What Could Possibly Go Wrong? Amateur Investors Cash Out 401(k)s To Buy Homes

– What Could Possibly Go Wrong Here? (ZeroHedge, May 20, 2013):

You know it’s getting frothy when… “We’re seeing many people cash out 401(k)s or IRAs because they want to take advantage of the [real estate] market.” As CNNMoney reports, in order to get in on hot housing markets, amateur investors are buying up homes and taking risky measures – like tapping their retirement accounts – to fund the deals. As one adviser noted, “our average client has retirement accounts of about $150,000 and is looking to buy one or two properties,” he said. “After 2008, they didn’t trust Wall Street. They wanted hard assets.” but as with every bubble there is always the greater fool to rely on – “They bought a lot of stuff cheap last year, but now they’re paying market value,” said Jack McCabe, a Florida-based real estate consultant. “Sometimes they’re overpaying… There’s no way they can get an 8% return buying at today’s market prices.” The problem, of course, is amateur investors sometimes spend all their free cash on their purchases, as “a whole lot of the people in the markets are not experts.” If the real estate market turns south again, that could leave a lot of investors in dire financial condition for their golden years.

Via CNNMoney,

In order to get in on hot housing markets, amateur investors are buying up homes and taking risky measures — like tapping their retirement accounts — to fund the deals.

“We’re seeing many people cash out 401(k)s or IRAs because they want to take advantage of the market,” said Sean Galaris of financial services firm LM Funding, based in Tampa. “This new scenario involves people losing significant personal funds since they are financing real estate through retirement accounts, savings and life insurance.”

…

“The decision to take money from your 401(k) is not for everyone,” said McDermott. At the age of 48, she has already had five arterial stents implanted. “Having heart disease put me in a position where I was scrambling for life insurance,” she said. ” I looked elsewhere to create a legacy: real estate.”

…

“Our average client has retirement accounts of about $150,000 and is looking to buy one or two properties,” he said. “After 2008, they didn’t trust Wall Street. They wanted hard assets.”

…

But Wall Street is getting into this market as well and that is driving prices higher.

…

“They bought a lot of stuff cheap last year, but now they’re paying market value,” said Jack McCabe, a Florida-based real estate consultant. “Sometimes they’re overpaying.”

As home prices rise, profits are harder to come by for investors than they were a year or two ago. “There’s no way they can get an 8% return buying at today’s market prices,” said McCabe.

…

“They’re lucky to get a 2% return,” he said.

And that’s if all goes well when they rent out the property. It often does not. Investments in rental properties can quickly sour if, say, a tenant stops paying rent for a few months or if a condo or homeowners association imposes special assessments to pay for major repairs.

“When that happens, investors may not have the wherewithal to pay their monthly common charges and property taxes,” said Galaris. “A whole lot of the people in the markets are not experts.”