Planning a RE strategy for both 401k and personal investment

[Debby Reed]

Hello, I'm hoping for some advice on an investment strategy for both my 401K and personal property.

A little background: I'm single, 50 and have 2 kids with me part time (not claimed as dependents). 

I'm employed full time with roughly 45k gross income, have about 20K in savings and 260K in an IRA that I could roll over to a self directed or solo 401K. I have a smaller match 401K with my employer, but can't do anything with that unless I cash it out. I own my well-maintained home in a great location with 30K left on the mortgage (house is worth 85K), monthly payments of $550 with a 2.75% ARM. No car loans but have about 4K debt on a 0% credit card.

My plan is to rent my current home at $800/month, buy a second property (duplex or triplex) up to 100K with a conventional 3% loan with 10% down (already talked to my bank about this) then live in it and rent out the other unit(s). The place can't be a rat trap that I spend a lot of time/money fixing since a. full time job, b. kids and c. limited mechanical inclination. I'm not sure what the numbers for the rents would have to look like  to make this work.

I want to use the solo 401K (once I've rolled it over) to either buy real estate and/or notes but since I'm not exactly a savvy investor I don't know where to start with that. I'm also not sure what the advantages/disadvantages are to buying property with personal savings vs using a solo or self directed 401K.

Thanks so much in advance for any and all suggestions!

[Trevor Ewen]

@Debby Reed

Welcome.

You have quite a few questions, and my responses may be better suited for some topics over others. 

1) You seem to have managed your money responsibly over the years. This is your greatest quality in this business. Hold tight to your ideas and discipline in personal finance, and you will make decisions that resonate with that.

2) Your income may be low enough to qualify your IRA for a Roth Conversion ladder (detailed here). If that is the case, or you can make it be so, I would recommend focusing on that over any or all real estate investment. The returns you get from not paying taxes are better than anything I have seen in this business.

3) Because you are 50 years old, most financial advisors would say you should be on the more conservative end of the IRA investment spectrum. In this regard, I would be very careful about acquiring properties inside the IRA, as crazy outflows could eat away a well-earned retirement fund. I would focus any 'alternative' investments on notes and syndications of the very trustworthy variety. I would stay away from singles and smaller multis in the IRA.

4) Your plan to house hack and rent your current residence are smart while interest rates are low, and the US market is very favorable to owner occupants. I feel you on the managing repairs end of the spectrum. It's often more work than people make it out. People who have to pay for this labor by the hour (like myself) are very wary of taking it on to begin with.

We've found a bit of gold buying from flippers in neighborhoods that are not quite ready for the high-end retail crowd. In this situation you get houses that are in good shape (because they have just been rehabbed), but can't quite fetch the price the flippers originally projected. You can come in and lowball the offer a bit. You may have to trade down on neighborhoods with this approach, but if you know your market, you can make an educated guess.

I wrote a long response, Reach out if you have more questions. Good luck getting started.