My diversification story
Just want to share my story regarding diversification from heavy equity/401k position to short term rentals. I'm sure there are things I could have / should have done differently but I'm moving forward with new perspective and knowledge.
Retired in January 2019 @ 55 to purchase a vacation property on Maine coast which my family had vacationed at for over 50 years. Had a history with the property so knew the potential and happy to say 2019 rental season went better than expected.
To fund this initial purchase, I had to tap 401k for substantial down payment with balance financed by Seller. Because I retired in the year I turned 55, I was able to access my 401k without the 10% early withdrawal penalty. Some of the funds were Roth but the bulk was traditional 401k so took a big hit with taxes.
Like many of us with 401ks, my account did very well the last few years but I knew at some point it would head the other way. My wife and I were basically living off the account's interest last year but knew that if and when the market went south we'd start to eat into principle which was not sustainable. Given that reality, I decided based on the positive experience of the 1st season it was time to further diversify away from 401k towards more short term rentals.
Since the initial property purchase, we tapped the 401k again to purchase a turnkey vacation property and a rehab project, paying cash for both. The turnkey is substantially rented for the season and the rehab will be rentable late summer.
The pro's of my diversification story; well,...I've diversified, own a few properties outright with positive cash flow on the horizon, own another vacation property with 20% down and positive cash flow year 1. The con's; major tax hit beyond the required 20% Fed and 7% +/- State held at withdrawal based on higher tax bracket, substantially lower 401k balance.
I'm thinking of leveraging the 2 cash purchased properties to finance further short term rentals and welcome your thoughts on this strategy.
I share my story to let those who may be coming down the home stretch towards traditional retirement that there are options regarding tapping 401k at 55 to enter real estate but not without costs. Thanks for listening and welcome any comments/questions for clarification, etc..
Welcome to BiggerPockets! Truly nice to meet you. Good luck going forward! Hope the best for you going forward in 2020!! Stay active in the forums to get to network!! I wish you much success in your quest! Thank you for sharing your story. Sounds like you are off to a great start. I have been toying with using money in my IRA (I will have to pay the taxes). But I feel it will be a better return in the long run. Thank you again.
@Toby Sheehan and also @Anthoney Hanks
An option to use your retirement funds and still be able to invest in real estate without having to take the tax hit and early distribution penalty is a self-directed IRA or 401(k). You could rollover or transfer to a self directed IRA, the funds stay in a qualified retirement account and then your SDIRA would purchase the property. All expenses incurred by the property would be paid by the SDIRA. All profits received by the property would go back to the SDIRA. You can then take distributions from the SDIRA as needed.
Thanks Anthoney and Carl. That ship has sailed for me but good advice for others considering my strategy.
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@Dmitriy Fomichenko
Thanks!
Hi @Toby Sheehan and welcome to BP! What an awesome story. It's really cool to hear how you took a deep dive into this and really diversified. Where about Downeast are you? That's a great spot for vacation rentals!
"I'm thinking of leveraging the 2 cash purchased properties to finance further short term rentals and welcome your thoughts on this strategy."
I definitely like this strategy. It's often called here on Bigger Pockets as "BRRRRR" and that is the strategy I am using right now. I buy houses in cash, fix them up, get tenants, then refinance them to get the money back out. And do it again!
Good luck!!
Eddie
Hi @Eddie Gonnella. I'm in Sullivan and looking to add a few more properties in the Schoodic area. Thanks for the heads up on BRRRR; didn't know I stumbled upon to a strategy that had a name!
Keep an eye on your ROI and make sure you have a CPA that understands real estate, depreciation, cash flow, that can help you figure if your investments are providing true diversification with good returns. Sounds like you have a good head and a viable plan. Good luck.
@Carl Fischer
Sound advice Carl. Tough in my region with a relatively short season so looking at options to bump ROI through off season occupancy via corporate tenants, school teachers, etc..