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What Could Possibly Go Wrong Here?
You know it's getting frothy when... "We're seeing many people cash out 401(k)s or IRAs because they want to take advantage of the [real estate] market." As CNNMoney reports, in order to get in on hot housing markets, amateur investors are buying up homes and taking risky measures - like tapping their retirement accounts - to fund the deals. As one adviser noted, "our average client has retirement accounts of about $150,000 and is looking to buy one or two properties," he said. "After 2008, they didn't trust Wall Street. They wanted hard assets." but as with every bubble there is always the greater fool to rely on - "They bought a lot of stuff cheap last year, but now they're paying market value," said Jack McCabe, a Florida-based real estate consultant. "Sometimes they're overpaying... There's no way they can get an 8% return buying at today's market prices." The problem, of course, is amateur investors sometimes spend all their free cash on their purchases, as "a whole lot of the people in the markets are not experts." If the real estate market turns south again, that could leave a lot of investors in dire financial condition for their golden years.
In order to get in on hot housing markets, amateur investors are buying up homes and taking risky measures -- like tapping their retirement accounts -- to fund the deals.
"We're seeing many people cash out 401(k)s or IRAs because they want to take advantage of the market," said Sean Galaris of financial services firm LM Funding, based in Tampa. "This new scenario involves people losing significant personal funds since they are financing real estate through retirement accounts, savings and life insurance."
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"The decision to take money from your 401(k) is not for everyone," said McDermott. At the age of 48, she has already had five arterial stents implanted. "Having heart disease put me in a position where I was scrambling for life insurance," she said. " I looked elsewhere to create a legacy: real estate."
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"Our average client has retirement accounts of about $150,000 and is looking to buy one or two properties," he said. "After 2008, they didn't trust Wall Street. They wanted hard assets."
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But Wall Street is getting into this market as well and that is driving prices higher.
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"They bought a lot of stuff cheap last year, but now they're paying market value," said Jack McCabe, a Florida-based real estate consultant. "Sometimes they're overpaying."
As home prices rise, profits are harder to come by for investors than they were a year or two ago. "There's no way they can get an 8% return buying at today's market prices," said McCabe.
...
"They're lucky to get a 2% return," he said.
And that's if all goes well when they rent out the property. It often does not. Investments in rental properties can quickly sour if, say, a tenant stops paying rent for a few months or if a condo or homeowners association imposes special assessments to pay for major repairs.
"When that happens, investors may not have the wherewithal to pay their monthly common charges and property taxes," said Galaris. "A whole lot of the people in the markets are not experts."
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Getting out of the 401K's and IRAs is smart.
These are some of the few reminaing unencumbered piles of cash remaining.
Ripe for the pickins by the sharks in DC.
U.S. Treasury swap outs perhaps.
But the asset class they are purchasing is wrong.
real estate is so 2004 i've got all my money in the nikkei its doubled in the last 6 months and where do you think it goes from here?????
This guy has a nice discussion with charts of whether it is a housing bubble or not. It IS a bubble, courtesy of Uncle Ben.
http://confoundedinterest.wordpress.com/2013/05/17/are-house-prices-in-a-bubble-again-lumber-confidence-mortgages-interest-rates/
No worries, the Feds are working hard on plans to confiscate assets from Apple and every other corporation that is not on the "friendly" list, such as Buffett's Conoco Phillips, Costco, etc, in order to help defray the costs of the next crash and depression.
Look at how the WallStreet chasers of Assets Under Management leap to micrphones to ridicule and scare people doing this.
Truth is, if you have a 401K, why not buy a house or two (if both have 10 acres of farmland around them). This would mean a govt grab of 401Ks won't grab that land, and it means the 2/20 crowd on WallStreet gets starved.
What Could Possibly Go Wrong Here?
Everything, remember 2008?
DaddyO
For sale by owner usually takes care of that.
