All Forum Posts by: Daniel Murphy

Quote from @Derek Zeigler:

Alright so What is the benefit of contributing to a Roth 401K vs self investing in a taxable account granted you have the discipline to invest. I am looking to invest more in RE and like the liquidity that a non 401k provides if I were to want it to put into a deal. I may be looking at it wrong but a 401K seems great for people to start with and for people not financially disciplined to actually save that money once they get it. Let me hear your thoughts.

About me: 31 yrs old, married with 1 child. net worth about $500K with just over $300K in investments. Max out roth 401K and roth IRA for last 2 years, Total income last year $176,000

As a financial planner, I would say that one of the main things I'm trying to do for my clients long term is to get money as efficiently into Roth IRA's as possible. The real benefits of a Roth, you won't see for 30+ years. Roth assets are withdrawn tax free, which gives you incredible options in retirement. Plus, they pass to heirs tax free.

Imagine yourself as a 70+ year old. You've built up a decent RE portfolio. You're retired & you don't need your investments to survive (which are now likely worth well over $1M).  You start to run into troubles when you're required to take distributions from your Traditional IRA's & 401k's.  Essentially, you've lost some control over your taxes now because of these required distributions.  This is one scenario when Roth assets are incredibly helpful.  You can control your tax bracket more because you have the option to withdraw tax free assets when needed. 

To your current situation. Your total income of $176k minus the standard deduction of $27,700 gives you an estimated taxable income of ~$148k.  This puts you in the 22% tax bracket which caps out around $178k.  So until your income grows by another $30k, investing in the Roth is still a good strategy. Once your income grows more than this, you'll likely want to shift your savings to the standard 401k. 

You'll also want to determine what your goals are. If you want to buy more RE soon, I would shift your savings to a taxable brokerage. Continue to put the min amount into your 401k to get the employer match, but you could put the rest into a taxable brokerage account which will be 100% available to purchase more RE.  

Long winded answer, but ultimately you want to save where you get the most tax benefit, and the most "how am I going to use this money" benefit.  Reach out to me if you want to talk about it more.  

Quote from @Ryan Rabbitt:

Thoughts on why to stop 401k:

- no match benefit

- returns are very low avg. annual ~5.5% last 3 years net of fees

- can only borrow up to 50k from 401k 

- limited access to capital until retirement age 

Thoughts on why it could be good to invest in ETFs or general securities example instead(SPY) :

- higher returns 9% avg annual last 3 years net of fees 

- access to capital - securities backed line of credit (could be used as another form of liquidity to continue purchasing real estate) 

- long-term mitigated tax liability - if you never sell the underlying securities and instead use the line of credit as a form of liquidity to purchase assets

It seems like this could be a long-term strategy with limited tax liability. I don't hear many people talking about this as an alternative if your employer is not matching 401k and you want to be more active in your investing approach long term. Do you think this could be a good strategy where are the pitfalls here? 

 A few thoughts on this... 

First, your return comparison is likely not an apples to apples comparison.  Usually, you're comparing your 401k portfolio returns (which are usually in a default target date fund) vs SPY.  It's like comparing a wide, stable & safe pontoon, to a speedboat.  As long as the expenses in the 401k are not abnormally high, investment returns should be similar if you're comparing like investments.  

You mentioned you make too much to contribute to a Roth. One benefit you may want to take advantage of with the 401k is the tax deduction.  Look at your previous years tax return, then go to your taxable income line.  Google "IRS tax rates" for your filing status.  If you're at or near an increasing tax bracket, it could make sense to contribute to the 401k just enough to get your taxable income one tax bracket lower.  (in fairness, this is not super common).  

All that being said, I normally recommend people invest 1st in their 401k to get the employer match. Then to a Roth IRA (neither of these are applicable to you). Next step is to look back at the 401k (for the tax deduction) or a taxable investment account. The taxable investment account will not give you a tax deduction, but you're right. It will be tax-advantaged to you & fully accessible to use for future real estate purchases.

This is a nuanced situation, but you're on the right track with your thinking.  Reach out if you have any other questions... I nerd out on this stuff. 

Most any of the big custodians will be able to set this up for you easily and with little to no cost.  Fidelity, Vanguard, Schwab etc.  It just depends on which interface you are most comfortable with.  I have 4 UGMA's setup at Schwab.  Very easy process.  

