Investor · Nashville, TN · Member since 2020 · 14 posts · 22 votes
Hey I'm seventeen years old and trying to figure out what to do with my money. I make upwards of 10k a year from a w2 job and save every penny. I want to own a multi-family house in my college town by the time I am 20. My question is when or how much should I start investing in a Roth IRA to start the compounding effect while not imposing on my potential real estate investing money? Thanks!!
Why not both? If you are able to invest in a Self Directed Roth IRA, You could effectively have the option to use those funds to invest in an investment property. There are many types of self directed IRA's and you will want to research them to make sure the one you get can hold real estate (you will get some that say "Yes you can invest in Real Estate" which is not the same as purchasing property in your Roth IRA) With the proper product, all proceeds that come from the Rent or sale of the property are Invested back into the Roth and will grow Tax free without counting against your contribution limits. The flip side is that expenses will also have to come out of the Roth, such as Vacancy, Maintenance, CapEx, and Management...because you will not be able to manage the property yourself. Please seek out the guidance of a CPA and Financial Advisor knowledgeable about these types of products.
Why not both? If you are able to invest in a Self Directed Roth IRA, You could effectively have the option to use those funds to invest in an investment property. There are many types of self directed IRA's and you will want to research them to make sure the one you get can hold real estate (you will get some that say "Yes you can invest in Real Estate" which is not the same as purchasing property in your Roth IRA) With the proper product, all proceeds that come from the Rent or sale of the property are Invested back into the Roth and will grow Tax free without counting against your contribution limits. The flip side is that expenses will also have to come out of the Roth, such as Vacancy, Maintenance, CapEx, and Management...because you will not be able to manage the property yourself. Please seek out the guidance of a CPA and Financial Advisor knowledgeable about these types of products.
@Jaden George good for you for thinking about things like this at your age. Real estate investing and Roth's both have pros and cons. The Roth would certainly be more passive. @Joshua Hanning suggestion may be the best of both worlds but it can also be complicated. I'd be tempted to say start the Roth now, continue to learn about real estate and look for great opportunities. You can always take the principal invested out of the Roth and use it for a down payment if a great property comes along. In the meantime you could at least be growing the Roth while waiting for your first investment property.
I kept throwing money into my and my wife’s Roth IRAs when I didn’t know what to do with our emergency $ savings. I didn’t want it sitting in my bank account earning only 1%. I bought stocks and they took off over the years. You can take all the principle you put in after 5 years of having your account tax free. So when I finally found a real estate deal I liked, I withdrew 62k out of our Roth’s to buy a rental. And it was all tax free since I didn’t touch any of the earnings! Let your money work for you in that Roth. Then when you need it for something big...boom. Snag it and sell some of your winning stocks like I did and use it towards real estate or whatever.
Yes. As long as you've had the Roth IRA for at least 5 years you can take out the amount of $ you have contributed over the years..but not all the extra earnings. Only the principle can be withdrawn tax free. So over the years, I've put in 92k. And now it's worth 280k. As long as I've waited 5 years, then I can pull out up to 92k tax free. It's a great deal. I pulled out about 62k and it was transferred into my bank account the next day. I still have another 30k to play with if I ever need it or get in a jam. That's my emergency $. But it was nice to pull out 62k with zero tax consequences five years ago when I bought my first rental property. I highly recommend opening up a Roth IRA and buy some stocks or index funds withIn it. Five years from now or longer you'll be happy you did. That's the only way I could have gotten into real estate 5 years ago. Now I'm up to 10 properties thanks to having my Roth locked and loaded to help me get in the game. Good luck!
Hi Jaden, I am 23 years old and started my roth IRA just about a year or so ago. Good on you to get started so early! As mentioned above, IRA's are meant to be passive vehicles. Although a self directed IRA can purchase property it comes with its fair share of complications. I began with passive investing , just putting in the $6k contribution and private money lending. I leveraged my network to come up with more capital, my friends and family have larger IRA's that could partner with my IRA on the same deal.
I especially like the Roth because it is considered a glorified savings account. Money you put in is considered your basis, and that money can be taken out at any time. Money you earn must stay within the account and in order to receive tax free distributions you must have had the Roth IRA for 5 years and reach the age of 59.5, The five year rule wont be a problem for you however you have a long way until you can touch your earnings. Don't be afraid to put money into the account because that is not locked in forever.
I believe you can do both, why not start a Roth and also work towards investing in real estate yourself and meeting your goal by age 20! Keep educating yourself its key! There is a lot of free education available to you to learn more.
Hey I'm seventeen years old and trying to figure out what to do with my money. I make upwards of 10k a year from a w2 job and save every penny. I want to own a multi-family house in my college town by the time I am 20. My question is when or how much should I start investing in a Roth IRA to start the compounding effect while not imposing on my potential real estate investing money? Thanks!!
I would talk to your cpa. If the immediate focus on truly owning Multifamily then look at buying a 4 plex close to a college rent out each bedroom so 4 units each unit has 3 bedrooms that is a total of 12 bedrooms. You live in 1 this way you have 11 tenants and 11 streams of income. I would look at doing an FHA loan my only worry is can you get approved for the loan due to the income you are making.
I think it's important to max out your Roth IRA while you're young so you can let compound interest work it's magic over your life time. You'll be able to invest in a Roth, Sep IRA, and Real Estate, once you make more money. Continue focusing on becoming a better version of yourself and earning more money while keeping personal expenses down.
