My wife and I are making the jump! How would you?

Question

My wife and I recently decided to pull her retirement to purchase a rental. She has about 20k in all together, and we are aware we will take a tax hit up front. We believe this is the best decision for us at the current moment.

How would you use 20k to find a deal? We can’t househack a duplex because we are living in our first home we just bought four months ago. I’m looking more into putting as little as possible into something that needs a little bit of work. Would you look for an off market property? How would you work the financing with only 20k?

Open to any and all ideas.

Thanks, Family!

Jim K. · Answer

@Kyler Cook

What if "the current moment" really isn't the best moment yet?1.You have to access retirement accounts and pay penalties to get get money.

2. You just moved into your first home four months ago.

3. You're being forced by your lack of funds to look at plenty of renovation in your first deal.

4. You're in the middle of a resurgent pandemic.

This really may not be a good time. Can you agree to hold off for six months, and in the interim, make a commitment to read four or five books together on real estate investing and personal finance? To record your expenditures over those six months and see where you can make changes? This is a GREAT time to check up on your personal finance health. As far as getting into renovation projects, though...this isn't a good time at all to be vetting and hiring contractors.

Caleb Heimsoth · Answer

@Kyler Cook my first thought is this is a really bad idea.  Real estate is best served as a compliment to an overall portfolio strategy, not the only thing.

The tax hit and early withdrawal penalty don’t make this worth it

Petur Karlsson · Answer

Hello, Kyler!

What kind of financing did you use to purchase your current home? If its not an FHA loan and there are no contingencies to you living in it for a set amount of time, you can consider listing it for rent while searching for a duplex to purchase for a househack, living in one side and renting out the other. That way, you'll have free (or close to free) housing and much better monthly cash flow to put aside for growing your investments.

This is exactly what I'm planning to do. I have a BRRRR deal underway (Buy, rehab, rent, refinance, repeat) and as soon as we complete it, my goal is to rehab our primary residence, rent and refinance it as well and then purchase a duplex to start house hacking. By that point, I'll have three properties building equity and no housing costs! It's never too late to get into house hacking, even if you already own a home, and it could be a very wise move to speed up the trajectory of your wealth building journey.

Jordan Atkin · Answer

@Kyler Cook

I’d take a serious look at @Jim K. comments.

Sometimes the best investment you can make is in yourself. I’d suggest taking to a self directed custodian to understand your options with that retirement account.

If your considering making a career pivot that extra cash could help provide stability and security for you to break out into your own.

Getting another rental won’t do much for you compared to getting your income UP.

Kevin Allen · Answer

@Kyler Cook as far as paying taxes you are never going to get out of paying taxes on pulling money from a retirement account.  However, if you’ve lost a job, been laid off, etc because of the COVID it could fall under the Cares act and you could avoid the penalty.  Also the taxes could be spread out over 3 years.  I’m not a CPA so if someone else want to give some input on this

Kyler Cook · Answer

@Petur Karlsson

We do have an FHA on our current property. So no go on that. Probably going to have to do creative financing or a 20% down situation.

Damaso Bautista · Answer

@Kyler Cook

With  20K if you can find a sub $80K duplex and come up with closing costs then you can make it happen. 25% down and go from there.   Another option would be if you could find someone to owner finance for you.  There are other ways I am sure but I don't have any experience with them.

Petur Karlsson · Answer

To address your second point, consider looking for private lending from family. I was fortunate enough to have in-laws that are very financially savvy and clearly understand what I'm doing, so they graciously offered to pull out HELOC money on their primary residence that they own mortgage free, to help the me and the wife acquisition and rehab our first rental. You can also look for a partner that can bring money to the deal, as long as you have complementing skill sets and symmetrical goals.

John W. · Answer

@Kyler Cook

I think it's a great time to liquidate all retirement accounts. You will come across something promising eventually and just keep saving up until you find it.

Jim K. · Answer

Kyler, I too got into real estate investing as a teacher. I was nowhere near ready, not even close, when I got into this. It cost me. We lived in too much house, we drove way too much car, and I suffered under the illusion that I needed to entertain the opinions of the broke. I too was short when discussions touched on our personal finances.Have you read books like "The Total Money Makeover" and "The Millionaire Next Door," and "Your Money or Your Life?" Do you look at blogs like "1500 days" and "Mr. Money Mustache?" Have you ever visited the ChooseFI.com website or listened to the Bigger Pockets Money podcasts? You may find some quality time spent with these to be a life-changing, or at least a life-affirming experience, as I did.

You might have difficulty believing how many guys I've seen shoot themselves in the foot because they didn't have their money game right when they started on REI. This business, especially when you're starting, can really wear you and your family down.

This is my second attempt to get through to you on some things it's obvious to me you haven't considered, or else you wouldn't be considering such a clearly flawed, low-probability-of-success investment plan. 20K is just not enough for any sort of realistic down payment AND reserve you'll need to go into this. I do not do this often. But I thought I would try. Please feel free to contact me if you would like to talk further about this. Good luck to you whatever you choose to do.

My wife and I are making the jump! How would you?

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