The principles of money

In 2007, I started working for a non-profit who offered a 401K to full-time employees.  In the beginning, I contributed a few bucks per pay period.  But when I started to experience financial hardship, I stopped contributing altogether and completely forgot about it.  Fast forward to 2014, I left the company and received a letter in the mail advising me of my 401k rollover options. I had $15,000 in it.  Most of those funds came strictly from my company putting in 3% of my salary each year.  I was unaware that they were contributing at all.  I rolled it over to a new 401K and left it alone.

Biggerpockets

Around this time, I was getting interested in real estate.  I was looking to buy a property in my area for cash flow.  I took a class at my community college taught by a local real estate broker and flipper. He taught me how to look for, and cash flow deals.  I also joined the Biggerpockets community and dived deep in their books and website.  After a year or so, I was ready to buy my first investment property.  I created an LLC and opened a business account with one of the small local banks in my area.  The loan officer at the bank advised me that as a business, I needed to put 25% as a down payment when purchasing a rental property.  I decided to cash out my “unused” 401K. My reasoning?  I didn’t know I had it anyway.  I deposited $16,000 in my new business account and my husband offered another $10,000.  This meant we could purchase a home under $100,000.  Which in our area, at the time, wasn’t hard to do.  I found a condo community in my city with 3-bedroom units under $70,000.  I enlisted a broker who put in offer after offer, but I kept being outbid.  My loan officer and I were talking in the bank one day and he suggested buying a home all cash.  The idea intrigued me.  But where could I find a home under $25,000?

Sold!

I started to do a search on areas in my state that had homes under $25,000. And as it turned out, there were plenty.  One hour from my home, where my paternal family were raised, there were homes going from $7,000 to $25,000.  I was familiar with the area because I grew up visiting as a child and knew there were hard working people there.  Factory workers, educators and healthcare workers all called this place home. It was an older community with older houses who needed a LOT of work.  I narrowed down my search to places that were turnkey.  I found a house on a corner lot that already had a tenant living in it.  It was listed on Realtor.com for $25,000 but had been on the market for almost a year.  It needed work and the listing agent let us know that the owners were out of state and were getting a divorce and needed the property sold quickly.  After speaking with my agent, we decided to offer them $15,000.  They accepted.  The property was already being managed at 7% and the rent was $450.  I received my first rent check the following month.

Taxes

When cashing out my 401K I was asked “Do you want us to take out the taxes?” I said no.  I’ll pay it later.  And right I was, we owed about $4,000 in taxes for that year.  So, my advice? Pay the taxes upfront. 

Was It Smart?

Was it a good idea to cash out my 401K to purchase a rental property?  The numbers say that it was.  The 10-year return on a target date fund was about 8%.  The property has cash flowed positive five out of the seven years and has appreciated 300% in value.  In this instance, it worked out well for me.  I am aware that this investment could have gone horribly wrong, and I would have lost my entire retirement savings.  Would I suggest it to you? Only if you understand the risk and are okay with losing it all. If I had more in my account, I may have thought twice about draining my retirement. Your risk tolerance may be lower than mine was at the time.  Would I do it again approaching 40? Absolutely not! My risk tolerance has changed. I am looking towards being comfortable in my retirement.

So, there you have it. My story of draining my entire retirement account and buying a rental property.  And all the taxes and penalties that came with it. It all worked out well but I would never do it again.