ALL CONTRIBUTIONS (not earnings, not rollovers, but direct CONTRIBUTIONS) TO ROTH IRA’s can be withdrawn penalty and tax free (even prior to 59 1/2)!!!!
Look it up. This is how I partially fund my stacking.
http://www.your-roth-ira.com/withdrawing-roth-ira-contributions.html
Scroll down to 'Types of Roth IRA Withdrawals'This is a huge and hidden loophole (for obvious reasons)
I've researched this to death... and am 100% about it.
Do you think that perhaps has something to do with the fact that you've already paid taxes on those funds?
Not much of a "loophole".
I agree, better to own a house in a nicer area to rent out than own any stock! The only concern I have is that the government will keep raising property taxes and when inflation hits, the cost of maintaining the house might become a liability.
If Ben slows QE and rates start to rise, being a Landlord will feel like a Dumb idea. I tried that business one time and you get one nasty, destructive tenant and your profits are wiped out for years. And don't forget the fun of selling in this market and having to fork out 6-10% fees to the realtor, title company, banks, etc.
Add to that evictions now are a time-consuming and costly process. Courts are so backed up it's not funny. And if you think the judge has sympathy for a Landlord....think again!
For those bold adventurers who undertake this endeavor, good luck and be sure to due lots of reading and research before you make the move. It's an asset that can be extremely hard to sell.
If you can make an ROI of 5%, doing the calculation like the banksters including only 10 months of rent for each apartment, how do you lose? You can writeoff the building all expenses and the interest payments. Sure there will be problems, you have to think of it as a second job and spend several hours a month taking care of it. Even if the property value goes down as long as its occupied it doesnt matter, you are making your money. I think the key is that you need to rent out a multi-family, three units or more to lessen the risk. Renting out a single family house is a big mistake, if your tenant doesnt pay you have zero cash flow.
I make 9% on my rental houses every year, rental houses I bought after 2008 when I emptied my 401k. That's seven years in a row, no empty units, and damage deposits cover everything. If you carefully choose who you rent to, there are no problems. I suspect your mistake was in buying houses where demand for rental houses wasn't high enough. Location, location, location.... Find those places where demand is high enough and you will not fail.
I make 9% on my stocks every year, junior stocks I bought after 2008 when I emptied my 401K. That's seven years in a row...et cetera.
What's that bad smell?
If you're a long-term investor the long-term performance of the market sucks. That bad smell is the odor of sell-side trolls.
Call me skeptical. For one thing, the time factor isn't considered. For another, the greatest challenge faced by the few landlords that I know personally is getting out.. But I live in a depressed market about to get worse. Good luck to you. It just doesn't work for me, and I don't see that ever changing. I'm too lazy! Rgds
"slowing QE"...."austerity"....."sequestration"....these are not bullish words for robust house prices or investments....
If so many people cannot afford $1,200/month mortgage, how can they afford $1,200 rent?
Bingo, bingo. And they will take it to by hook or by crook. Also this isn't going to end well for everybody, in fact it will be bloody and messy.
Housing was never allowed to clear and it's not only because of the fed. Real estate is a critical part of the US economy (also pretty much every 'advanced' economy) and crosses many sectors.
Not possible to have a recovery in GDP without a recovery in real estate.
I guess your paymasters have decided that you need to make a few token non-goldbashing-related posts here in order to present some thin veneer of semi-plausible credibility, eh?
sure wish I had that ability. outside of quitting my job, there's no way to get to that money. :-/
I actually have talked several of my clients out of doing this.
One of them went all-in real-estate in 2006 and lost everything. He rebuilt and was being advised to take out his retirement to buy rental property...So at least he'd make up for his underwater mortgages by receiving rental income...
Obviously going all in on anything is a risky endeavor, presuming you're not in the information loop (if you have to ask, then you're not). However, I'd much rather take my chances with the local zombies (city/county) than the entire zombie collective (federal). If you're old enough to withdraw without penalty, the decision gets a lot easier.
