Investment townhome (Atlanta, Alpharetta, Kennesaw: for sale, real estate market, rental)

[ATLTJL]

Here's an interesting question for the financially minded members of the board.

I've been thinking about diversifying my retirement account. I'm thinking about taking a loan against my 401(k) and giving myself a bit of a self-financed mortgage on an investment property. Now, I know the logic is never take out of your 401(k) to buy something, but I am viewing this as using a percentage of my retirement to diversify into real estate. It's only a percentage, I'm not talking about liquidating the whole thing.

So here's my question. The max amount you are allowed to borrow from your 401(k) is $50k. Can you think of anywhere in the metro where you can get a decent townhome for that much or less that would be relatively easy to fill with a decent tenant?

It doesn't have to be perfect. I have become decently handly with superfiical things. I'm not going to rewire a place or fix bad plumbing, but I can paint, hang ceiling fans, put up backsplashes, etc.

I'm pretty much looking for a place that is in decent shape and can attract a tenant that won't do all kinds of damage, not pay rent, etc. Anywhere along the 85 corridor would work as I'd like it to be on my way to/from work for me to stop by to check up on, do routine maintenance, etc.

I thought about the Jimmy Carter area of Norcross, but looking at the demographic map of the area, I see it has gotten almost 100% Hispanic, and since this will be my first foray into an investment property, I figured it might not be good to have a tenant where we have a language barrier (I don't speak Spanish). I know plenty of properties in that area do fit my criteria, though.

I'm looking for a place where I will be able to pay myself back at a 4.5% interest rate within 10 years, so I figure something that will reasonably be able to rent for at least $750 per month, preferably around $800.

Any suggestions on where I should look? Any cautionary tales on whether this might not be a good idea? My logic is I can't control the stock market, so I wanted to divesify my retirement portfolio to include something that I will at least be able to have a small amount of control over.

Any thoughts, good or bad, are appreciated. Thanks.

[PKCorey]

Check Fannie Mae REO Homes For Sale - HomePath.com

I've seen a few townhomes listed on there in Kennesaw, College Park and others areas for as low as $14,500 and upwards. You can probably check Gwinnett County to see if they have any deals as well.

[lastminutemom]

location, location, location

If we wouldn't recommend someone live in an area on this forum, don't buy there.

In Atlanta, condos and townhomes appreciate much slower in strong markets and fall much faster than single family homes.

If it is fee simple, you have to worry about how well your wall sharing neighbors maintain their property, if it is not fee simple, you have to worry about the fiscal health of the Homeowners Association.

There have been a few condo/townhome complexes that have gone totally under in metro Atlanta.

Clark Howard always says that the best rental properties are in neighborhoods/complexes where most residents are owners. It ups your demand for your property and maintains the quality of the neighborhood, otherwise known as your investment.

In your price range, you might be hard press to find a unit that fits' Howard's criteria.

[tamlym]

[quote=lastminutemom;22974665]location, location, location

In Atlanta, condos and townhomes appreciate much slower in strong markets and fall much faster than single family homes.

... you have to worry about the fiscal health of the Homeowners Association.

Clark Howard always says that the best rental properties are in neighborhoods/complexes where most residents are owners. It ups your demand for your property and maintains the quality of the neighborhood, otherwise known as your investment.
[quote]

Agree! Also, some townhome subdivisions have limited rental allowances....eg you buy the property and are not allowed to rent it out becuz there are already too many rental units there.

Personally, I stay away from townhomes and condos because of the HOA fees and possible rental restrictions. Unless there are massive amount of units to keep the cost down, the recurring high monthly HOA (and ever increasing) eats too much into my return/carrying cost.

Also factor in that the unit may be empty for 3-6 months pending you doing repairs and finding a decent tenant, additional repair costs once a tenant moves in and discovers new issues, losing first month rental if using a management company, property taxes, and insurance.

You MAY be able to get an "ok" SFR with your budget? Have you looked into that? The location may not be the greatest, but it may be OK for cash flow purposes (vs appreciation purposes)....

