Your Questions About Advantages And Disadvantages Of Investing In Real Estate

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Robert asks…

Investing my 401K in real estate?

I am considering changing jobs and was thinking about taking an estimated $100,000 out of my 401K and investing it into additional real estate. I presently have 3 income properties, two of which are free and clear but need about $20,000 in improvements and the other is occopied with an appraisal of $36,000 and an equity loan balance of $4,000.

In my targeted area, I can possible purchase two additional income properties and because I am a licenced contractor and doing all the work myself , I figure i’m saving money on the improvements.

I understand the penalties of cashing out my 401 K but also think there are some advantages to investing the money in real estate. I think I can increase my assets while making some additional money by using the money in my 401 k instead of trying to borrow from a bank.

Any advice on the advantages or disadvantages

financi4 answers:

There are custodian for retirement funds which allow you to hold real estate. Try Pensco or Entrust. Or search on Yahoo or Google for self directed ira real estate.

You may not be able to improve the properties you already own but it is worthwhile to find out what your options are in regards to being able to shelter your retirement funds with real estate holdings.

If you cash out $100,000 from your 401(k), you will need to pay federal income taxes of whatever your income tax rate is (30%) plus your state income tax (6%), plus a penalty of 10% to the federal government for early withdraw.

James asks…

what are the pros and cons of majoring in real estate?

I want to major in real estate because i like the idea of working with people, being outside, and investing in all different types of area in real estate–mostly because of the investing part, though. I also want to know what be more beneficial, just getting a real estate license or getting degree in real estate AND getting a real estate license? would getting a real estate degree be a waste of time? what are the advantages and disadvantages of getting a degree in real estate?

financi4 answers:

Businesses vary greatly in terms of their goals and the goods and services they provide, but every business deals with money. Accountants are financial professionals that keep track of money; many college and universities offer accounting courses to help prepare students for jobs in accounting, business and management.

Paul asks…

How much to contribute to my company’s 401(k) plan — the max. that they match or the 401(k) max of $15,000?

My company matches 50% for the first 6% invested in their 401(k) plan. Should I contribute the 6% and invest additional funds elsewhere (investments / real estate / etc.) or should I invest the maximum possible amount of $15,000 in the 401(k). What are some of the advantages/disadvantages?

Note: I’m relatively young, so I have a good 37+ years until retirement

Thank you for your time 🙂

financi4 answers:

The answer depends a little bit on how much you earn.
For any option, always start with the 6% in the 401k, because you are getting an additional 3% of free money – no investment anywhere will give you that guaranteed return. Plus since the 6% is taken before taxes, it really only costs you about 4%. So, say you make $5000 a month, you will see your takehome pay go down by about $200, but your retirement savings go up by $450. No brainer – do that.

Now, if you can continue to save more, there are really three options:
1. Max out your 401k
2. Fund a ROTH retirement account, then resume your 401k if you have more money.
3. Choose other investments, including paying down debt.

For people who make less than $125,000 a year, a strategy to consider is to fund the 6% in your 401k to get the full match, then put $5,000 into a ROTH IRA. The reason that you may want to do that is that although you do not get a tax deduction for it now, when you withdraw it in retirement, the original contribution, plus all the earnings that it grows, will be tax free. The tax rules are a little complicated on this, especially if you are above the income limits for participating, but it’s a strategy I recommend for young people who can do this, as the likelihood of this growing substantially in the next 20 years is high.

If you are over the income limits for ROTH participation, or just don’t like the idea, then I would still increase my 401k contribution to the maximum, as the IRS is picking up about 1/3 of the cost of that.

If you are married, you want to make sure your spouse’s plans are fully funded.

Once your retirement savings are fully funded, then the next question is what is the best use of your other money. In most cases, paying off consumer debt (especially credit cards, car loans and personal loans) will give you a better return than other investments. Mortgages and student loans are less attractive for premature payoff, because there are some tax advantages to those, and usually they are pretty cheap interest rates.

I also would examine your insurance policies, especially disability and life insurance, to make sure they adequately protect you. A person under 30, statistically speaking, has a one-third chance of suffering a disabling illness or injury that lasts at least 3 months between age 30 – 65. Could you survive 3 to 12 months without any income? If not, time to plan an emergency fund or buy some disability insurance.

Also, if you have children (or nephews/nieces you care a lot about), 529 savings plans are great things. They act like 401ks for retirement, and allow you to invest for future education with tax-free or tax-deferred growth. Look into those if you see helping someone with education costs in the future.

Good luck!


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