The simple fact is that virtually every market is in a bubble... but some bubbles can burst and yet still leave their owners with a practical asset full of utility (not that housing fulfills this role necessarily).
How noble you are, persuading clients to keep money under your management. Real quandary you faced there.
401(k)s are one of the greatest scams Wall Street has perpetuated against the public, and considering the last decade, that's saying something. Getting out of 401(k)s to pay off debt is smartest, followed by all future foreseeable expenses, and then the metals: brass, lead, and gold.
Good post, Saxby. I agree. This is one of the many many unintended consequences of zero interest by the Ben-meister. Besides the fact that my mom's annuity is paying zero and she has to use the principle, it makes people move out of any interest based asset. So, if you have a large credit card bill charging double digit interest and virtual zero return on retirement investments it makes sense. The tax on the withdrawal is what you would have paind had you used the money, anyway. So, there is only a 10% tax penalty. Given that all retirement investments are ripe for the next round of government confiscation, keeping large balances is risky.
Bottom line it that stocks are equivalent to a casino, interest rates are zero, bonds are bubbled up...that leaves paying debt and hard assets.
My bigger point is that this is what you get with managed economies. There are loads of unintended consequences the geniuses did not see or sacrifice as a trade off for the common good.
I'm paing 2.99% on my home and, with tax breaks I would guess around 2% effective rate. With biflation I still have a hard time seeing it as a good idea to pay it off immediately, which I could do by emptying my 401k. Only if you really believe in deflation does it make sense.
I agree. I just did a refi. My expectation is that government will push for inflation. Therefore, I would go long on all debt and only pay down the high or variable rate stuff. In fact, I made that move last night. I decided to borrow against my 401k at a super low fixed rate to pay off variable rate debt. If inflation hits, I am contracted for the lower rate. It is also why I changed my mind on renting versus owning. I swore off owning but I realized that rent prices can climb rapidly with interest rates as well as demand. My home mortagage is fixed except for the property taxes. So, these are good things to debate, consider and reconsider based on the economic environment.
Yeah, "you'd better buy now or you're going to be priced out of the market." "The market is heating up; better move quick."
At this point I think I would rather be the victim of my own ignorance than that of a paid ignoramous. Especially when they are living considerably better than me.
Yep like I tell people I can fail just fine on my own. I don't need someone else to do it for me.
Fuck that... tell them you're putting your money in the indexes because you're going to beat all the money managers. Rub it in their faces. (whether you actually do invest it this way isn't for them to know).
No way to get 8% return? Sure is, lever up in an FHA loan!
Let's take a moment to pray for residents around OKC who just got completely pummelled by a monster tornado.
it completely wiped out 2 schools in Moore. Leveled.
were is all those fucking goons from boston to help deal with this?
$50 billion to Oklahoma ought to do it. Chump change.
And according to CNN, the cops are preventing by force people from trying to return to their homes in a broad area, even many who live in neighborhoods that suffered little or no damage. I would tell them "FUCK YOU!", park my car at their police-state roadblock, and proceed to hike to my house (or its remains) if I had to.
We've experienced this first hand in 2003 during the Cedar fire in San Diego ( largest fire in Cali history) which started about 5 miles from my home. Many people were blocked from returning to our homes and got looted ( including us). We learned the hard way. When the Witch Creek fire occurred 4 years later we refused to leave. We hunkered down with the shot guns. Our eldest erected a sign to our main road " looters will be shot... Have a nice day!" Luckily we live 10 miles outside of town in the mountains and could escape notice. This time they had a mandatory evac of the entire town( 35,000) for no frigging reason. I mean have you ever heard of a Forrest fire burning down an entire town? Marshall law was imposed. Riots occurred at the check points where people congregated trying to get back in. Some people did manage to hike in and Im sure those who went through that experience will never repeat their mistake. They'll have to drone every last one of us to get us to move next time. Once you taste fascism for the first time it forever changes you.
