Brownsfan2k5
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Location: Military
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| Real Estate or Roth IRA |
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I have currently been in the military for 4 years (23 years old) and have been using my time and money to max out my wife and i's Roth IRAs every year. We currently have over $25,000 combined. We also have been buying investment properties every year. We currently own 2 single family homes and 1 multi family home.
My question is, should I continue to fund my Roth or should I use the money instead to buy more properties? My goal is to eventually get out of the military and start up a property management company, but we currently do not have the funds to accomplish this goal while funding both our IRA and the properties. Thanks. ANY help is appreciated.
-just a guy trying to get out of the rat race-
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Wed Feb 27, 2013 2:03 pm |
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littleroc02us
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Thanks for serving our military. I was in the Marines for five years myself. Personally, if it were me I'd continue to max out your Roth IRA's versus buying more property. If all you do is max out your Roth's from this point on for 35 years at 8% for example based off of the worst 25 year period, where you'll only be 58 at that point you've accumulated 2.23 million.
When your in the military it would be hard to landlord properties because you tend to have less flexibility during the day. I would wait until you get out and find a job that pays well and start buying properties then.
Risk comes from not knowing what you're doing. (Warren Buffet)
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Wed Feb 27, 2013 2:20 pm |
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oldguy
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Location: arizona
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quote:
My goal is to eventually get out of the military and start up a property management company,
I would open a Taxable Account at a no-load fund company such as Vanguard or Fidelity - that way you'll have a money supply that is immediately accessible for houses, etc - use an Index Fund, it grows tax deferred and you pay only capital gains tax on your profit if/when you sell some. The return averages about 11%/yr over the longterm.
When you get out of the AF do both plan to work for W2 earnings? Or one in Prop Mgmt? Or both of you in Prop Mgmt? In any case, I recommend getting your Real Estate licenses. It is about a 3 or 4 week course as I recall (mine is over 25 yrs old), probably costs $500 each by now. Most states have reciprocity agreements so the licenses will be transferable when you move. You'll get a good baseline of real estate law, mortgage math, plus a bunch of landord 'war stories' - knowledge that you'll draw on for the rest of your lives - I've never actually used the license (for sales) but the education was well-worth the cost.
Our Prop Mgr handles rentals, sales, repairs - and 'repairs' has branched into remodeling houses. It is all run from a 3 person office and the labor is subcontracted to tradesmen.
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Wed Feb 27, 2013 3:28 pm |
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smk
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it is hard for anyone to give you specific advice without knowing more about your personal circumstances. the best thing for you to do would be to look into some sound financial planning software that can help direct you on how to structure your personal finances. ESPlanner is a good one for that as is lets you use TIPs as a riskless investment and then you can add risk to that to see where your comfort lies.
now for a couple of suggestions: if you want to start a property management company, are you going to manage the properties for other people or your own? it might be a good idea to start with other properties and get good at it. then if you decide real estate is a good investment for your personal assets according to the software above, you can manage those efficiently as well. you will need to consider that if real estate declines, not only do you lose on your assets, but you could lose your job as well. there is a serious diversification issue.
second suggestion - i think there are some situations in which you may be able to purchase properties in an ira. you might explore those with an eye towards whether you nee the tax benefits or not for real estate.
last suggestion - if you want to get out of the rat race, this isn't a way to do it. you are just switching courses, but you are still in the race...
Steve Kanney, CFA
http://www.integratedfinancialny.com/index.html
Any comments made are designed to help you make your own decisions and do not consititute investment advice.
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Wed Feb 27, 2013 4:22 pm |
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Brownsfan2k5
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First, i want to thank everyone for their advise! Ok i have a question for you all. The reason i have been buying properties is because, if i eventually own upwards to 10, i then can rent them our for $700-1000 each and make around $100,000 a year. Right? Isnt that creating a good source of cash flow? Besides i love everything about investments/finances! I just feel like the military pension is unbeatable. I feel trapped :/
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Wed Feb 27, 2013 7:44 pm |
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smk
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how much you make may depend upon how much you borrow. if you earn 100k/year and pay 110k/year in debt service, you won't be generating cash flow.
