No. of Recommendations: 5
There are times when you really have to wonder if some people truly don't understand what a retirement investment is supposed to be. And this is one of them. We recently had a real estate crash that helped bring down the American economy and didn't do the rest of the world any favors.

So what are some people doing?

Got it in one. Closing (or borrowing against) their 401(k)s and buying investment real estate.

http://money.cnn.com/2013/05/20/real_estate/amateur-investor...

Before anyone starts, yes, there can be times when investing in real estate can be profitable. But it's profitable for people who understand what they're doing, and have sufficient income that they know they can afford the taxes and maintenance on the place.

This isn't flipping. This is buying a house, renting it out, and then selling it when the local market rises.

And it isn't just individuals who are doing this, a lot of banks are doing this. The banks can afford the loss. Most individuals can't.

Nancy
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No. of Recommendations: 5
Before anyone starts, yes, there can be times when investing in real estate can be profitable.

Actually, this We recently had a real estate crash that helped bring down the American economy is a significant part of what's making NOW a time that investing in real estate profitable, which is why people are taking risks to get into real estate.

This isn't flipping. This is buying a house, renting it out, and then selling it when the local market rises.

Because prices and interest rates are so low, it's making cash flow positive rentals where 5 - 8 years ago, rental properties would have required an additional investment every month because they were cash flow negative. So, this is actually one of those times when real estate can be a profitable investment.

However, for most areas, the 'rise' in the local market is probably only going to be about the rate of inflation, so that's not such a great investment for retirement. But if the investor puts away the positive cash flow each month toward retirement and/or keeps the property and ends up with free & clear rental properties that can provide them retirement income (rather than selling) it can work well for retirement investing. So, I would say, given the proper circumstances, there are a lot worse investments that could be made for retirement.

But it's profitable for people who ... have sufficient income that they know they can afford the taxes and maintenance on the place.

Yes, I would agree that this is the issue. Those who don't have enough reserves to invest in real estate without doing something like withdrawing from or taking a loan from a retirement account are taking a very large risk with their retirement. But that doesn't make it the 'worst investment' - I would say that it makes it a 'very risky and potentially costly way to make a reasonable investment'.

So it's more of an issue about how people are getting the money to make the investment, than the investment itself.

AJ
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No. of Recommendations: 2
Yes, I would agree that this is the issue. Those who don't have enough reserves to invest in real estate without doing something like withdrawing from or taking a loan from a retirement account are taking a very large risk with their retirement.

There's actually another risk that some purchasers don't see. (Please note: I said some, not all). A lot of condo groups and HOAs put restrictions on rentals. Condos in particular might not allow purchase of property for rentals. There are rules set up for this. The owner has to live in the house for a certain period of time before a rental is allowed. Banks and other investment corporations know this and have their lawyers check beforehand so they don't make that mistake.

Individuals (as we learned during the Great Housing Crash), don't always understand the rules and don't necessarily have a lawyer to go over the rules with them. There have been some ugly stories about what happens when someone buys with intent to rent and doesn't mention this to their agent.

As I tried to say, real estate investment can be profitable if you know what you're doing and have the funds to cover the costs. Particularly those people who are able to do a lot of maintenance themselves can make a profit. It also helps to know the location and area, rather than buying from a distance. Back during the crash I remember linking a story about how people from Virginia and other regions were investing in the Boston housing market, and unwittingly making bad purchases on someone else's say so.

So yes. Good for people who know what they're doing. Not so good for people who simply don't want to put their money into standard investments and who have been to a class given by Richard Kiyosaki.

Nancy
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One thing in the article isn't completely correct - if you loan from your 401k it isn't always repayable immediately upon job loss - this depends on your individual plan and some plans (at least for bigger companies) do allow you to keep repaying the loan after you left the company, which basically means that you won't have that money growing while it's missing in your 401k for your retirement, but it also means you can use it for such purposes as a down payment without having to pay interest to a bank.