Miffed;-)
How about another crazy theory based on nothing more than a whim. What if those parts of the country that tend to be more conservative are also more likely to be the victim of tornados? These people live with the reality that at any moment their shit can be blown completely away, and they cannot reliably survive living in denial of such things. If my crackpot theory were true would we see a sudden conservative surge in the hurricane Sandy regions? Probably not because it is so rare plus the really big disasters poor money on people lik ethey were on fire. Probably not a good incentive for personal responsibility. California has earthquakes but they get rumbles constantly and really bad ones are pretty rare so it would be easy to become complacent to the threat. I don't have many answers but I do think that your environment forms you. I'm sure those tornado vistims appreciate everyone's prayers, but I seriously doubt they are relying on them.
"A whole lot of the people in the markets are not experts."
Exhibit A: "Wall Street is getting into this market"
If they can tap their 401k and buy property in cash and without a mortgage, then I say go ahead and do it. At least you'll own something when your 401k's go to shit.
Real Estate is all about leverage and cash flow. The investor wants to put as little of his on money into it as possible, and get enough cash flow from the property to cover costs until he flips it at a higher price. If he puts down 10%, covers costs, and flips for a 10% price gain, he makes 100% return. If you can do this with 1% down, even better.
Old Normal thinking.
New Normal is get your money out of Wall Street accounts and Congressional bullseyes. You buy a 250K house for cash, rent it with a property manager for $1500/mo. No mortgage payment. Net 5% per year after repairs and vacancies AND THAT'S ALL.
Forget about appreciation. Just take the 5% and be glad you got it. Forever. There are going to be a hell of a lot of people who will be doing -20% / year forever.
Your plan is great IF you can find good tenants and IF they pay the rent and IF they don't gut the place and IF your next door neighbor doesn't turn his rental unit into section-8 housing and IF the hurricane insurance doesn't go up 20% and IF the local government doesn't jack up your taxes and IF you can shell out the $ to make constant repairs and IF you can replace the leaking roof and IF your insurance covers the kid who was bitten by your tenants Pit Bull and IF your house isn't on top of a sink hole and IF your POA doesn't charge you a big fat assessment, then you can enjoy your 5%, worry free, a year after paying the property manager.
Perhaps the smart move is into property management.
When stagflation comes to stay, along with double interest rates, what's your $250k worth if you want to cash out? Less. So where's the conservative investment here?
"Real Estate is all about leverage and cash flow."
No it's not, that's what speculating is. The Fed and central planners may be trying to recreate the last bubble but it's not going to work. The real economy is finished and won't recover regardless of how much new money they create. This is actually an opportunity for those who may have gotten in over their heads in the last round to unload some debt before the real crash.
ANd here I was thinking it was a place to live....
Like a parrot,regurgitating.
The Rothschild Banksters... Why They Love Making War!
Written and spoken by Michael Rivero.
http://homment.com/CDBFh4PsBF
Just cash it out and take it to the casino.
Learn to play Texas hold 'em or some other game that requires at least some level of skill.
At least at the actual casino, they won't change the rules in the middle of the game or confiscate your chips to bailout the high rollers.
unless you are Phil Ivey, then maybe.
No big deal but Moore, Oklahoma just got wiped out by a big ass 2 miles wide tornado.
2 schools, a day care, a bank, a medical center...
Kids are likely dead... this is real bad.
Look at the news... the town has been wiped out... like a nuke went off.
http://kfor.com/on-air/live-streaming/
in a fiat world it means a growth opportunity.
15 kids trapped under debris...
That can only be a positive development in Paul Krugman's eyes --- just think of all the broken windows!
Not funny
Is ANYTHING related to Keynesian cargo-cultism and death worship funny?
A 4 years old kid and a 3 month baby are dead... :(
seriously - why do people get more upset about kids dying than people in general ? Dead is dead, right ? Is it any better to be dead at 75 than at 35 or 5 ?
