advice re: retirement/buying a property

[lidasa]

This is my first time here - hope I'm posting in the right forum.

My husband(37) and I(almost 36) want to be smart about our retirement plan, and have been researching ways to be a smarter than we've been.

We currently have about 170k in two 403(b)'s. My husband makes 95% of our income, which is about 130k/year. Around 16k is put into the 403(b) annually, which includes his organization's match. We have 10k in a savings account, which is our emergency fund so we don't plan on using it for anything. We add about $140/month to it. Not a lot, but it's what we can afford.

We are in an extremely HCOL area, so buying a house where we live is not in the cards for us. But, we both feel that owning a home would help us to feel more secure in our future. We bought a home ten years ago, at the height of the market, and when we moved for my husband's job about 4 years ago, lost all our equity and then some. It hurt a lot, but we are trying to not focus on it and move on.

There are some areas about 2 hours from here that are "vacation spots," and there are some nice homes in those areas for 75k and up. The really nice ones start at probably around 175k.

For comparison, I just checked, and a studio in our neighborhood is 600k. We have three kids, so it wouldn't work for us. We rent now and plan to continue to do so. My husband's job is not one that he could do anywhere else, so we are here and have committed to staying here for the foreseeable future. His job security is very high, which is a big deal for both of us.

So, my question is: a financial advisor told us that given our 2 goals of wanting to own a home (for personal and financial security) as well as continue to save as much as possible, we should consider taking a loan from our retirement account of 50k, and use it to buy a home that would cost us around 100k. We looked into it, and the rules let us do that, and we could afford to pay it back (so no penalties) as well as afford the mortgage and taxes etc. But, is that just stupid? We were both taught that no matter what, we should never take money from our retirement account. But this seems like it might be the exception to the rule, because we would essentially be investing it somewhere else, and there are no penalties associated with doing this. We would be able to rent out this home (airbnb style), which would be nice, but we would not count on it to make the mortgage payment. In other words, any money we made from renting it out would be considered extra income, not necessary for us to manage the costs associated with owning a home.

What should we do? Obviously we are not in a perfect situation, and of course I would like to be saving more every year, but I want to balance saving with owning a home, if at all possible. Both are important to us.

Thanks all for any insight or advice. Please go easy on me! I've seen people torn to shreds in forums like this .

[~bs]

Is the market not again at a all time high in your area? It is in mine. If you buy now, you may be repeating the same mistake from 10 years ago.

IF you really want to buy a house for investment purposes and perhaps to retire into eventually, you should wait until the market turns again. Analyze how far the housing dropped on the previous drop in % terms, and wait for the housing prices to do the same in the next cycle.

Save money, since you're looking to potentially purchase a property, you may want the savings in liquid money market or some other investment that won't lose value. If possible, try not to take from your retirement account. If you're going to wait until the market turns, you still have some time to save money to ensure you won't have to.


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For the record, I'm doing exactly as I'm advising here. I'm trying to accumulate liquid assets for flexibility during the next market crash. I would like to purchase another rental property within the next 5 years. If you look at the previous market cycle, it took around 3-5 years after the initial stock market/economy shock for housing prices to settle into a trough.

[lidasa]

thanks for the reply, all very good points.

So re: high point in the market. it's very strange, but the particular area where we are looking has not recovered in the same way everywhere else has, so prices are still lower than they were even 20 years ago. i think it has to do with the different vacation rental market -- people built so many homes 10-15 years ago that the market is saturated with foreclosures still. we are aware of it, which is why we aren't holding our breath that any property would make us any large amount of money. We are thinking more in terms of the security of owning something we could potentially retire to in 30 years (husband wants to work until 70... I say more power to him...).


I just saw a home go on the market there for 35k that has a newish roof and it says no mold or structural damage, but tons of cosmetics are needed. there are a bunch like that. I think it's probably too good to be true, but it's definitely interesting.

[msomnipotent]

I would talk to a mortgage broker first. If your down payment is a loan that has to be paid back, things get complicated. I'm the type that would find a cheaper vacation home that needed a little TLC, and just pay for the whole thing with a 403b loan. It just depends on the math. Don't forget that the property taxes will be more because it is not your primary residence. Our PT on our cottage is roughly double that of a resident.

Do you have someone you can split the investment with?

[TexasHusker]

If you borrow $50K from your company plan, be advised that whatever balance you have not repaid is considered due in full when you leave the company.

That could present a real cash crunch.

[lidasa]

If you borrow $50K from your company plan, be advised that whatever balance you have not repaid is considered due in full when you leave the company.