As long as you have some contingency/emergency fund other than the 401k I think this is a viable possibility if you want to move into a house quicker rather than later with the current interest rates.
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No. of Recommendations: 5
Wow, you read a lot more into that article than I did. What I saw was that there are issues with tapping retirement accounts and life insurance (presumably whole life, since it's 'tappable'). And I also saw some risks pointed out that are unique to real estate. But I also missed anyone pointing out the risks of any other investments that could be substitutes. There is no such thing as a 'safe' investment. Even CDs have inflation risk, so while you may not lose your principal, when you get it and the interest back, it's not going to purchase as much as it did when you invested. And putting your money under your mattress, or burying it in your backyard is even worse than a CD paying paltry interest, because the money under the mattress pays no interest and has risk of theft or loss in a disaster besides.

A lot of condo groups and HOAs put restrictions on rentals.

If someone is getting a mortgage to purchase a condo/townhome, there are actually more restrictions than just the HOA/condo group restrictions. FHA also requires condo/townhome projects to be qualified, meaning that they must have at least 50% owner occupants, no entity/investor can own more than 10% of a complex, and no more than 20% of the HOA members can be delinquent on their fees, among other requirements. And you generally can't get a conforming or FHA mortgage (90%+ of the current mortgage market) for a condo at all if the condo complex isn't FHA qualified, although there can be some exceptions.

The owner has to live in the house for a certain period of time before a rental is allowed.

This is if an owner-occupant mortgage is used. Investor financing does not require this. If HOAs require this, it's in the CC&Rs. If an investor is not willing to slog through the CC&Rs themselves, or pay someone to do so, then they shouldn't be investing in real estate that has CC&Rs, whether it's for personal purchase, retirement investing or some other investment. So, again, this is not an issue with 'real estate for retirement', but just an issue with real estate investment at all.

There have been some ugly stories about what happens when someone buys with intent to rent and doesn't mention this to their agent.

If they buy with the intent to rent, they need to be mentioning it to more than their real estate agent. They need to tell their loan officer, too (assuming they are using a mortgage to purchase). If they check the box on the loan application that says that they intend to occupy the property as their primary residence, and instead, actually intend to rent it out, they are committing mortgage fraud. Again, this is not an issue with 'real estate for retirement', but just an issue with any real estate investment at all.

As I tried to say, real estate investment can be profitable if you know what you're doing and have the funds to cover the costs.

And as I tried to point out, the issues that you are bringing up with investing in real estate aren't issues with using real estate as an investment for retirement, but rather, general issues with investing in real estate.

I don't see that those issues make real estate any better or worse as an investment for retirement than other investments. It's all about what risks one is willing to take, and ensuring that the risks are recognized. Stock index funds have market risk. Bond index funds have interest rate risk. Managed mutual funds have expense and management risks. Individual stocks have bankruptcy risks. Individual bonds have call risks. Commodities have weather/natural disaster risks. Collectibles have the risk of no longer being as popular. etc., etc., etc.....

I don't disagree that investing in real estate successfully requires some study and knowledge. But it's not any more insurmountable than learning about any other investment, and probably simpler to learn about than some investments (FX trading, anyone?).

I do disagree that the article portrays real estate investing is 'possibly the worst retirement investment'. What it portrays is that people are taking risky and potentially costly actions, like cashing out or borrowing from retirement accounts, to invest in real estate. That doesn't mean that real estate investing is bad. It means that people who are investing in real estate (or gold, or individual stocks, or energy futures, or collectibles, or any other investment that they often can't buy in their retirement account) are taking significant risks, which they may not completely understand.

AJ
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What it portrays is that people are taking risky and potentially costly actions, like cashing out or borrowing from retirement accounts, to invest in real estate. That doesn't mean that real estate investing is bad. It means that people who are investing in real estate (or gold, or individual stocks, or energy futures, or collectibles, or any other investment that they often can't buy in their retirement account) are taking significant risks, which they may not completely understand.

With so much uncertainty perceived in retirement accounts these days, I wonder if some folks are simply trying to find a faster/better rate of return on their money?

One of my step-brothers was a contractor for years and after building several apartment complexes in Idaho, he decided to invest in climate controlled storage units. He's making a killing in it. One of his other brothers is now investing in his storage units. He figures it will get him a better return than the sad little retirement account he has through his teacher's retirement.

LWW
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