Who has taken out $300K-$500K from a 401K & invested it in a Vacation Home for Rent?

[cyber888]

Who has taken out $300K-$500K from a 401K & invested it in a Vacation Home for Rent?

Ok, so the logic of this question is that $300K at 4% is earning $1,000/month.

Now, if you take that money and invest it in a vacation home, pay it outright without any mortgage, and then you rent it at VRBO.com or Homeaway.com by yourself on a weekly basis (no rental management company).. you could charge $200/night - $250/night for it.

Assuming you charge $200/night (you charge cleaning fee and taxes in addition) and you are able to rent it out for 20 days a month. You gross $4,000/month. You pay HOA, insurance, utilities. You net $3,000/month. Maybe on a bad month, you net $2,000 - $2,500 ... that's better than earning $1,000/month.

Now if you purchase a bigger house and take $400K-$500K from your 401K, you could charge $350/night - $400/night or higher for it. And you could gross $7000-$8000 a month, instead of getting $1,500-$1,800/month at 4%

I'm just wondering if anyone who are very savvy in Real Estate vacation rentals has done anything like this.

Years ago, I use to have a log home and rent it out. My monthly amortization was around $1,300+/month and I was making $1,300-$1,500/month in rentals, but I had a mortgage and was break-even. But I have a full time job and so DW and I got tired of it, but thought about doing this again when we retire and no longer have a full time job.

 

[MarieIG]

Can you roll it into an IRA, and own the property w/n the IRA?

 

[trumpeting_angel]

If you can roll it over into an IRA, it would have to be a self-directed IRA. I own real estate in a self-directed IRA, and it's a wonderful way to grow income without being taxed on it - it really grows. There are a million regulations and you have to (1) really know what you're doing with real estate and (2) have completely hands-off management. It's also imperative to understand all the complex rules of the self-directed IRA, which are complicated and a little scary. As in IRS breathing down one's neck to make sure every i is dotted, etc. Pluse, the IRA administrator takes high fees.

A better plan than taking the tax hit on such a big 401(k) withdrawal, but not without drawbacks.

 

[cyber888]

Thanks. Well, I know that you're not suppose to use the property personally. But if you want to stay in your property (say 1 week during summer), could you pay for it, like rent your own property and proceeds go to your IRA ?

If you can roll it over into an IRA, it would have to be a self-directed IRA. I own real estate in a self-directed IRA, and it's a wonderful way to grow income without being taxed on it - it really grows. There are a million regulations and you have to (1) really know what you're doing with real estate and (2) have completely hands-off management. It's also imperative to understand all the complex rules of the self-directed IRA, which are complicated and a little scary. As in IRS breathing down one's neck to make sure every i is dotted, etc. Pluse, the IRA administrator takes high fees.

A better plan than taking the tax hit on such a big 401(k) withdrawal, but not without drawbacks.

 

[FIRED2018]

"Maybe on a bad month, you net $2,000"

I believe you're not making an informed, objective evaluation if this is how you envision a bad month.

Try a family of drug dealers move in and do $30,000 in damages before the cops kick in the door and make an arrest. That was my bad month.

I had great months too, but the bad ones are more memorable.

Real Estate is a great investment for 2 types of people. Realtors and professional real estate investors. Amateurs sink hard with only a small percentage surviving long enough to become successful amateurs or maybe become professionals.

non-pros will most likely do better with REITs. 30 year cagr is almost 9%, nearly the same as Total U.S. Stock Market according to portfoliovisualizer.com (period 1989-2018).

 

[MissMolly]

How many years of rental would it take to recoup the taxes you would have to pay drawing that much out of your 401k?

 

[MarieIG]

Thanks. Well, I know that you're not suppose to use the property personally. But if you want to stay in your property (say 1 week during summer), could you pay for it, like rent your own property and proceeds go to your IRA ?

But why would you do that?

You aren't getting to deduct that money. And it is already post-tax money. Put it in a happy little (tax managed) post-tax account.

Keep in mind, you will want to get money OUT of the IRA at 59 1/2, or convert it a bit at a time to a Roth, to reduce the tax bomb. (That is why you want the RE property properly structured in the IRA).

I will defer to our tax expert PB4uski if he drops by. Senator is the RE expert.

 

[pb4uski]

Ok, so the logic of this question is that $300K at 4% is earning $1,000/month.

Now, if you take that money and invest it in a vacation home, pay it outright without any mortgage, and then you rent it at VRBO.com or Homeaway.com by yourself on a weekly basis (no rental management company).. you could charge $200/night - $250/night for it.

