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Should I or Shouldn't I?

I want to buy a house at a deal and rehab it. (I'm a liscensed contractor and can make the rehab happen). Then could easily sell it and clear 30K+ safely within 2-3 months.

My IRA is all that I've got except the equity in my home. Self employment does not fair well on a equity loans. Had a bankrupt 6 years ago. (Credit is now Fair and coming up). My house is worth 150K, I owe 50K. I've got 25K in my savings (a traditional IRA that's losing). And over 10K in a clear line of credit at the commercial building supply.
Go Figure.
I know about the penalty for early withdraw. I'm 4 yrs. short of no penalty. Damn all these retirement rules. Even after the penalty, I make a lot more than leaving in the current IRA, (stocks just are not getting it) plus I've got other properties in sight. I would rather go with a bank loan, but the loan and a decent rate is not for sure and will take time.
What to do?
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Go with the Bank Loan. Take the time. The Bank wil be a "second opinion" on your speculation about the housing market in your area. Some people say there is a real estate bubble. Although my opinion is that with oil going up, lumber and construction materials, going up, vacant real estate going up,and interest rates going up; to build a new house on vacant land today is getting very expensive so the existing housing stock which was built/bought cheaper is still holding it's value. However,many people would caution you that you COULD be the last guy to buy high and then invest more money and end up with an expensive house that you can't sell when the bubble bursts. However, in my opinion, if the bank is your partner that is less likely to happen. I think your idea is a great idea, and you should do it but having a relationship with a bank is essential in the contracting business. You'll need a line of credit now and then in the future, plus you need to rebuild your financial reputation by having bank loans and paying them. You could become a very important future customer of the right bank. Doing lots more real estate deals in the futre, making both you and the bank money. Think like a winner, think long term not short term. I believe you should leave your IRA alone (that is your Extreme emergency fund)and find out how much the Bank would require of you. You have the skills that can make you a lot of money if you go slowly and cautiously. Just my opinion. Good luck.
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No. of Recommendations: 12
I know about the penalty for early withdraw. I'm 4 yrs. short of no penalty. Damn all these retirement rules. Even after the penalty, I make a lot more than leaving in the current IRA, (stocks just are not getting it) plus I've got other properties in sight. I would rather go with a bank loan, but the loan and a decent rate is not for sure and will take time.
What to do?


Not only do you pay a penalty, but you pay regular income tax at your marginal rate. THus, you might be paying at 25 or 27% or higher of income on the money you take out, plus a penalty. A very expensive way to get money!......

If you had 100K in your IRA, and wanted to take it out, you would be giving up over 40% of it......and never see it again.

You'd be better paying $5000 interest more on 100K for 3 months...even if you have to pay 10 or 11 or 12% rate on your loan, you'd be way way ahead.

If you got 100K equity in your house, why don't you set up home equity line of credit, or refinance and take out the cash to use? You have collateral, so there should be no problem.

You aren't going to get the cheapest rate, but ANYTHING will be cheaper than the penalty and income taxes you have to pay.

It sounds like you are just looking for justification to raid the IRA. This isn't one, by any means.


t.
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Thank you for your reply. Your advice is well heeded. It's the time factor I'm worried about to do the deal. I can wait...there will be other deals. You are absolutely right, on dealing with the bank...I just have to find one that will except my equity as collateral and use their money instead of mine, and if you have never dealt with a bank that looks at your credit score (my average is 620) (last year it was 590) more than your money you know how it is. I knew a contractor about five years ago that wanted to open a SAVINGS account at one of the larger banks with $10,000.00 cash. They turned him down because of his credit. There is something wrong with the picture. I could go on but...
Thanks Again.
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Thank you, well taken.
JG
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There are lenders who will make a loan secured by the property without checking your credit score.

You can look at bringing on an equity partner to fund the early deals so that you can make some money and bootstrap your way forward.

You can invest the IRA money in rehab projects. They just need to be someone else's projects so do not assume you have to leave the money invested in stock.

Retirement is important so if you can bootstrap your way forward without touching the IRA the tax advantages or penalties likely mean it is best to leave the funds in the IRA. Just consider how they are invested.

John B. Corey Jr.
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