Mom and Dad got one!

[Joey English]

Mom and Dad got one:

I’m so proud of my mom and dad. They just bought their very first income producing property – and they did it very creatively.

In early fall 2005, my mom and dad broke ground on a house. At the time, my brother-in-law, Michael, was their builder with myself and two other friends making up his crew. We had a track record of building custom homes in a gated mountain community for about $75 per square foot. That would’ve put the current construction budget at $165k. When we finished, we expected Mom and Dad’s house to appraise in the $300k range.

Mom and Dad made their plans in an appreciating market. They intended to live in this house for a few years and then sell it, taking advantage of Section 121 of the IRS tax code. Section 121 states that when you sell a home you’ve lived in for two out of the last five years, a married couple can clear up to $500k in profit tax free. Mom and Dad planned to put this tax free profit into their retirement plan.

In August 2005, disaster struck our county in the form of Hurricane Katrina. It wasn’t just the coastal areas that felt the effects; we felt them way up in the mountains in North Georgia in the form of price increases. We saw materials like OSB, Advan Tech subflooring and copper triple in price.

Consequently, the price to build Mom and Dad’s retirement house doubled. This made for a house payment they couldn’t afford. But they moved into the house counting on appreciation over the next few years to help them sell it for a profit. In order to help with the house payment, they took money from their 401k to supplement.

When the market took a sharp decline in 2008, Mom and Dad lost all the 401k money they had put into that house.

Their retirement savings took a big hit, but they courageously started over. They contributed to their 401k for a few years to get some funds built back up. They also day-traded the stocks held in the 401k to maximize their growth potential. Within a few years, they had a good sum built up.

What they did next was super savvy. They took out a loan from their 401k to partner with a local rehabber. The rehabber used those funds as a construction loan for the properties he was flipping.

This made Mom and Dad’s return grow exponentially – and the situation produced another bonus. Not only were they making the profit with the rehabber, they were also paying interest to themselves via the loan repayment plan they’d made with their 401k custodian.

How’s that for creative?

This month, Mom and Dad used funds they’d built up in their 401k to purchase a double wide on land. It’s currently had the same a tenant in place for four years and has a positive cashflow of $550 a month after all expenses! Just in case you’re wondering, if they keep it for 10 years (which they will), that’s a 21 percent return. BOOM!

Pete Fortunato has a great saying – “Use what you have, to get what you need, to get what you want.”

It would’ve been easy to let what happened on that first house keep Mom and Dad from investing. Instead of letting an unsuccessful attempt keep them from financial freedom, however, they boldly used what they had – their 401k – to get what they needed – a double wide on land – to get what they wanted – passive income that pays them when they retire.

Mom and Dad, your persistence, cleverness and bravery is inspirational. By doing what you’re doing, it won’t be long before you are financially free. I love you and I’m very proud of you. Keep it up.