Age 23 - Prioritize Real Estate Down Payment or IRA?

Question

Hello,

My name is Vidal and I am a relatively new member. The question I bring before you all is about savings prioritization. The two options I'm considering at this point are 1) start saving for a down payment for an apartment/condo which I will live in for two years (during grad school) and rent thereafter (to students near university) - and 2) don't buy now, rent during graduate school instead, and just put most savings away in traditional retirement saving vehicles.

The time horizon for saving a down payment is 12-months.

If more information is needed please let me know. I appreciate the advice and forthcoming discussion!

-Vidal

Lori Verni · Answer

My input on this is, "it depends." There are other factors to take into consideration. Questions I would ask myself before deciding, if I were you, would be:

• What kind of income am I going to make in my job after I graduate in two years? (Will it be enough to buy a place to live in and/or rent out then, AND also save plenty for retirement?)
• Compare how much money you would be likely to make off of the retirement money versus the money saved/income from an investment property in the same time period. (For example, if you had $10K in a retirement savings for 2 years at an average rate of return of 10%, how much would that earn you, versus what would you "earn" in the investment property--don't forget to include equity built by tenants, savings on rent, cash flow if any, and income tax writeoffs, as well as expenses such as taxes, maintenance, insurance, etc.)
• Where do I want to live after I graduate? (Within a reasonable distance to manage this investment property? Keep in mind that there is a LOT of turnover and repair involved with university rental properties, so unless the cash flow is enough to use a management company and still profit, that's something to keep in mind.)
• If buying a condo, don't forget to include the condo fees when figuring out your cash flow.
• How much would it cost you to rent a place versus how much would your mortgage be if you bought?
• Depending on the answers to these issues, you might consider neither buying now nor putting it in a long-term retirement savings, but instead renting cheaply and saving a ton so you can buy an investment property and/or residence after you graduate, in the place where you will be permanently living.
• However, also keep in mind that, while you would not want to cash out a retirement savings (because of the hefty penalties), there are some where you can give yourself a loan from that money. Be sure to check the details of any investment account before you start it so you are intimately familiar with what these guidelines are.
• Lastly, remember that there is some value in "what do I WANT to do?" Doing what your gut tells you will likely propel you forward to do more, so while this may not always figure out firmly on paper, it does have value to be considered as well.

My intention is NOT for you to reply with the answers to these questions, but rather, to provide food for thought. Good luck in making your decision! It sounds like you will be successful no matter what you do!

Mark Nolan · Answer

@Vidal Anguiano

Welcome to Bigger Pockets. The favorable thing abut contributing to a traditional IRA is that the contributions (maximum of $5,500 for tax year 2016) will reduce your taxable income for the year. You can later distribute $10,000 without the 10% early distribution penalty if the funds are used towards the purchase of your primary residence.  See the following.

https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-tax-on-early-distributions