Hey @Shawn Fletcher, I honestly don't know a ton about the rule of 55, but I hate seeing your question go unanswered for so many days.  Schwab has a good article on this.  Here's a few things to note from the article:

- You can only take the penalty free withdrawals from a 401k where you were actively contributing. 

- You need to leave the plan in place until you're 59.5. IE- you can't move your 401k plan into an IRA & continue to take withdrawals. You'll want to check your admin fees for keeping the plan alive to see if it's advantageous to leave the plan in place.

All in all, this seems pretty straight forward. BUT, I've been a financial planner for 15  years & have not yet run across this (other than state employees having early withdrawal benefits) & the 72t provisions.  

You'll want to call your recordkeeper (401k sponsor) and ask them directly. If this is not a common thing, they may not know about it and automatically code any distributions pre 59.5 as "early distributions" which will trigger the penalty on your taxes.  

Call to double check. If you get a service rep that doesn't know about it, ask for someone else until you feel confident in their answer.  Financial service reps are hit or miss... 

Quote from @Bailey Kramer:

2. Every Monday I check Pricelabs to see how my property is performing

Can you elaborate a bit more on this? What do you check, what do you look for & what is considered good / bad? 
I've been using price labs for a while but if I'm honest, I don't spend much time in there anymore.  I'd like to institute a weekly routine like yours. 

I've had this question in my head for a while and figured I'd finally ask it.  

Let's say you created a youtube channel for the purpose of creating a following & eventually making a profit. A DIY maker type channel. 

Could you do a renovation on your home, create a video & then deduct the rehab costs? 
Assuming of course that you continued to make videos in an attempt to build a profitable channel... 

Personally, I see this is an answer that changes over time. RE investors are a different breed. We're hands on, learners, risk takers. Most stock market "investors" are pretty hands off. They want to add money to a diversified portfolio & forget about it.  So your answer will likely change as you get deeper into RE investment & there is no "right" answer.  

But, here are some thoughts to make smart decisions.  

You'll want to at least save enough in your 401k (employer plan) to get their match. (the "free" money)

Next, do a rough calculation of your total taxable income.  Add up all your income for the family (use your Schedule E from last year to estimate the rental income).  Subtract your itemized or standard deduction and then google the 2023 tax brackets.  Let's say your number ends up at $180,000 which is just above the 22% tax bracket, slightly into the 24% tax bracket.  If you're creeping into a new tax bracket, it could make sense to add some extra money to your 401k to bring your taxable income back into a lower tax bracket.  - To clarify, this is not super common to be on the cusp of another bracket. 

Lastly, depending on your comfort level with risk & your timeline to next RE purchase, you could consider investing into a taxable account for a shorter perior of time. If the market goes up, you could have more money to leverage for the next home purchase.  

A timeframe of less than 6 months is extremely difficult to plan for "investment" wise. Your best bet is to keep the money in CD's.  You can find 3-6 month cd's with a 5+% yield.  

"Investing" the money over this short period of time, especially with a goal of buying properties soon, would not be the best move.  

Let's say your best case scenario of investing is a 10% gain. So now you have ~$39,600, but owe income taxes on the ~$3,600. Does that dramatically change your purchase plans? 
Or the worst case scenario is going down 10%, does this knock you out of a purchase? 

Investing = long term

Saving = short term,   Keep saving the money, enjoy the predictability & use it to plan your purchase. 

@Adam Sorrells, 

I live in MN and have a property in Cape.  I used Scott Waters at Accuspec, 239-935-9906

I found out at the inspection that Scott was my neighbor about 6 houses down.  I've met him every time I fly down & he is a top notch guy in every way.  I feel his inspection was great, his service was even better.  After the hurricane he even took the time to check my house out for me, send me pictures & help me out when I went down to clean up the property. 

Absolutely a full 5* recommendation for him. 

Stay away from the Ultraloq, I started with this one on my STR because it was all I could find during covid. The instant I left the property, it would not work and customer service was horrible.
I now have it on my home residence & it eats batteries monthly.  

Schlage encode continues to be the most common answer for the "best". Keep a few notes of wisdom...
Program 5-10 extra codes in. That way if it's every buggy & unresponsive (which absolutely will happen), you have emergency options.  If you give these codes out in an emergency, just delete them after use & replace with a new code.  
Do not let the locks get wet, they will fail.  
Lookup the FAQ on the Schlage website on batteries.  ONLY use premium alkaline (whatever they recommend on the site) for batteries.