Because kids do not have the same decision-making faculties as most adults or the ability to flee the storm. In this case I assume they were herded into the school basement, not good enough for an F4 or F5.
at 75 you've had a full life.
Ever talk to anyone who's had a kid die? I've seen 80 yo women who lost a child when they were in their twenties and they never get over it. I still miss my mom and my grandparents but I don't know if or how I could live if something happened to one of my kids.
I think we feel compassion for the parents
a 2% return is 10 times what a savings account gets, 2.5 times what a 5 year cd gets. historically that is a good return.
housing has reached its historical value as a function of income and has returned to its historical market, local. that is not to say it is a good investment but if inflation does show up and one is able to lock in a low current mortgage rate the investment looks real good for someone who knows what they are doing and has enough money to spread risk and/or pay cash but amateurs never belong in the market except to buy their own home.
Sounds like 2003 - 2006 all over again. I can't believe we are reinflating into housing bubble 2.0. The asking prices in my area are ridiculous, but if you look behind the curtain all is not well: foreclosures being held off the market, empty homes, large mortgages, etc. Ugh.
I went in on real estate in 2008 and the property has doubled since then. So far better than PMs since then.
All the PM's I bought in 2008 MORE than doubled since then...until that unfortunate boating accident, of course!
Might consider purchasing some real "underwater" properties and perhaps locate the spoils of someones unfortunate boating accident.
If you have had the property since 2008 and have it rented then wait for recapture @ 25%. Ummmmm, PM's don't have recapture mandated as does real estate. So, good luck when selling.... Oh, there is really no way out of recapture short of death....
Yep, throw in another 10% for transaction costs (commish, title policy, closing fees) , not on just the basis, but the basis plus the gain. LOL, recaptutre may be the least of his problems.
People are stupid!
jepp thats right and don't forget to put your last few dollahs into the overprice bloated stock markets
lol i heard apple will hit 2000 soon
Income generating property owned outright and outside the banking system is better than gold. That's why they pay shills to write these articles. They use your retirement funds as collateral for the ponzi, paper gold puts and the like.
You won't be able to get it "outside" the tax system - that's where they will rape your ass until it bleeds.
I'm leaning more and more to people taking $$$ out of 401(k)s for a variety of reasons. For the typical middle class two-income family, over the course of their working years they will see $150,000 - $200,000 vanish into thin air due to management fees and various leaks. On top of this, go over to BrightScope and punch in a few of your local 401(k)s. Horrible performance, horrible asset selections and horrible management.
Plan administrators are terrified to do anything and don't want to be pegged as a fiduciary....so they stick their heads in the sand and ask for a raise each year as any soul sucking muppet administrator should.
Above all, raiding your 401k puts the fear of God in the controlling elite because they were all counting on sticking it to the middle class anyway with tax reform in 10 - 15yrs, so might as well beat them to it and take away their punch bowl.
The average "marginal" tax bracket since 1913 is approximately 59% with some years in the 70 to 90%. So, if today's higher marginal tax bracket is 36.5% (and the US debt is the largest ever) then why would you not take your taxes now rather than defer. Moreover, the myth that you will be in a lower tax bracket in retirement is nonsense. None of my clients are in a lower tax bracket. Why the fuck would they pay me. Of course, there is the tax deferred compounding associated with "qualified" plans, but there are many other invesment products that offer compounding. As a matter of my practice I get my clients to stop funding qualified plans and remove their monies from current qualifed plans using code section 72T (SEPP)
Oh yeah, try to get "qualified" money out of your estate. There are some methods, but usually at the second to die a shit load of your money goes to taxes. Yeah, if not careful your beneficiaries will get their income tax bracket jacked as they recieve income from your IRA's etc. There is "streching" methods, but again you must plan.
"How fortunate for governments that the people do not think"
-Adolf Hitler
"A whole lot of the people in the markets are not experts."
So what?
