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Mike Polizzi
  • Rental Property Investor
  • Bayonne, NJ
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Hurricane Sandy Re-Build: Need Advice for my Parents!

Mike Polizzi
  • Rental Property Investor
  • Bayonne, NJ
Posted Jan 26 2018, 20:31

Hello BP, I need your help now more than ever!

Here's the scenario: In October 22, my family found out that our life life long vacation home/rental property was absolutely demolished in Hurricane Sandy. Although my parents had insurance coverage that protected against wind & flood damage, the insurance company attributed the damage to something outside of their coverage. 

Long story short - My parents were able to pay off the land and have the rest of the destroyed house demolished and are finally in a place to build. The land is worth about $500k.

The Problem: The construction is going to cost roughly $500k. They are set on one builder who has finished multiple properties in the area. The house would net a significant cash flow especially during the summer weeks. Unfortunately, my parents currently do not have the cash to put 100k down on the construction loan.  

Potential Strategy: Since they currently own the land in full, I'm thinking they should transfer the property into an LLC. This will allow them to have some protection between their personal assets and their rental (in case of any future tenant suit). As far as the money to pay for the construction, together they have roughly a million dollars in 401k/IRA (Note: My dad will be 59 1/2 in February and my mom in November). Both my parents are very familiar with real estate and especially the shore market. They have their entire portfolio in bonds & equities and with the need for a correction in the bull run and their retirement looming, it makes sense to me that they diversify some of these funds to something they know and are familiar with. I'm wondering if they would be able to transfer the 500k into a self-directed 401k and pay for the construction of the home through this vehicle instead of having to pay cash for a downpayment. I have read that you can do this but you can't "visit the property." I was curious if there were strict rules in relation to this - ideally they would love to rent it out for the 10 summer weeks and enjoy the property for a week or two throughout the year until they retired. At 59 1/2 my dad would be able to take the funds out of his account without penalty but he would still owe the tax on the investment which would be at a high tax rate. Additionally, their primary residence has some equity but they refinanced part of the property to pay off their business partner after Sandy. It seems like a self-directed 401k would be ideal in this situation and they have said they would be willing to sell in order to buy a new property but they would like to not just rent but also stay at the house for a week or two in the off-peak months.

How would you approach this situation?

They are very open to ideas and I'm curious what some of the great minds of BP come up with. 

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