first thing you need to do is look at the return on a property if you paid cash. you probably take out something like 10% of revenues for repairs and also taxes. also 5% for vacancies??? that is your cap rate. if the cap rate is say 5% and you invest 1mil, that would produce 50k income/yr. if rents go up, that would grow over time. if you estimate a persistent growth rate for the rent, add it to your cap rate and that would be your actual long term return. so you see you may need 1mil to generate 50k in income.
then you look at borrowing. if the borrowing rate is lower than the long term return, you can consider it. it would help if it was lower than the cap rate as well, but that may not happen. if it is at least close to the cap rate and the rent grows, then it will start producing income over time. initially you may not be seeing any income at all if you maximize leverage.
lastly you want to take a close look at taxes to see what the right structure is for you.
if you feel finance is more your calling, you would want to go out and study. see if it lights you up or puts you to sleep. see what your natural talent is for the subject. that's how to explore career alternatives in the beginning...
Steve Kanney, CFA
http://www.integratedfinancialny.com/index.html
Any comments made are designed to help you make your own decisions and do not consititute investment advice.
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Wed Feb 27, 2013 8:52 pm |
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Anton Martin
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Location: Florida, USA
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| Re: Real Estate or Roth IRA |
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quote:
Originally posted by Brownsfan2k5
I have currently been in the military for 4 years (23 years old) and have been using my time and money to max out my wife and i's Roth IRAs every year. We currently have over $25,000 combined. We also have been buying investment properties every year. We currently own 2 single family homes and 1 multi family home.
My question is, should I continue to fund my Roth or should I use the money instead to buy more properties? My goal is to eventually get out of the military and start up a property management company, but we currently do not have the funds to accomplish this goal while funding both our IRA and the properties. Thanks. ANY help is appreciated.
-just a guy trying to get out of the rat race-
I suggest you to ontinue to fund your Roth, as it will give you option to save more money and try to stay for long time period in military. It will make you save more money and as you get retire you will be having money to accomplish your dream.
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Wed Mar 13, 2013 9:23 am |
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Eric69
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I would think populating your ROTH every year would be a no brainer. Tax free investing
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Wed Mar 13, 2013 7:59 pm |
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oldguy
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quote:
I would think populating your ROTH every year would be a no brainer. Tax free investing
Keep in mind that Roth withdrawals have some rules. The Roth must be over 5 years old, plus you must be (1) disabled, (2) first time home buyer.
Ie, the Roth money cannot be used for investment properties.
Personally, we keep our Roth accounts for retirement and we use our Taxable Account for rental houses, a fallback EF, etc.
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Wed Mar 13, 2013 8:34 pm |
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littleroc02us
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Yes, but if it's been 5 years you can take out all of the principle tax free.
Risk comes from not knowing what you're doing. (Warren Buffet)
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Wed Mar 13, 2013 9:04 pm |
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oldguy
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Cash: $ 751.85
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quote:
you can take out all of the principle tax free
I don't know if 'tax free' is the right term, you've already paid the tax on the principal?
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Wed Mar 13, 2013 10:46 pm |
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Eric69
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Yeah.....I wasnt talking about using your Roth for anything other then retirement. I look at it as a free gift from the government.
Other then matching one's employer's 401K contributions, that would be number 2 on the list....wouldn't it? From there you could do the real estate thing.
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Wed Mar 13, 2013 10:50 pm |
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Eric69
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My Mistake.....I meant to say "gift"
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Thu Mar 14, 2013 6:19 am |
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gilbertholdings
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personally, i'd keep the roth ira and just take a little longer for the properties. for me, it's about diversification. with properties, you're not guarnteed income, some months you may not have renters, you may have repairs, etc. having another source of income for retirement would be good, and the more money that gets in early will do substantially better than if you put it in later because of compounding
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Thu Mar 14, 2013 10:40 am |
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littleroc02us
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Cash: $ 384.35
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quote:
Originally posted by gilbertholdings
personally, i'd keep the roth ira and just take a little longer for the properties. for me, it's about diversification. with properties, you're not guarnteed income, some months you may not have renters, you may have repairs, etc. having another source of income for retirement would be good, and the more money that gets in early will do substantially better than if you put it in later because of compounding
Both real estate have their ups and down, so what you stated about the power of compounding and the return on investment isn't always true, just as it is in real estate. So the realistic answer is that risk=reward.
Risk comes from not knowing what you're doing. (Warren Buffet)
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Thu Mar 14, 2013 1:31 pm |
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