Assuming you charge $200/night (you charge cleaning fee and taxes in addition) and you are able to rent it out for 20 days a month. You gross $4,000/month. You pay HOA, insurance, utilities. You net $3,000/month. Maybe on a bad month, you net $2,000 - $2,500 ... that's better than earning $1,000/month.

Now if you purchase a bigger house and take $400K-$500K from your 401K, you could charge $350/night - $400/night or higher for it. And you could gross $7000-$8000 a month, instead of getting $1,500-$1,800/month at 4%

I'm just wondering if anyone who are very savvy in Real Estate vacation rentals has done anything like this.

Years ago, I use to have a log home and rent it out. My monthly amortization was around $1,300+/month and I was making $1,300-$1,500/month in rentals, but I had a mortgage and was break-even. But I have a full time job and so DW and I got tired of it, but thought about doing this again when we retire and no longer have a full time job.

I've heard of people doing this, but it is a lot of work to arrange the rentals, clean the rentals, etc. Besides, I think your whole calculation is based on a false premise that your $300,000 only earns 4%.... more like 8-10% for investments of similar financial risk to a vacation property.

 

[pb4uski]

If you can roll it over into an IRA, it would have to be a self-directed IRA. I own real estate in a self-directed IRA, and it's a wonderful way to grow income without being taxed on it - it really grows. There are a million regulations and you have to (1) really know what you're doing with real estate and (2) have completely hands-off management. It's also imperative to understand all the complex rules of the self-directed IRA, which are complicated and a little scary. As in IRS breathing down one's neck to make sure every i is dotted, etc. Pluse, the IRA administrator takes high fees.

A better plan than taking the tax hit on such a big 401(k) withdrawal, but not without drawbacks.

I don't get the attraction of real estate in a self directed IRA. There are so many hoops to jump through... you don't get any tax benefit of depreciation... any gains are taxed as ordinary income vs depreciation recapture and capital gains tax.

 

[Winemaker]

I wouldn't do it, although my real estate has rewarded me handsomely. An acquaintance of mine just purchased another rental in Hilton Head, he gets $10,000+/week. I feel more diversified with $ in stocks.

 

[Senator]

Thanks. Well, I know that you're not suppose to use the property personally. But if you want to stay in your property (say 1 week during summer), could you pay for it, like rent your own property and proceeds go to your IRA ?

You can use Real Estate for rent for 14 days a year, or 10% of the time rented and be OK. You cannot take a paper loss if you use it longer. If you are working on the property, those days do not count. If you own property in an IRA, you cannot work on it. That is like a contribution, although no one will be across the street with binoculars. You can absolutely manage real estate in a IRA, just as you can manage other investments like stocks in the same IRA.

I have a vacation rental in Kissimmee, FL. It's ~$200K and mostly hands off. It is NOT in an IRA. I use Evolve Vacation Rental and they have a property manager than handles all the cleaning, maintenance, etc. I stay there once in a while, and document fixes while I am there.

Maybe you make money, maybe not. Investing in a rental does not give a person a god-given right to make money.

I wouldn't do it, although my real estate has rewarded me handsomely. An acquaintance of mine just purchased another rental in Hilton Head, he gets $10,000+/week. I feel more diversified with $ in stocks.

And if he rents it for only 14 days a year, it's 100% tax-free.

I've heard of people doing this, but it is a lot of work to arrange the rentals, clean the rentals, etc. Besides, I think your whole calculation is based on a false premise that your $300,000 only earns 4%.... more like 8-10% for investments of similar financial risk to a vacation property.

There are companies that specialize in this - for a fee... No work (mostly) for an owner.

I don't get the attraction of real estate in a self directed IRA. There are so many hoops to jump through... you don't get any tax benefit of depreciation... any gains are taxed as ordinary income vs depreciation recapture and capital gains tax.

It can be VERY lucrative, especially in a Roth IRA and if you manage it yourself. You pay no tax on gains or profit. You do not need depreciation advantage, the income is tax free. Not that many hoops and you only pay tax when you withdrawal money from the tIRA. You can sell at will and not worry about a large tax hit.

How many years of rental would it take to recoup the taxes you would have to pay drawing that much out of your 401k?

0 years, if you buy it in an IRA.

If you can roll it over into an IRA, it would have to be a self-directed IRA. I own real estate in a self-directed IRA, and it's a wonderful way to grow income without being taxed on it - it really grows. There are a million regulations and you have to (1) really know what you're doing with real estate and (2) have completely hands-off management. It's also imperative to understand all the complex rules of the self-directed IRA, which are complicated and a little scary. As in IRS breathing down one's neck to make sure every i is dotted, etc. Pluse, the IRA administrator takes high fees.

