buy 2nd home w/loan or use investment money?

[faydra]

Husband is 66 and I am 59 and we live in California. My family lives in B.C. Canada. We have chance to buy a 2nd home at the lake in B.C. for $210,000.

We have no debts except current principal residence $437/month with $51,000 owing.

I have been wanting to take our money out of the market and put it into real estate.

We receive $3700/month from soc sec and pension. Have $345,000 in husband's 401k (he's retired now), $125,000 in traditional IRAs, and $65,600 in money market a/c's and bank accounts.

I thought we could take $50,000 from money market and bank a/c (leaving $15,600 in the bank account) for a down payment and take the remainder ($160,000) from the 401k and pay the taxes on it -or- would it be better to put $50,000 down and get a loan for the $160,000?

Any advice is greatly appreciated!

[Tree0164]

Have you run the numbers on what the mortgage would be? Getting a second home would be very expesnive. Would you be planning to eventually move there?

I personally wouldn't feel comfortable taking a mortgage during my retirement years.

[Like2Plan]

Husband is 66 and I am 59 and we live in California. My family lives in B.C. Canada. We have chance to buy a 2nd home at the lake in B.C. for $210,000.

We have no debts except current principal residence $437/month with $51,000 owing.

I have been wanting to take our money out of the market and put it into real estate.

We receive $3700/month from soc sec and pension. Have $345,000 in husband's 401k (he's retired now), $125,000 in traditional IRAs, and $65,600 in money market a/c's and bank accounts.

I thought we could take $50,000 from money market and bank a/c (leaving $15,600 in the bank account) for a down payment and take the remainder ($160,000) from the 401k and pay the taxes on it -or- would it be better to put $50,000 down and get a loan for the $160,000?

Any advice is greatly appreciated!

faydra,
I am within 5 years of retirement and I have been thinking of purchasing a second home, too. There are lots of things to consider.

Have you looked at what financing the 160K would do to your cash flow? I don't know what kind of interest you are considering, but using one of those mortgage calculators, Your Monthly Payment for 30 Years for an Interest Rate of 5.750 % on a Loan Amount of $ 160,000.00:$ 933.72 a Month. You would have insurance, property taxes and routine maint. to factor in as well. You would be using quite a bit of your monthly income just for mortgage payments.

On the other hand, have you looked at the tax consequences of taking out 160K from your 401K all at once? It appears your income would be over 200K if you did this all in the same tax year. You may end up paying a lot more taxes than you thought. Plus, you could get hit for Alternate Minimum Tax (AMT). Would you be paying for the income taxes (state and federal) out of the 401K as well? This could further reduce your 401K nest egg quite a bit.

I was surprised to see that medicare part B payments are now income tested (as of Jan this year) and your DH could end up paying higher part B premiums for a year (they look at income tax records two years prior).
"As required in the Medicare Modernization Act, beginning in 2007, single beneficiaries with annual incomes over $80,000 and married couples with incomes over $160,000 will pay a higher percentage of the cost of Medicare Part B coverage, reducing Medicare’s share. These higher-income beneficiaries will pay a monthly premium equal to 35, 50, 65, or 80 percent of the total cost, depending on their income level, by the end of the 3-year transition period. "

Even if both homes were completely paid for, there will be taxes, insurance, maint and upkeep to consider.

A more fundamental question might be for what purpose do you have the 401K? Is it an emergency fund? Or, was it set up to supplement your retirement income? Or, is it "frosting on the cake"? Was it set aside to make a big ticket purchase such as this home? Do you need these assets to be liquid or will a real estate investment work with your long term plans?

It looks like you have done a good job accumulating a nest egg, but have you spoken with a professional who might be able to help you with a plan for getting your money out of the 401K/IRAs with an emphasis on minimizing the tax consequences? Right now it looks like any big ticket items that you used the money for would have painful tax consequences.
I am wondering if there is some way you could spin off some of your traditional IRA assets gradually into a Roth IRA? If you could do this incrementally each year so as to not kick youselves up into another tax bracket, perhaps you could save more of your assets from taxes (long term). After you converted your traditional IRAs over to Roth, would you be able to convert 401K money into traditional IRAs and then convert them into a Roth over the course of several years? I don't know if this is possible in your situation, but a good planner might really be worth their weight in gold to help you figure out the best way to go.

-DC

[Like2Plan]

faydra,
I was wondering how difficult it is to get a rental at the same location? (Is it pretty difficult?) I am assuming you are not planning to stay year long? I was wondering if rentals are a possibility, what would a rental cost for a season vrs the cost of ownership (when factoring in taxes, insurance and what have you)?

-DC

[faydra]

Theresa - No we wouldn't move there. It would just be a nice place to spend summers.

DC - your advice is appreciated. The tax ramifications are something to look at all the way around. I have found it very hard to find a good financial advisor and should probably consult a financial attorney. The 401k and other investments were created to have a source of income in retirement, however my husband and I live off the soc sec and pension so I guess these investments fall under "frosting on the cake".

Guess I need to do some more research into this. I've always taken care of our investments but I need to look into the taxation on these. Thanks.

[DebbieL]

Real estate in BC is really overpriced right now. I live in Victoria, BC and the run up has been outrageous (being in CA I'm sure you've seen that). If you buy now, you are buying at the peak. I'll bet it is twice what it was in 2001 or so. I think things will turn soon, and some sanity will return to the market - now is not the time yet. Average home price for Victoria right now is at about $570K. The average household income is only around 60K, so things are definitely out of whack. All the markets aren’t as expensive as Victoria, but the whole province has inflated way beyond what prices should be. In 2001 the average house here was about 240K (which was still a lot considering our low income levels and lack of real industry here in Victoria). Victoria is considered a tourist town and a retirement place. Not too much in the high income jobs here to support these prices.

My advice if you are thinking of buying in BC is WAIT. The crash is coming. I work in an architectural firm and we are all of the opinion that this can’t last much longer.

PS – They just brough 40 year mortgages here. Lord help us. Last year the most you could get in Canada was a 25 year. They really want to keep this stupid bubble going as long as possible.