When they go ka-boom, all I care about is making well and damn sure that savers, investors, the few remaining taxpayers and the prudent & frugal don't end up paying for the social programs, subsidies and bailouts that they'll come begging for...
If we only had more experts....and expert consultants! People paid for their advice but never held responsible for it.
Perhaps what you should have written is, "When the BANKSTERS go ka-boom, all I care about is making well and damn sure that savers, investors, the few remaining taxpayers and the prudent & frugal don't end up paying for the social programs, subsidies and bailouts that they'll come begging for... "
Perhaps you'll see what I mean if, perhaps when the the banksters Ponzi scheme catches up with you, you might have more sympathy for your fellow 99%ers?
Owning a home doesn't mean what it used to. Certain characteristics still apply but other external forces are changing the meaning whether you hold title or not.
Speaking from experience I think owning a home is more like how a rat owns the cheese in a trap firmly grasping it's neck.
These are not investment properties even if that's what people think of them. When they get the first big expense, they're going to look to sell. They're flippers.
And it's a bet that can't pay off: you get eaten with property taxes. You get eaten with the income tax. You get eaten on the capital gains tax on the sale.
Just go buy like 3 food trucks that sell $8 tacos with nasty white fish in them and a mayo citrus goop. Cash businesses baby.
Surely this is what Ben wanted everyone to do.
No kidding. Get the bad mortgages off the banks books by selling them to the suckers.
Smart Investors. Real Estate is at its low. Interest Rates are at their lows. They will get a better return than the Stock Market over time. A lot more stable than the Stock Market. Less volitle.
Real Estate will go up with inflation and so will Rents.
This sounds like an ad on HGTV. The asking prices in my area are close to 2005 -2006 asking prices. There are bidding wars for houses in California and many other areas. Bottom, not even close.
Low cap rates hardly make for a great buying opt. when rates go up, what happens to prices?
Yep, real estate should go up huge when interest rates go up.
Wait, ummm...
That is a lot of illiquid money just sitting to be taken away !!
Oh, the peace and serenity of owning a piece of Rental Real Estate. Which does not fluctuate on a daily basis or even on a Monthly basis.
No worries if the Fed Prints money or does not print money. No worries about a flash crash. No worries about if the Company you invested in misses earnings and you lose 25% of your value over night. No getting up every morning and checking your stock prices to see if you are still ok with your retirement. No worries about the FED raising rates as yours is locked in for 30 years.
Nothing like sitting back and saying let THEM eat cake as you have yours.
Wtf is retirement?
Unless one is willing and able to put a lot of sweat equity into owning, maintianing and managing a property it is hard to make easy money.
Carrying cost can loom large when a rental sits empty or worse still, has a no pay tenant in place.
Fools ruch in where angels fear to tred.
I smell a Mozilo behind all this.
They're cashing out because they have NO TRUST in Washington or Wall Street!
Anyone half-asleep with their eyes half-closed could not have missed the fact that money will be stolen, by hook AND by crook, by the corrupt political and banking establishments.
May as well cash that shit out now before it is taxed into oblivion, "vaporized", or subject to a "stability levy".
The government's debt-ceiling induced raid of the Thrift Savings Plan G-Fund is what finally spurred me on to close my Roth IRA and move everything to real estate. And not RIETs or anything like that, actual houses. Anything less and you miss out on depreciation writeoffs, tax advantages, and rental income.
Good time for everyone here to watch, "Life without Principle."
It's on Netflix and Amazon streaming....
If there were no housing bubble and things like Cyprus still happened, I'm sure a lot more people would do this as part of a seemingly sound strategy (but of course when the government wants cash, it will go after whatever investment necessary to requisition it). Post-bubble and seeing houses on the market for 5+ years without being sold, it should be painfully obvious why this isn't a good idea for a growth asset. Anyone else look at a hunk of land for sale and think to themselves, "if only I had some voluntary serfs..."?