At your age, depending what your career ambitions are, the next several years may be full of college, moving, and job hunting. A Roth IRA (which is particularly advantageous when you are young and plan on earning more later in life thus disqualifying you from contributing), will be passive enough that you can handle from wherever and focus on your schooling if need be. Also, The 2020 IRA contribution limit is $6000, so if you find yourself in a position where you have more free time and/or investable income and you want to try your hand in both, you can undoubtedly do that.
@Jaden George - Good for you man! I would echo what @Juan Deshon said, put the money into the Roth and start investing in real estate as a Private Money Lender. I've been blessed enough to quit my job by leveraging my returns from this amazing Passive income strategy. Feel free to reach out if you think you'd want to go that route, especially if you want a near 0% risk by originating your own loans to very well seasoned investors with over 150 to 200 deals a YEAR under their belts for over 10 years! Heck I've helped my family and friends originate loans as little as $10 to $15k with easy double digit returns! This truly is an amazing way to passive invest and grow your capital if you ever wanted to expand into owning your own real estate. This will also help you leverage someone else's analysis, a Title Company, a team of lawyers etc to learn the documentation, steps, and overall steps involved by spending none of your own money! Best of luck pal!
Hey I'm seventeen years old and trying to figure out what to do with my money. I make upwards of 10k a year from a w2 job and save every penny. I want to own a multi-family house in my college town by the time I am 20. My question is when or how much should I start investing in a Roth IRA to start the compounding effect while not imposing on my potential real estate investing money? Thanks!!
Since you are not an adult - most states will not allow you to execute a legal contract. Do you have a parent that will purchase or will you be over 18?
ROTH IRAs are allowed for minors (under $15k in Florida) - depends on state laws
That's amazing you're focused on your finances at such a young age. Like @Brett Goldsmith mentioned, let that compound interest work for you, it's such magic it even impressed Einstein.
@Jaden George Some contrarian advice here. You will likely pay minimal taxes on 10k/yr income. Stash that cash and then start investing it. Or start investing it right away - Alot you can do with 10k these days with creative financing.
Putting in a Roth takes away your freedom from taking it out without having to pay penalties and your not really saving much if any on the tax side.
@Jaden George Some contrarian advice here. You will likely pay minimal taxes on 10k/yr income. Stash that cash and then start investing it. Or start investing it right away - Alot you can do with 10k these days with creative financing.
Putting in a Roth takes away your freedom from taking it out without having to pay penalties and your not really saving much if any on the tax side.
That is literally the point of investing in a Roth when when have a low marginal tax rate. You pay low taxes and the money grows and is withdrawn tax free. He will more likely than not never be in this low of a tax bracket again, even in retirement. By putting money into a Roth he will probably never pay taxes on it.
The decision to got with Roth or traditional retirement accounts simply comes down to tax rate arbitrage.
Another point about the decision to Roth or RE is, how will OP qualify for a mortgage while in college? He can save $10k/yr for 3-5 yrs and end up with $30-50k down payment, but he will probably need a mortgage, which even if he gets a MF and rents out the other units, he will require some sort of income/ credit. Now if the bank of mom/dad step in, that's another story.
If I was in his shoes, I'd go with the Roth hands down.
Regardless of what you choose, open the Roth IRA and put $100 in it. You won't miss the $100, and you want that 5 year clock starting as early as possible. You might not need to utilize that 5 year clock, but guess what...if it hasn't started, it won't be there when you want it! My further advice is to max out the Roth and put the rest towards your future RE endeavors. You'll never again get the opportunity to put in a 2020 contribution. If maxing out the Roth makes you uncomfortable, then put in half the maximum. When you start moving up the tax brackets, then you can start weighing the costs/benefits of Roth contributions vs. traditional contributions with current tax deductions vs. investing in (generally) tax deferred RE. But do start with the Roth, in amount, in 2020. Good luck!
@Jaden George do you expect to have income in college to be approved for a loan? If so I would save for a househack, if not, Roth IRA until you're out of college
@Bill F. I see what you're saying. I'm just weary of putting money in retirement accounts in general if theres not a large tax advantage over say a 1031 or similar exchange. If you withdraw earnings from a Roth IRA you owe income tax and a 10% penalty. Being 17 you never know where lives gonna take you (at least I didn't LOL) and when you may need the cash.
In terms of getting a mortgage in college - I actually got my first mortgage the fall of my senior year on a 6 unit from a credit union. I had to meet with the President and pitch him the idea we had for the property and they were able to underwrite me based on the income I would be getting in the future (I had a contract to work for an Investment bank out of college) so anythings possible. You could alternatively partner with someone you know or meet at a Meetup / REIA who would have the balance sheet or liquidity needed. You could also go to a no doc lender if you were willing to pay higher fees (6-9%) or hard $ if you had no other choice and could still make the number work for you.
All great points about the ways to creatively finance the acquisition.
As with a lot of things in life, they come down to opportunity costs so there isn't one clearly right answer. In OP's case, it will come down to what is the cost of needing the money for REI, but not having it or missing out on 1-5 years of retirement savings within a Roth. What will his marginal tax rate be in retirement will give you the answer to the later question. You can't go back in time and contribute to an IRA, but you can raise more money, so exclusion is also at play here.
It also comes down to OP's personal situation. Will he have have a high paying job lined up out of college in IB or will he have something closer to the median wage with $30-60k in student debt? Maybe the answer is neither RE or ROth, but pay down loans.