Is it time to use our retirement funds to buy 2 houses?
November 23, 2008 6:17 PM   Subscribe

We have a house but want another one. Hope to retain ownership of both. Please help us figure out how to accomplish this in the midst of the wild economy without making a huge mistake.

Ultimately, we want to do what is best for our future, but we really, really want to move away from where we live now (don't ask why, it's an extremely long story). We even have our new neighborhood picked out. Please help us determine the best way to make this happen.

Let's start with some of the numbers:
We currently live in a small home which is worth about $125-135K.
We owe about $40,000 on it.
We're looking to purchase a new home in the $195-215K range.
My husband wants to keep our current home and rent it out; we figure we could get $800-1,000/month.
We have about $90K saved up in retirement funds, but we're watching those dwindle away daily (we had $130K this time last year).
We have $4,200 in a regular savings account.
Our annual gross income is about $60,000, which we hope and expect to grow.
We have no credit card debt, and currently no car payments.
I'm 30, my husband is 37. No children yet. Hope to have one in 2-5 years.

So we have some choices we have to make. One "easy" solution would be to take out some or all of our retirement funds to pay off our current mortgage and use the rest for a down payment on the new one. I honestly like this idea because I don't want to lose another 20-30% of our retirement fund if the economy continues to worsen, it would lessen the oh-my-gosh-how-can-we-afford-this feeling, and we have time to rebuild our retirement.

But would we be better off going a different route? If there are other ways to do this, we'd love to know some ideas so we can make the best choice in this decision. Thank you.
posted by anonymous to Home & Garden (11 answers total) 1 user marked this as a favorite
Are you planning to retire in the next two years? If you think the economy is going to worsen enough to lose another 20-30% of your retirement savings, I would submit that maybe you don't want to be owning two homes right now.

Taking money out of your retirement fund at age 30 because it has lost value is a fool's errand. The stock market fluctuates over the short term, but over nearly 100 years, it has averaged 15% returns year over year. You want to pay into the market now, because it's cheap and will be just about guaranteed to be worth a lot more in 35 years when you retire. Or even in two years when the economy has probably recovered substantially.
posted by autojack at 6:33 PM on November 23, 2008

1) You're assuming housing prices won't fall so much as to equal or surpass your theoretical retirement savings.

2) A house worth $125K can bring in up to $1000 in rent? That sounds crazy to me, but who knows. It'd be helpful to know where you are to assess some of this better.

3) Being a landlord isn't always fun and it can be costly - something to consider.

4) If you were 10 years older, I'd see this as more of a risk. But you can replenish your savings.
posted by Dee Xtrovert at 6:33 PM on November 23, 2008

If you pay off your mortgage and put a down payment on a new home, you're going to be left with zero in the way of savings. If either of you lose your job, or a house experiences problems (you'll have two to maintain now), you're in huge financial trouble. You've got zero room for error and your gain (12k per year in rental, minus the cost of actually running the place) isn't worth the risk.

You'd be a fool to watch so many people live beyond their means and to follow in their footsteps.
posted by scabrous at 7:50 PM on November 23, 2008

I wanted to clarify a bit: you haven't realized ANY loss on your retirement savings yet. If you cash it out now, you guarantee a loss. If it's a tax-sheltered retirement account of any kind (401k, IRA, etc), you will also be penalized for withdrawing from it early. Unless you are convinced that the stock market will not regain or surpass its former levels before you retire, taking money out of retirement accounts now is not a smart move.

I would point out that, in the last 100 years, the United States has weathered nine recessions. We seem to be in the midst of our tenth. Of those nine, one lasted ten years (the Great Depression), one lasted three years, three lasted two years, and four lasted one year. The historic trend indicates that we will weather this one, also. If you don't drain your retirement accounts, in a couple of years they will probably be worth as much or more than they were worth a year ago. If you keep funding them now, you'll be buying securities at fire sale prices. When you retire, you'll have a pretty generous pile of money.

If you can't afford a second house without taking out "some or all" of your funds from your retirement accounts then you can't, in practical terms, afford a second house.

I don't really understand what your motivation is to keep the current house. To modify Dee Xtrovert's comment, being a landlord is pretty much never fun. Unless you will get some pretty substantial income from renting the place, I can't imagine it being worth it.

