Dumb to use $30k IRA for down payment on 2nd house?
Looking at buying second property - I'm going to rent my place out starting next week. I just signed a 6 month lease on an apartment in Dallas to buy some time for myself, but I really hate the idea of renting. Talked with a lender and I'm prequalified for about $600k.
Wondering if y'all think it's a dumb idea to cash out an IRA at the age of 31 that only has $32k'ish in it to use as down-payment/closing-costs...?
I'd only need to put 3.5% down which is 17.5 thousand on $500k plus 8-9 for closing costs which I'd safely have netted after paying the 10% penalty.
First house is LTV around 40% but I'm not HELOCing the down payment - IDK I hate the idea of having too much debt and $30k IRA is small potatoes honestly isn't it?
I make $130-140k a year.
Curious to know what your guys thoughts are - ideally in 10 years I'm at 5 properties.
Ah, the classic dilemma of using retirement funds for real estate investments! Based on the most helpful WSO content, here are some points to consider:
Early Withdrawal Penalties: Cashing out an IRA before age 59½ typically incurs a 10% penalty plus taxes on the distribution. This can take a significant bite out of your retirement savings.
Opportunity Cost: The $32k in your IRA has the potential to grow significantly by the time you retire, thanks to the power of compounding interest. By withdrawing it now, you're sacrificing potential future gains.
Debt Consideration: You've mentioned a dislike for debt, which is a prudent stance. However, consider that a HELOC on your first property could be a debt instrument that allows you to leverage your existing equity without touching your retirement savings.
Income Stability: With an income of $130-140k per year, you seem to be in a strong financial position. This could mean you have the ability to save for a down payment relatively quickly without needing to dip into your IRA.
Investment Strategy: Your goal of owning 5 properties in 10 years is ambitious. It's important to ensure that each step you take aligns with your long-term investment strategy and doesn't jeopardize your financial security.
Retirement Planning: The $30k in your IRA might seem small now, but it's part of your retirement plan. Consider if there are other ways to achieve your real estate goals without compromising your future financial stability.
Remember, while the idea of tapping into an IRA for a down payment can be tempting, it's crucial to weigh the immediate benefits against the long-term impact on your retirement savings. It might be worth discussing with a financial advisor to explore all your options and their implications. Keep swinging through those financial vines carefully!
Sources: Buying a ~$600k house at 25, Plan on Buying a House in 3 Years - What to Invest in Until Then, How much do you put into your 401k?, Some Very Basic RE Questions, Brainstorming Next Move After House Hack
Well you're looking to light $10k on fire with taxes and penalties (and most likely wiping out your retirement savings) so you can buy a home with a mortgage payment that will be about 80-100% of your net pay.
Not worth it, just wait a year and save the $20-30k. Also getting gains tax free is what you should want to do, would never touch a retirement account to do that and only put down 3.5%. That's like no equity. Wait until you can easily put down 20-30% and can afford any unforeseen costs instead of barely being able to afford 1/4 of a normal downpayment (20%).
Thanks for the response. Agree with all of what you said there
What's the mortgage/expenses of your first property and what are you renting it for? If you were to buy a 2nd property what are you expecting your mortgage/expenses to be? How secure is your job in this environment?
I don't think it is the dumbest thing nor do I think it is the best play either. It just comes down to assessing risk and reward. I understand why other commenters disagree because most people will advise you not to cash in your retirement and take on too much debt, which are very valid points. However, I will also say that you can't expect outsize reward without taking some risk. I agree that the ~$30k IRA is pretty small dollars and given your young age with no dependents (I assume), now would be the time to take risk. If you lost all $30k, it would suck, but in the long run it probably wouldn't really affect you. The risk that I am more concerned about is 1.) How easy is it to rent out your first property and how strong are the tenants financially? The last thing you want is tenants who can't pay rent and now you are on the hook for 2 mortgages. 2.) How secure is your job? Similarly, if you bought a 2nd property and got laid off, well that would suck. As for the upside/reward, I have some friends who bought their first property for ~$500k with 5% down and ended up selling it for $800-900k 2-3 years later. Dallas is a pretty strong market from what I hear, so I don't think its ridiculous for that to happen to you if you bought a second property. One good deal can significantly accelerate your real estate portfolio growth and save you a lot of time (how long would it take you to save for a 20%-25% down)? So at the end of the day, it comes down to properly assessing the risks and what your risk appetite is. I would say make sure you really understand the market you're in and cash out on your IRA only if you think you have a really good opportunity that is worth the risk. Don't cash out your IRA to buy a property just for the sake of buying.
Won't a ~475k mortgage at 7% rates with a 30-year be almost 4k after PMI and taxes? Seems really expensive on that income
Would probably do a 5-year adjustable @ ~5% instead of 30 year. Honestly no reason to lock into 30 year in this environment esp since rates are projected to come down. Still pretty expensive though after tax and insurance
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