I am a firefighter and started a second full-time job with purpose of increasing income so that I can buy more property, reduce current toxic debt(any debt that doesn't pay for itself) and paying off the 3 rentals that I currently have so that I can take and borrow on them again to buy more rentals. Was wondering if this is the best route to go or would it be better to use extra money to give me and my wife's ira and 401k a big boost. I am only going to do this 2nd job for 3 years and I know the first year is going to consist of getting out of the toxic debt so that leaves 2 years of either paying off rentals or investing heavily into ira and 401k...
Just my 02 cents... Mortgage rates are really low and the stock market is near all time highs. RE deals are not easy to find but they are still out there. My focus would be on RE. You have a pension as a fireman so I would keep the 401k on the back burner. I don't feel great about the underlying economy supporting the current stock market spike. I max out everything but I am expecting a correction.
My advice is to talk to some professionals that are not trying to sell you something.
If yo contribute the rest of the funds to your retirement accounts then they can later be transferred to a self-directed IRA or 401k that allow for self-directed investments such as real estate. The IRS code specifically states that retirement accounts can invest in real estate not just equities.
Thanks Joe B.
I would buy more rentals. You can get tax advantages for SFR over 27.5 years. That is a great incentive to buy and hold. You would also have the ability to 1031 out of them at a later date and defer any taxes. You can do that over and over. I would NEVER put RE into a retirement account. You give up a LOT of tax advantages. If you built your retirement accounts and have the ability to do self directed accounts, consider doing HML. You can get great rates of return and unlike investing in RE itself, HML has NO tax advantages outside of a retirement account. That means, you can get deferred taxes by doing HML with your retirement account and would be giving up nothing as far as tax advantages. HML outside of a retirement account results in ordinary income. I do both. Of course, before you do anything with a self directed account, talk to a good tax advisor.
All good advice here. I also work in public service and am fortunate to have a pension. This is the order in which I would do things, not necessarily right just my two cents.
-Pay high interest debt like your hair is on fire
-Have at least six month emergency funds to support everything.
-We have a 257B as well as the pension, kinda like a 401K. It lowers my income threshold for the year and grows tax free until I'm 59.5 years.
-Then I do both the wife and my IRA's
-Lastly I push money into the market using Betterment.com (Also see wealth front.com). It's very user friendly and is index funds with very low fees. They tax harvest and rebalance a diversified profile for you. Depending on when you need the money is how you set the risk tolerance.
Good luck and thanks for reading,
Also, I'm also saving for downpayment on new investment properties simultainiously to all of this. I'm up two five houses and one duplex. Many argue the benefits on her of Real Estate investment and in other financial circles they like the financial markets. My best advice is to diversify and have some money invested in both. Working with your levels of knowledge and risk tolerance. Check out mrmoneymustache.com he's got an entire section to his reasoning for using ETF's and index funds. Also the people over at early-retirement.com are brilliant when it comes to the financial markets. Me on the other hand.... I'm smart enough to let other people invest my money for me. Take care.
Lots of good points... Some I never considered or knew about so thanks everyone!
@Marquis W. , which is surprising I did not expect to be writing that line based on recent experience.
Do you receive any matching in your 401k with the pension? Make sure your contributions to the plan do not exceed the matching. If there is no matching do not put anything in there at all. The real estate will be your retirement. You might want to pay yourself down to a healthier 50% LTV and try to purchase future prorperties between 50-75% LTV paying down to the 50% range. Some leverage works as a tool, too much and the slightest hiccup can bring the whole thing crashing down.
Push the money into federal municipalities, state municipalities, and paying off your most profitable property in my opinion.
Federal and state municipality funds are tax free investments, and mine perform in the 8-9% range, which means tax effective 11-12% range, equal to that of a decent cap return for real estate, plus they usually pay monthly.
on top of that, the last thing the states and feds wont pay is their water, power, and sewage bills, hence why its a good steady flow of income.
Also, it gives you three sources of solid residual income. The more sources of residuals you have, the more stable your income portfolio is.
The more stable it is, the more likely you are to get financing, specifically because you have income coming in from many sources. It means it will take more impact on you for you to be unable to make payments.
Another thing to keep in mind is equity.
The sooner you wipe out the note, the sooner you build equity in your property, which is why I suggest at least one.
By having the equity line available, you can potentially borrow against one house at any given time to buy another house at a good buy with the proper credit.
All things to consider.
I personally favor equity, because I can be approved for a line of credit at any time, and simply not tap it for an extended period of time, and have it readily available to me should I choose to use it.
Marquis White I went through the same thing for awhile. I'm also still employed as a firefighter but am slowly replacing that income through real estate. Personally, I have shifted from increasing my deferred compensation contribution to purchasing real estate.
@Marquis W. pointed out. That said, I agree with paying off "toxic debt" and placing a higher priority on any 401k contributions that may be matched. While your 401k is restricted to certain assets, the typical return on these assets should probably be weighed against the returns you can make putting the money elsewhere. For real estate investors, this analysis often leads to a "forget the 401k" type conclusion.