A better plan than taking the tax hit on such a big 401(k) withdrawal, but not without drawbacks.

You can absolutely manage it yourself. You cannot do physical work on it.

 

[COcheesehead]

A friend does VRBO with a cute house in a very popular tourist area. She makes about $15,000 a year on it. Some weeks she could book the house times 2. Some months it sits empty.

 

[pb4uski]

....It can be VERY lucrative, especially in a Roth IRA and if you manage it yourself. You pay no tax on gains or profit. You do not need depreciation advantage, the income is tax free. Not that many hoops and you only pay tax when you withdrawal money from the tIRA. You can sell at will and not worry about a large tax hit. ...

I can see that but until your post I had never heard of real estate in a Roth IRA... didn't even know you could do that but I don't see why not... only instances I have seen have been traditional IRAs.... Roth would make sense unless you had a loser.

I assume that if it is in a Roth IRA you still can't use it for up to 14 days or even rent it yourself (that would be a contribution?).... but could you stay in it to work on it?

 

[trumpeting_angel]

You can absolutely manage real estate in a IRA, just as you can manage other investments like stocks in the same IRA.


It can be VERY lucrative, especially in a Roth IRA and if you manage it yourself. You pay no tax on gains or profit. You do not need depreciation advantage, the income is tax free. Not that many hoops and you only pay tax when you withdrawal money from the tIRA. You can sell at will and not worry about a large tax hit.

You can absolutely manage it yourself. You cannot do physical work on it.

It’s been years since I opened my SDIRA, so I just read up on this and found conflicting answers.

https://www.theentrustgroup.com/investments/real-estate/things-you-should-know/property-management


Versus:

https://www.iraresources.com/blog/is-it-required-to-hire-a-property-manager-for-my-self-directed-ira

I would not manage my property inside the SDIRA. It’s been hard enough to convince insurance companies, lawyers, and tax clerks to title bills and checks properly. I can’t imagine going through that with every handyman and guy from the oil company who comes to service the furnace. But I prefer to stay far away from the edge of IRS rules. Others might be more comfortable with managing it themselves.

(Also, my property is in Indianapolis!)

 

[MissMolly]

0 years, if you buy it in an IRA.

His question was not about IRAs. My question was not about IRAs. Both questions were about 401k. This is not an answer to the questions asked. I am still curious how many years the OP would think it would take to cover the taxes that would be due if one pulled $300K out of an 401k? That should certainly be part of his calculations and I'm not sure if it was even considered. Others have explained how complicated it can be doing it within an IRA and is not something for inexperienced landlords to consider.

 

[ivinsfan]

Are you going to manage the entire rental process yourself? I see that's your plan. Have you ever done stuff like that to know how much effort it entails?

What's the seasonality of your property? I can guarantee people renting in off season and particularly for longer rentals will want a large discount. You forgot to mention real estate taxes on this property and many states charge a higher rate of tax when it's a second home or you are not homesteading it.

As in anything real estate it's location specific. The once sleepy town of SGU had many people making a few bucks on VRBO, until the big boys moved in and build an oversupply of condos/vacation rentals and the price per rental just tanked. I rented a brand new 2000 square foot condo with two masters and sitting directly on a golf course for 2 grand total for 30 days... the place had 5 TV's cable on each one, heated outdoor, pools country club access and on and on. The owners are required to rent through the company owned rental management branch who take a cool 30% off the top for "handling" your rental.

 

[cyber888]

Yes, I've rented a Log home I use to own for 6 years, so I know the process.
I've bought and sold and constructed real estate for 20 years and have always made $. I would say I have an eye of it. The vacation home I'm aiming is about 2 hours away from me and have been going to that place for 15 years .. renting properties there. I was thinking of this for my retirement, where i manage it myself .. had 6 years experience already.

Are you going to manage the entire rental process yourself? I see that's your plan. Have you ever done stuff like that to know how much effort it entails?

What's the seasonality of your property? I can guarantee people renting in off season and particularly for longer rentals will want a large discount. You forgot to mention real estate taxes on this property and many states charge a higher rate of tax when it's a second home or you are not homesteading it.

As in anything real estate it's location specific. The once sleepy town of SGU had many people making a few bucks on VRBO, until the big boys moved in and build an oversupply of condos/vacation rentals and the price per rental just tanked. I rented a brand new 2000 square foot condo with two masters and sitting directly on a golf course for 2 grand total for 30 days... the place had 5 TV's cable on each one, heated outdoor, pools country club access and on and on. The owners are required to rent through the company owned rental management branch who take a cool 30% off the top for "handling" your rental.

