Would you empty your 401k to buy real estate in hopes of a better return on your money? Depending on the amount you have saved, your current rate of return, and your appetite for adventure (aka becoming a landlord) this could be a viable option. Initially most people would cringe at taking 'secure' money and using it to purchase 'volatile' real estate in the Atlanta market, with an election year upcoming. However, if you do your homework, you may wonder, "Why didn't I do this LAST year?"
A conversation I had last week with a savvy investor & his contractor peaked my interest as they discussed bidding on an auction property in Dallas. He's pulled out $45K to purchase two homes totalling $50K. The first home was $23,000 and is already rented at $1200/mo. and he's in the process of purchasing the second. He has enough to cover the tax implications at years end. He explained how his gains were 36-40% higher than what he was currently getting through the investments in his 401k. The basic math on the first property is that outside of what was spent to get the home rent ready, at $1,200/mo barring no major repairs, he stands to have repaid his 401K in under 22 months. So after the break even, he's looking at a 'free & clear' positive cash flow property after repaying himself the initial investment. But with the prices of some homes that I've sold in the last 36 months (the cheapest $8,900), I know that these numbers are not only realistic, but can be even better!
Right now there are 178 homes listed for sale under $15,000 in Gwinnett, Cobb, Fulton, Dekalb, Clayton, Henry, Douglas combined. These are all metro area counties within a 40 minute or less drive to Atlanta. Even with $850 in monthly rent you can pay off one of these properties in 18 months. Now before you empty your nest egg, there is a LOT of homework you need to do regarding your 401k plan. Talk to your 401k administrator to find out what types of investments are permitted in the plan. If your plan allows you to buy real estate, examine whether it would be easier to buy the property outside of your 401k. The IRS imposes numerous restrictions on real estate purchases in a retirement account. Most 401k plans allow loans, which you can use for any purpose. The IRS limits 401k plan loans to the lesser of 50 percent of your account value or $50,000. After the 401k homework you'll need to create a strategy to pursue properties in a certain area, within your price point, and condition requirements--don't want to put $20,000 into a $20,000 house! You'll also need to prepare to be aggressive as the competition on $30,000 & under properties is fierce as you would expect, but someone has to win the bid. With the right price, the right terms, some timing, and a little luck, that someone could be you!