[gtcorndog]

If you want to diversify your portfolio into real estate, perhaps you could allocate some of your assets into a REIT. They have actually been doing pretty well lately. Vanguard has a very low cost fund that I am invested in. It provides exposure to real estate without the hassles of becoming a landlord. I own a condo that I am landlord for in Virginia, and it isn't all its cracked up to be. Sure there are tax benefits to ownership (assuming there is mortgage deduction and you depreciate the asset), but I wouldn't take a loan against a retirement account to do get in the real estate market.

[tigers84]

Am by no means condoning this, but have you considered a self directed IRA? That is a popular way of using qualified monies to invest in real estate and other non traditional asset classes. Like anything, it has it's pros and cons.

The disadvantage of the 401k loan is that not all plans allow them, and 50k is the max, as long as its at least half your total assets. Also, if you ever default, the govt will charge you taxes on withdrawal and 10% penalty if under 59.5 and non hardship. Can be expensive at exactly the wrong time.

GT Corn offers the most liquid, easiest, cheapest and least cumbersome option. If you want to step up the risk, there are closed end reit (public and non public) All reits utilize leverage to enhance returns, but closed end reits especially so. Many are income oriented, but they can offer capital gains, too.

[ATL Golfer]

This is what I'd do.

Transfer the amount of money you want into a self directed IRA. Equity Trust Company is a company that many people I know recommend. I invest in condos with a friend and he uses this for some of the transactions.

That way, you aren't running into any issue of withdrawal/loan fees, paying yourself interest. Etc. Equity Trust views it as you do, another investment.

[vkvidal]

Try Brookwood condo/townhomes in Norcross.... I went to someone's house there and they were really cute, nice quiet community and I saw some on the market real cheap 40K- 94K . I also came across one for rent for 1100. If you find something in Norcross before Jimmy Carter or in Alpharetta message me I am looking to rent a town house in the next couple of months !

[noah]

Agree, if you really want to do this and have some money in an IRA do the self directed IRA route. Of course you miss out on the tax advantages of rental property but thats how it is if you want to use retirement accounts. How about a single family home...if you plan on managing yourself and are ok with working class neighborhoods you could find something in your price range and earn 20-30% on your money each year...but it is more work then a 401k. Of course these higher returns means you won't be in Buckhead, more like college park. If you look at 30337 for instance you will see many properties in your price range. But these are the neighborhoods which the pros look to for good returns.

Originally Posted by tigers84

Am by no means condoning this, but have you considered a self directed IRA? That is a popular way of using qualified monies to invest in real estate and other non traditional asset classes. Like anything, it has it's pros and cons.

The disadvantage of the 401k loan is that not all plans allow them, and 50k is the max, as long as its at least half your total assets. Also, if you ever default, the govt will charge you taxes on withdrawal and 10% penalty if under 59.5 and non hardship. Can be expensive at exactly the wrong time.

GT Corn offers the most liquid, easiest, cheapest and least cumbersome option. If you want to step up the risk, there are closed end reit (public and non public) All reits utilize leverage to enhance returns, but closed end reits especially so. Many are income oriented, but they can offer capital gains, too.

[anothertntony]

Originally Posted by gtcorndog

If you want to diversify your portfolio into real estate, perhaps you could allocate some of your assets into a REIT. They have actually been doing pretty well lately. Vanguard has a very low cost fund that I am invested in. It provides exposure to real estate without the hassles of becoming a landlord. I own a condo that I am landlord for in Virginia, and it isn't all its cracked up to be. Sure there are tax benefits to ownership (assuming there is mortgage deduction and you depreciate the asset), but I wouldn't take a loan against a retirement account to do get in the real estate market.

I second this suggestion. REIT funds tend to pay out a lot of non-qualified dividends, so it is probably best to keep them in your tax advantaged account. Also, note that many of the funds will have a short-term redemption fee (Vanguard's VGSIX/VGSLX funds have a 1% redemption fee if held for under one year). However, they are liquid, which can be a big benefit.