You want a new house? Sell your old house.
posted by autojack at 7:53 PM on November 23, 2008

Paying off your mortgage will do absolute nothing for you other than tie up a lot of your capital. Paying off your mortgage is only a good idea if you're going to be living in the house and can't afford mortgage payments. I'd suggest:

1. Pay enough off your mortgage so 50% of your rent payment makes the mortgage payment. This lets your renters pay your mortgage, and gives you a few hundred dollars a month income.
2. If you can afford it, buy another house to rent with the remaining money and do that same thing, have your renter pay your mortgage. That way you'll have twice as much money when you retire (and sell the houses) and have twice the rental income, and realistically you have very little of your own money invested.
posted by blue_beetle at 8:25 PM on November 23, 2008

Why can't you sell your old house? What is your rationale for keeping it? How do you know you can make $800-$1000/month in rent? It's only worth $125K.
posted by schroedinger at 8:43 PM on November 23, 2008

My husband and I did this two years ago (bought a second house, renting our our former residence). Some thoughts on your proposal and the responses its gotten so far:

I absolutely agree that draining your retirement savings to do this is the wrong way to go. Doing so will lock in your loss, take a tax hit on top of it, and leave yourself without a last-ditch safety net (not to mention setting yourself further back for retirement).

You don't say what your current mortgage payment is compared to what you think you can get for rent. If you're paying less than $800/month, and your income is $60K/year, and you are at all fiscally responsible, it should be very easy for you to come up with $20K for a nice fat down payment for next summer, after prices have probably fallen a bit more.

You need to be realistic about possible rents. Is $800-$1000/month a guess or do you have good data to back it up? Look at your local classifieds and craigslist to find out what is the "going rate" for your place. Drive out and look at places at least from the street to see what $1k/month will get you. Maybe try; it's somewhat useful for data in my city.

Don't try to do it if the rent isn't going to fully cover principal, interest, taxes, insurance, and some on top for maintenance/emergencies. The days of renting for less than you owe, taking a loss on your taxes, and hoping you'll make it up eventually on appreciation are over. (At least for folks in your [our] tax bracket. When you start pulling in mid-six-figures, the ballgame changes.)

Talk to an accountant about how to deal with the tax stuff, maybe run your particular numbers to see whether it all makes sense. In its own weird way, you're going to be starting your own business. Get schooled about how it works. Read and research.

Avoid hinky financing.

Some aspects of landlording aren't so fun, and there are some absolute horror stories that you should be aware of (get a few books on the subject and learn more). But in my experience, it's been the easiest money I've ever gotten, way easier than working. Learn the landlord/tenant law of your area, screen your tenants well, stick to the terms of your leases and don't let folks take advantage of you.

If you decide to go for it, good luck! As a recently-fledged landlord, I'm still sort of amazed that it works, but it's been pretty good so far.
posted by Sublimity at 9:25 PM on November 23, 2008

When I first moved in with my partner, instead of selling my little house I rented it out.

My first tenants were fine people in the sense that they always paid their rent on time, and they stayed for the term of their lease. But they were clueless about how houses worked, so they did things like call me over late at night because the power was off. "Did you check the circuit breakers?" I said. "Yes," they said. "You're sure?" I said. "Oh, yes," they said. So I got up, got dressed, drove over, and flipped the circuit breakers for them.

Story #2: Just like story number 1, ends with, "So I drove over and used my toe to push the drip tray back under the fridge for them."

Story #3, blah blah blah, ends with "So i drove over and switched the thermostat from 'heat' to 'A/C' for them."

When they moved out, they decided cleaning was too much trouble. I kept their security deposit but it didn't nearly cover the cost to have the house thoroughly cleaned and the random trash in closets removed.

Tenants #2: I had to evict them. That took several months for the legal process on top of the time they hadn't paid rent while I was warming up to begin eviction proceedings (tip for amateur landlords: always begin proceedings ASAP. You can always stop if they really do pay the rent "next week."). During the eviction process, I dealt with drunken abusive phone calls. When they finally left, the garage was full of all the trash they'd ever generated, the house was full of garbage which included vomit and human waste, a non-running car full of trash was left in the drive...gah, I don't even remember what-all. Between the lost rent, cleaning, repairs, painting, and rubbish hauling, I lost nearly $6000.