 

[Cut-Throat]

The once sleepy town of SGU had many people making a few bucks on VRBO......

What's SGU

 

[ivinsfan]

What's SGU

Airport code..St George Utah

 

[ivinsfan]

Yes, I've rented a Log home I use to own for 6 years, so I know the process.
I've bought and sold and constructed real estate for 20 years and have always made $. I would say I have an eye of it. The vacation home I'm aiming is about 2 hours away from me and have been going to that place for 15 years .. renting properties there. I was thinking of this for my retirement, where i manage it myself .. had 6 years experience already.

So it's not a rhetorical question? You need to do some research on yearly rental night averages

 

[wolf]

You have to pay back the 401K, loan. Job lose? How are you going to pay it back.
Sell the property? As other's have mentioned, much to complicated.

Stick to the traditional ways of being a "landlord". There is no easy "shortcut".

Good to think out of the box though.

 

[Senator]

0 years, if you buy it in an IRA.

His question was not about IRAs. My question was not about IRAs. Both questions were about 401k. This is not an answer to the questions asked. I am still curious how many years the OP would think it would take to cover the taxes that would be due if one pulled $300K out of an 401k? That should certainly be part of his calculations and I'm not sure if it was even considered. Others have explained how complicated it can be doing it within an IRA and is not something for inexperienced landlords to consider.

I do not think you can do it in an employer 401K, but you can absolutely do it in a Rollover SD IRA. Maybe in a 401K from your own company? If he is not currently working there, he can do a rollover tax free.

It's not about experience in being a LL. It's about tax knowledge and thinking outside the box a bit. 100% of a vacation rental workload can be outsourced. Doing what others do not want to do is how you make money.

What others say about real estate is irreverent unless they are actually doing it. Far too many people have a bad experience in real estate because they think they have a God-given right to make money as a LL, and they have no clue how to do it. No different than opening a restaurant, some win, some lose. I have 24 renters plus a vacation rental. I am living it and making over $200K a year on them, after all expenses.

I can see that but until your post I had never heard of real estate in a Roth IRA... didn't even know you could do that but I don't see why not... only instances I have seen have been traditional IRAs.... Roth would make sense unless you had a loser.

I assume that if it is in a Roth IRA you still can't use it for up to 14 days or even rent it yourself (that would be a contribution?).... but could you stay in it to work on it?

A Roth or tIRA makes no difference. It just needs to be a company that allows self directed IRAs. It only matters when you withdraw money from the account that you pay taxes or not. Fidelity won't do it, and there are generally more fees and more paperwork. Maybe if it is too profitable, you get audited?

You cannot rent it to yourself, or stay in it yourself (I just looked it up). Working on it is definitely not allowed in an IRA, although no one watches with a pair of binoculars. Managing it is definitely allowed. Part of managing it may be to inspect the unit and anticipating what a guest would experience that improvements can be made?

 

[cyber888]

So it's not a rhetorical question? You need to do some research on yearly rental night averages

Well, I've only used after-tax money before. I have not used IRAs to do it and was wondering if it could be done with retirement money. But the suggestions here from Senator certainly opens the possibility.

 

[Senator]

A friend does VRBO with a cute house in a very popular tourist area. She makes about $15,000 a year on it. Some weeks she could book the house times 2. Some months it sits empty.

When my place sits empty, I lower the price for booking within the next 30 days. Works nearly every time. I am booked about 65% of my time so far. It's nearly impossible to rent 100% of the time unless you have one guest. A day or two between tenants adds up quick.

So it's not a rhetorical question? You need to do some research on yearly rental night averages

Evolve Vacation Rental has many reports available, for many areas of the country, including Utah. When they price my unit, they adjust the price automatically from $95 in September to $200 over Chrismas.

https://evolvevacationrental.com/vacation-rental-performance-reports

 

[ivinsfan]

When my place sits empty, I lower the price for booking within the next 30 days. Works nearly every time. I am booked about 65% of my time so far. It's nearly impossible to rent 100% of the time unless you have one guest. A day or two between tenants adds up quick.



Evolve Vacation Rental has many reports available, for many areas of the country, including Utah. When they price my unit, they adjust the price automatically from $95 in September to $200 over Chrismas.

https://evolvevacationrental.com/vacation-rental-performance-reports

Do you give a discount to a 30 day renter since there isn't any churning for that month?