My diversification story

[Toby Sheehan]

Just want to share my story regarding diversification from heavy equity/401k position to short term rentals.  I'm sure there are things I could have / should have done differently but I'm moving forward with new perspective and knowledge.

Retired in January 2019 @ 55 to purchase a vacation property on Maine coast which my family had vacationed at for over 50 years.  Had a history with the property so knew the potential and happy to say 2019 rental season went better than expected.   

To fund this initial purchase, I had to tap 401k for substantial down payment with balance financed by Seller.  Because I retired in the year I turned 55, I was able to access my 401k without the 10% early withdrawal penalty.  Some of the funds were Roth but the bulk was traditional 401k so took a big hit with taxes.  

Like many of us with 401ks, my account did very well the last few years but I knew at some point it would head the other way.  My wife and I were basically living off the account's interest last year but knew that if and when the market went south we'd start to eat into principle which was not sustainable.  Given that reality, I decided based on the positive experience of the 1st season it was time to further diversify away from 401k towards more short term rentals.

Since the initial property purchase, we tapped the 401k again to purchase a turnkey vacation property and a rehab project, paying cash for both.  The turnkey is substantially rented for the season and the rehab will be rentable late summer.  

The pro's of my diversification story; well,...I've diversified, own a few properties outright with positive cash flow on the horizon, own another vacation property with 20% down and positive cash flow year 1.  The con's; major tax hit beyond the required 20% Fed and 7% +/- State held at withdrawal based on higher tax bracket, substantially lower 401k balance.

 I'm thinking of leveraging the 2 cash purchased properties to finance further short term rentals and welcome your thoughts on this strategy.  

I share my story to let those who may be coming down the home stretch towards traditional retirement that there are options regarding tapping 401k at 55 to enter real estate but not without costs.  Thanks for listening and welcome any comments/questions for clarification, etc..

[Toby Sheehan]

@Carl Fischer

Sound advice Carl. Tough in my region with a relatively short season so looking at options to bump ROI through off season occupancy via corporate tenants, school teachers, etc..