Using retirement to buy condo

8 Replies

Hi. I'm from Phoenix Az and I am 34 old.  I'm tired of living paycheck to paycheck.  I know I will pay lots of money in taxes if I take out my $43,000 retirement early, but it is my only way to come up with the money to put as a down payment on real estate.  I would like to buy a condo in a very great location near Arizona State University. I am very familiar with those condos since my mother has lived there the past 5 years. They are newer and beautiful and rent out quickly. I feel confident this would be a good investment. The condo is $87,500.  I would have enough money to put down.  Also the rent would be cheap enough for me to pay if someone does not rent it that month...around $500. Does anybody have any advice to give me? Any words will be helpful to me....Jennifer

@Jennifer Allen  - Are you looking to make this purchase so that you can supplement your income with the cash flow (i.e. "tired of living paycheck to paycheck")?  If so you will really want to make sure that you will be getting the cash flow that you need from the investment.  Condos will have high monthly association fees and you want to make sure you are accounting for insurance, vacancies, repairs, etc.  Once you have calculated what your actual monthly cash flow will be, ask yourself if it is worth paying the taxes and penalties for cashing out your retirement fund.  Is it worth it for an extra $50, $100, $200 a month?

If you are not going to be doing this for the immediate cash flow, then you might want to look into converting your retirement fund into a self directed IRA if you believe real estate will be a better investment than what you currently have. You will not have to pay the penalty nor taxes, but you will not be able to collect/spend the cash flow. Just be aware that your retirement "fund" will now be much more active and will have new risks.

I too am 34 (grew up in Tempe in fact) and believe in the long term pay out rather than the short term gain.  I am using rental properties as part of my retirement strategy so I too see the benefit.  $43K in retirement is a good start and if left for retirement will have ample time to grow (30+ years).  Just make sure that what you would lose in pulling out your retirement savings is worth it in the long run.

@Jennifer Allen  

I can't offer any financial advice but have you considered purchasing the condo with the retirement funds 'inside' an IRA? That way you don't have to withdraw the money from your retirement plan and pay taxes.

There are plenty of rules when doing this but it's covered in depth here on BP and there are many experienced investors that can offer advice. I have a blog here on BiggerPockets that discusses the basics as well.

Good Luck!

Using an SD IRA with leverage can be tricky since you can only use a non-recourse loan for the rest of the purchase. But it may be worth it. There are people doing it successfully.

Alternatively, if you can find an investing partner or even your own cash to "co-invest" that will work, and may be better than completing the sale with leverage. 

@Jennifer Allen  

I think the main unanswered question here is are you after the extra cash flow or are you trying to improve your retirement account? It's going to be really tough to use those retirement funds if your looking for cash flow in your hand.

I do know of a couple of condo's in that price range, in Tempe/Chandler area that the seller is willing to carry the note with 20% down. Let me know if I can help you in any way

@Jennifer Allen  when I left my corporate job, I pulled all my retirement funds out and bought real estate. I wouldn't change it looking back. Can you buy the property with 10% down? If so you'll only need to take out ~$15,000 from your retirement account. You'll pay a small penalty to get you headed where you want to be. I say go for it. Depending on how many mortgages you currently have, you could possibly buy 3 of these units. If the numbers work, maybe that would get you an extra $600+/month in cash flow. But I agree that condos aren't the best for cash flow. 

Thank you so much Chris, Loren, Jeff, Dick and Mark ! I truly value all your advice. Yes, I am looking for cash flow. I did more research and understand it is not much profit buying condos in my situation with only about a $100-200 month cash flow after the HOA fees. Houses in my price range need too much work though and I dont have the money to renovate them ...but I would like something that is less maintenance. I currently own a home (for the past 5 1/2 years). My home is now worth more than I owe on it but I'm not sure I want to go there [email protected] Dick Rosen I may look into that regarding the seller carrying the [email protected] Mark Gallager thanks for the enouragement...I am realizing that condos are not the best cash flow.. unless I can buy property for less than 25-30%...Thanks guys! :)

Hello Jennifer,

Kate Jensen here in Scottsdale, AZ. I understand that you're interested in the cash flow, but you also seem to be a person eager to explore ways to grow your portfolio. I get excited when people talk about using self-directed IRAs to purchase cash flowing properties inside their retirement funds. In my opinion it's an awesome tool giving you total control of retirement funds. There's an approved, local company, Vantage,  in N Phoenix (208th & Tatum) that offers the tools to do this. They offer classes monthly to learn exactly how it works & understand the dos & don't and the pros & cons. No high pressure, just good information.

If you have any questions, please feel free to contact me at [email protected].

@Jennifer Allen ,

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Raymond

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