That could present a real cash crunch.

Yes, I saw that when I was reading up on this option and thought we'd hit a snag. But, we have two accounts, and the larger one is from my husband's old job, so it's not tied to a company anymore. It's a nice little loophole. I'm more concerned about property taxes in the area going up significantly in the next 5-10 years, which seems likely...

Still feeling nervous about taking from a retirement account. We really want the security of property ownership for retirement though. I think we may wait a couple of years so we have time to save more money and then see how we feel about it. Knowing the costs of owning a home, I think I would only feel comfortable owning something we didn't live in full time if we have major cash reserves at all times, and very, very low monthly costs. I think for now we would have to increase our income by about 12k per year, which is certainly doable, but it's going to take 12-18 months.

[lidasa]

I would talk to a mortgage broker first. If your down payment is a loan that has to be paid back, things get complicated. I'm the type that would find a cheaper vacation home that needed a little TLC, and just pay for the whole thing with a 403b loan. It just depends on the math. Don't forget that the property taxes will be more because it is not your primary residence. Our PT on our cottage is roughly double that of a resident.

Do you have someone you can split the investment with?

Property taxes will be double? Oh goodness. That certainly makes a big difference. They are already quite high. Thank you for pointing that out. Might be a deal breaker right there.

I am with you on paying for the whole thing with a 403b loan. The more I think about it, the more I want to buy the least expensive and still livable thing I can find.

[tripods68]

a financial advisor told us that given our 2 goals of wanting to own a home (for personal and financial security) as well as continue to save as much as possible, we should consider taking a loan from our retirement account of 50k, and use it to buy a home that would cost us around 100k. We looked into it, and the rules let us do that, and we could afford to pay it back (so no penalties) as well as afford the mortgage and taxes etc. But, is that just stupid?

I wouldn't advised borrowing $50K from your retirement account to buy a house. It's just a bad idea 1) huge tax consequences, 2) touching retirement accounts is a huge NO, NO! 3) I'd FIRE your Financial Advisor for suggesting taking out a loan using your retirement account.

I probably would still rent for a while and save 20% towards a down payment. Personally you are not ready buy a home yet in HCOL. Also consider taking a part time job to increase household income towards saving for a home on top of your EF.

[lidasa]

I wouldn't advised borrowing $50K from your retirement account to buy a house. It's just a bad idea 1) huge tax consequences, 2) touching retirement accounts is a huge NO, NO! 3) I'd FIRE your Financial Advisor for suggesting taking out a loan using your retirement account.

I probably would still rent for a while and save 20% towards a down payment. Personally you are not ready buy a home yet in HCOL. Also consider taking a part time job to increase household income towards saving for a home on top of your EF.

There aren't tax penalties if you use the money to buy a home from an account that isn't tied to a company plan. I didn't know about that and also thought the dude was nuts when he suggested it, but it is an actual thing.

But I do think we aren't in a position to take out the money. We also aren't in a position to save up 20% towards a down payment in our area. To buy the apartment we live in now, which is not large by any means, it would cost at least 1.3million. So... not happening. 50k for a cute home 2 hours away sounds a lot better than 1.3 million right here. We could very possibly have 50k in savings if we are careful in another 2 - 2.5 years, so we'll keep truckin'...

[feh]

So, my question is: a financial advisor told us that given our 2 goals of wanting to own a home (for personal and financial security) as well as continue to save as much as possible, we should consider taking a loan from our retirement account of 50k, and use it to buy a home that would cost us around 100k.

ABSOLUTELY NOT!!!

In fact, hearing your FA says something like this is an excellent reason to never speak to him/her again.

Click on the link in my signature for strategies for keeping your personal finances in order.

[msomnipotent]

I used a 403b loan towards a down payment on my first home. It wasn't that big of a deal for me, but that was over 20 years ago. I'm not sure what the OP means by "tied to a company plan". Aren't all 403b's considered a company plan?

The reason why I said to talk to a mortgage broker is because mortgage rules are stricter now, especially concerning where the down payment is coming from, and this would not be your residence. What concerns me is that your FA is advising you to buy an investment property that you may or may not be able to afford and finance 100% of the cost. It is one thing if he/she said, "If you really must insist on having a property right now, this might be the best way to do it in your case", or if it was more like, "Sure you can get that property! Leverage all you can from your retirement savings". I don't understand the reasoning behind 50% from your 403b and mortgage the rest. I would think that buying a cheaper house and paying it in full with your 403b would be a safer bet. At least you could sell the house to repay the loan if something happened to your job. Having a mortgage just adds another layer of headache.