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Is it a good investment to use my whole retirement to buy a rental property?

I have approx 72k in my retirement and want to know if it is a good idea to purchase a rental house.  Can anyone please give me some advice?
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April 13 2011 - Victorville
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Answers (14)

Cindy4341, if you meet all the criterias I outlined and your have the stomach for risk, then perhaps this may be a good move.

Also, there's a concern: Why if properties drop more in price? Say you bought at $100,000 and later it's worth $85,000!

My answer:  In certain cities in the US, the rental market remains strong. Even if the price goes down, the rent remains the same. Oftentimes, the rent is increased every 3 years. This rentability factor is what should be primarily considered because this is one of the criteria for return on your investment, and not capital gain or loss from selling. In summary, even if home price still goes down, your rent remains the same, if not increased after every 3 years.

My answer below shows a very realistic return of 14.66% per year based on your $72,000 amount (after taxes and penalty).

Disclosure:  This does not work in all areas of the US. It works in cities where the home price is low and the rental market is very healthy. One such city is Las Vegas, NV.
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April 19 2011
Hi Dan, my 15% vacancy assumes almost 2 months empty per year. So I'm being extra cautious in spite of the fact that my rental properties here has a 0% vacancy ratio.

To answer your other concern, Vegas currently enjoys a very healthy rental market. Many good people were foreclosed upon or short sold, and previously accustomed to paying $1500 or more on their previous mortgage. So paying $1250 is a breeze for those who are not part of Nevada's 14% unemployment rate.

Also, Vegas still has about 5,000 people PER MONTH moving here. This is a big part of the initial rental market.

By the way, I just used Vegas as an example. It can work for Florida and other depressed markets.
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April 19 2011
Add #7 to my answer below:

7. When you make this investment in real estate using your retirement funds, you must agree to yourself that all incomes must be reserved for your retirement or to pay down the mortgage. It cannot be used for your personal spending today, or any day, before your actual retirement age.

$10,560 divided by $72,000 = 14.66% return (after IRS tax & penalty). If you are not making this kind of ROI on your 401k or retirement account, then perhaps this is a good move. Keep in mind that this return only counts the gross rental income. It does not count if 10 to 20 years from now you retire and both homes appreciate in value and you realize a capital gain!

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April 19 2011
Profile picture for the_country_hick
Al, what is the vacancy rate in loss vegas? What cap rate can be expected there? All of the good math in the world does not help if a rental remains empty. That imaginary income that does not arrive (always include 1 month empty a year) sure changes profits to losses.
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April 19 2011
Everybody is saying "No," but I am going to disagree! My answer is "YES!" with the following conditions:

1. You are under 50 years old. Why? You may still have time (15 years) to recoup losses.

2. You will take an active role in managing your real estate investment. Your goal is to earn a higher return through rental income (and hopefully realize equity appreciation over the years).

3. Know the consequences: If you are under 59 1/2, you will pay Federal Taxes based on your tax bracket which can bump u up to a higher bracket together with your current income. ADDITIONALLY, you will pay the IRS a 10% penalty. In a nutshell, you may only have $35k left to invest after taxes and penalty.

4. You have good credit, low debts, and you can qualify for a home loan for investment purposes (10% to 20% down).

5. With $35k left, you can buy 2 houses in Las Vegas, for example. Fannie Mae has the Homepath(.com) program wherein investors can buy with only 10% down and Fannie pays for closing costs up to 3.5% (if closed by June 30, 2011). In Vegas, a 3 to 4 bedroom home with 2 to 3 bathrooms and only 4 to 10 years old sells for about $100,000 each. You can use $20,000 of your $35,000 and still have $15,000 for repairs and a buffer budget. Each of the homes rent out for $1250 per month on average.

6. You realize $2500 a month gross rental income. Now, do the math:

$995/mo P & I for both loans (10% down, 5.25%, 30 yr)
$150/mo Property Tax
$100/mo Insurance
$375/mo Vacancy ratio at 15%
----------
$880/mo NET ($10,560 a year)

$10,560 divided by $72,000 = 14.66% return (after IRS tax & penalty)

And remember, you still have $15,000 CASH! If you have further questions, click my photo for my contact info.
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April 19 2011
no
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April 19 2011
NO, don't do it.
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April 17 2011
HI,

Rental property is probably the best buy that it has been in many years.  There are a number things to consider before buying rental property. 
1. How large of a home can you buy with the money.
2. How strong is the rental market in your area?
3. What will your total cost be on the home?  Taxes, insurance, maintenance, etc.
3. What can you rent the home for?
4. Will you manage the property yourself or hire someone to do it for you.
5. Do you have someone to do the periodic maintenance or  will you need to hire some one?
6. What is the estimated vacancy rate in your area?
7. What is your estimated pre-tax profits on such a venture?

I have a spreadsheet that will guide you through the investment analysis process.  If you give me a call I can discuss it with you and then send you a copy.

Sincerely,

Mel Gilson
707-330-8930
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April 14 2011

I think the consensus is "NO", for several different reasons. Most of us feel property values will likely still decrease before they increase. Though property values are important, ROI is key. Monthly rental rates are increasing as demand increases, which increases a property value though the actual real estate value may be less. Ultimately, this decision should be made with your financial planner.
More variables to be considered than what is dicussed here! 

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April 14 2011

That is a great question, it really depends on your risk tolerance and current ROI compared to what your worse case ROI can be with an income property. Do you have or need exit strategy built in on the income property? Where are you investing? Close to home? Do you have a professional helping you?

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April 14 2011
Don't put all your retirement money on an investment property. It's too risky. Real Estate value may still drop more.
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April 13 2011
Do not use the "whole" account.  You have a lot to consider here - such as your age and how many more years you will be contributing to the account.

It certainly would make sense to use a "small" portion of it to invest in income-producing real estate if it provided you with a good return on your investment.  You can use our Kansas City or Atlanta properties with seller financing as a benchmark to compare to other investment options you may have.

Finally, remember that if you are financing the purchase in any way, the loan must be a non-recourse loan.

Good luck!
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April 13 2011
WHOA!  NO!  There are way TOO many factors to consider when answering this question so I would say not without the hand holding of somebody successful.  The chances of you losing are far greater than you winning.

Good luck, hope this helps.
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April 13 2011
Profile picture for the_country_hick
It is never a good idea to place all of your retirement funds in any one asset. That includes houses, gold, and automobiles. Diversification is the best way to go.

Also, once you are retired and maintenance is needed who will do it? How will it be paid for then? What happens if no renter wants your rental for several months? Until retirement how could you afford to pay for problems that will happen with that house and cost you a lot of money?

Also, what happens if house prices drop more?

Peter Schiff: Here's Why Home Prices Have To Decline At Least 20% And Probably More

The Fallacy of a Pain-Free Path to a Healthy Housing Market - Economic Letter, December 2010 - FRB Dallas<--- the federal reserve. They print the money and make monetary policy.
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April 13 2011
 
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