's a 10% early withdrawal penalty if under 59-1/2. Second, many employers will withhold an additional 10% for taxes that may be incurred by the employee. Depending upon what your annual earnings may be, you may be on the hook for more than the employer withheld 10% as the withdrawn money is taxed as ordinary income.A better option would be to finance more of your investment and/or find a different way to put less down. If you're looking for multi's and you're willing to live in one of the units, have you looked into FHA loans?

Ben Cochran · Answer

Mark Ferguson, I haven't checked out borrowing against the 401k but I will, thanks. I'm now looking in the Greeley/Evans area as I realize that finding a multi unit in Ft Collins will be extremely difficult with the financial situation I have. Also I really enjoy keeping up with you on Invest Four More and watching your progress over there in Greeley. Michael Evans, thanks for the suggestions regarding an LLC. I'll definitely research this option more. I actually just created my LLC (Altitude Property Investments) a couple months ago for any future REI's. And thanks to everyone else for there input!

Mark Ferguson · Answer

Yes, getting a mutiunit in ft Collins for less than $40k down will be tough. Have you asked to dare if you can borrow against your 401k?

Ben Cochran · Answer

Thanks Joshua Daniels, I know there is a pretty substantial penalty for withdrawing any funds from a 401k, so that's why I had the idea of rolling it into a IRA. As far as buying a multi unit in Ft Collins for 15k down, slim to none.

Joshua D. · Answer

I would not recommend doing an IRA investment as a first property. They are complicated and I'm not sure that you can do repairs yourself. As a first property I like the margin of safety that doing your own repairs affords. Just in case you bought wrong. Others may disagree but that's how I feel. What are the tax Implications of pulling out the 401k?If I was you, I would use the 15 k as a down payment and have the 401 as an emergency fund of sorts. Not sure if 15k gets you into a duplex in Fort Collins, but it might.