By Lew Sichelman
Realty QA is a weekly column in which Lew Sichelman, a nationally syndicated columnist who has been covering the housing market for more than 40 years, responds to readers’ questions on real estate.
WASHINGTON (MarketWatch) — Question: I am 37 and have a job grossing about $81,000. My wife is also 37 and grosses about $42,000. We both contribute to our 401(k) to the tune of about 15% (including employer matches). We currently have about $200,000 in our combined 401(k)s. We have some small debt, nothing major. We have a large mortgage on our personal home, a home-equity line of credit and one car payment.
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My question is, with the housing market hitting all-time lows in sales, resales, home starts and mortgage rates, I am considering emptying my 401(k) to pay all cash for a rental house that would cost about $115,000. This rental property would generate approximately $850 per month. (I currently have a rental that generates $900 a month, but it has a mortgage).
My line of thought is this: Use cash from retirement savings to purchase the home outright and put the income from the house into a Roth or other retirement vehicle. The income would be taxable, but, I have plenty of tax advantages, so, I’m not too concerned about that. Also, at $850 a month ($10,200 annually), the return on investment would be greater than any retirement fund will earn.
So, it’s like guaranteed return on investment. Meanwhile, my wife and I will continue to contribute to our 401(k)s, uninterrupted. What is your opinion on this logic? — K.V., Helena, Ala.
Answer: Several thoughts come to mind. First are foremost, you and your bride are young enough to raid your retirement accounts. As long as you will continue to contribute to your 401(k)s as you have in the past, I think you should be OK on that score. There are tax consequences for removing money too early from a retirement account, but that shouldn’t matter in this case.
Secondly, though, renting houses is no walk to the bank, as I am sure you no doubt have learned, since you already are a landlord on another property. You used the term “guaranteed,” but there is nothing guaranteed in the rental business. Finding decent tenants is tough enough, but you never, ever know for sure how long they’ll stay, what kind of shape they’ll leave the place when they exit, and how long it will take to find someone to take their place. The house could be trashed or remain empty for months at a time while you make it habitable once again or until you find a new tenant.
In your case, though, if there is downtime, at least you won’t have any debt service to worry about because you won’t have a mortgage. But you’ll still be on the hook for insurance, taxes, utilities and other recurring expenses.
I’ve written about landlording many times in the past. Heck, I am one myself. But the one thing I haven’t covered enough is deferred maintenance, which can be a killer.
If a tenant doesn’t complain about something not working, the landlord doesn’t know about the problem and can’t get it repaired. That’s just fine with most landlords, because no news is good news.
And as a result, the issue — a leaky faucet, a running toilet, a leaking roof, damaged siding, falling gutters — never gets the attention it needs. Worse, the longer the problem persists, the worse it gets and the more damage it can cause. So, if the tenant is in the house for any great length of time — I’m talking years, not months — the consequences of deferred maintenance can be devastating, if not to the house itself, then certainly the landlord’s pocketbook.
You can tell your tenant to report even minor problems to you right away until you are blue in the face, but some just aren’t going to cooperate. Also, you can put in your lease that you have the right to make regular inspections, but unless you actually do — and do it thoroughly — deferred maintenance can come back to haunt you.
This isn’t to say never a landlord be. But it is fair warning about one of the drawbacks of landlording that tends to receive little attention.
Question: I have read that the Federal Housing Administration’s 203(k) rehab mortgage was being utilized by investors who are buying distressed properties and rolling the price of the house and the rehab costs into one loan. Do you know of which mortgage lenders are doing this? I live in Tampa, Fla., and I’ve only found lenders who do this for primary residence buyers. —W.E.
Answer: What you read was incorrect. No lenders are currently making 203(k) loans to investors. What the dastardly writer should have reported was that 203(k) lenders are openly courting buyers of distressed properties who intend to live in the them. I — I mean this hack — made a glaring reportorial error, and I — err, he — should have his license revoked.
However, my sources — yeah, I have sources — tell me that given the huge number of foreclosures and short-sales on the market — especially the FHA’s inventory of same — investors might once again be included. Perhaps sooner rather than later, so stay tuned.
Meanwhile, the government-insured rehab loan is great for buyers who are in the market for short sales and foreclosures because these properties often have deferred maintenance issues or just need to be updated. Especially if the buyers doesn’t have the cash on hand to cover a down payment and the cost of repairs. As the reporter noted — at least he got this part right —a borrower can roll the price of the house and the cost to bring it up to snuff into one loan based on the “as completed” appraised value.
Question: I am having a tough time finding a bank that offers the 203(k) loan you wrote about. I live in Los Angeles. How do I find a bank that offers this, or do you have any suggested banks? —P.F.
Answer: Since I quoted someone from Bank of America in the story to which you are referring, you might want to start there. But for a detailed list, the Federal Housing Administration’s website has a complete roster of lenders you can sort by state, county and even ZIP code.
See the FHA’s lender list here.
Nationally syndicated columnist Lew Sichelman has been covering the housing market for more than 40 years. Because of the volume of mail he receives, he cannot answer individual questions, nor can all questions be answered in this space. Email firstname.lastname@example.org.