I was young and naive. I made mistakes. And I know being a landlord works out for some people. But there are a lot of risks. One tenant who slips through your screening process can wipe out any reserves you have--and you don't have much. Whenever I hear someone saying they'd like to become a landlord, I suggest they watch Pacific Heights first.

Which is separate from the retirement account question, to which I reply: don't do it. If anything, a downturn in stock prices is a good time to put a bit more into your 401(k), in my opinion--they're bargain-priced. Also, as was already mentioned, a recovery may well spare you some or all of your losses, which right now exist only on paper.

Perhaps you're thinking of this route because you doubt you'll be able to sell the house you're in in the current market. That might be true. My partner and I aren't planning to move any time soon, but I was reflecting the other day that if we wanted to, we probably couldn't right now for that very reason--we don't have the resources to put a down payment on another house, and couldn't take the risk of this one not selling. I'm used to having all my options open. It was sobering to realize that we're stuck where we are for the time being. I understand from your post that moving feels more urgent to you, but in your situation I would look for an option that avoided both taking money out of retirement funds and becoming landlords.
posted by not that girl at 9:30 PM on November 23, 2008

Landlording can be fun and rewarding in its own way. It's a solid investment even if the property doesn't appreciate and you have occasional rent losses, because at the end of the day you still have the place to rent and every month you build equity. So there can be good reasons for becoming a landlord.

I would not touch your retirement savings to do it, though, unless you can make it a loan and you can pay yourself back. It doesn't sound like your overall income is high enough to make this an attractive option, sorry.
posted by dhartung at 11:44 PM on November 23, 2008

Your question suggests a real lack of understanding of some basic concepts about personal finance. I caution you against doing anything without speaking with a financial advisor who can explain in more detail than you can read about on the intertubes why what you're suggesting is just a little inane. That "oh-my-gosh-how-can-we-afford-this feeling" is there for a reason -- you can't afford this.

Retirement accounts are called retirement accounts because they're for retirement. Taking the money out now is mind-numbingly dumb. Owning two houses isn't necessarily stupid, as long as you can afford both. Sounds like you really need to save up for a down payment, though.

In the end, holding on to your current house just to rent it out seems unnecessary except to fulfill your image of yourself as someone who owns two houses, or as a landlord. Neither of those is reason enough to own both houses. *If* you feel that the rental market is burning up right now, if you feel that housing prices are going to continue to rise, if you feel like you can't get a good price on your current home and want to wait to see it appreciate, if you feel you can get a great monthly payment that covers your current costs on the house and then some, then by all means, go for it (after saving the down payment on house #2). Otherwise? Nope.
posted by incessant at 11:53 PM on November 23, 2008

I will suggest an alternative. If you really, really want to someday be investment-property panjandrums, you can get your feet wet by selling your current house and purchasing a two-flat or duplex in the neighborhood of your choice. Depending on the market, the rent on the other unit could almot or more than cover your mortgage. Eventually, you will have sufficient equity to leverage your way into a single-family home and rent both units of the first building.

In the present stagnant US market, though, you're unlikely to see equity appear by magic (i.e. rising prices), so you'll have to amass it the old-fashioned way, by paying down a mortgage for several years.

Look, I ran some numbers. I guesstimated that you bought your house at $80K and have an 8% mortgage. This gives you a current payment of about $600.

You could refinance at the current 6%, taking out $40K equity to use for a down-payment. That brings your mortgage to under $500. You will now need to buy the new house and take out a $160K mortgage. This will cost you less than $1000 monthly.

So your new total mortgage service will be $1500 monthly. If you can truly get $900-ish rent for the first building, your monthly net may be about the same. It is potentially possible that you could make these numbers work. I advise you to go to a financial planner who charges a flat fee and get them to work you some realistic numbers. You will need to account for, among other things:
* property taxes
* maintenance and repairs
* emergency fund Yes, furnaces break. And they know when your emergency fund is low.
* rental income
* depreciation
* passive losses (essentially negative income, one of the best reasons to own property, because it offsets other income and reduces your income taxes -- note that mortgage interest + depreciation are generally the main component of your passive losses)

I don't know your overall money picture and how much risk you are willing to take. This is a dicey time to get credit even if your credit score is good. You could also be in a real bind if your jobs are not secure. How would you manage with only one income for six months? A year? What if you have an extended eviction process with a tenant and forgo that $900? Be very sure you know the answers.
posted by dhartung at 12:40 AM on November 25, 2008

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