Question: I have a pretty stable job that I like and have been contributing pretty heavily (17 percent) to my 401(k) over the past few years. I also have an HSA that I contribute the maximum to, and my wife has an IRA that we contribute to as well.
We’d like to move into a new home, but we aren’t confident that we could sell our existing home without taking a large beating on our down payment. I know there’s a dollar/cost average play here (i.e., the house we’d buy would be depressed as well), but I just don’t like that. So lately I’ve been considering purchasing a second home and renting our current one as a way to get past the current housing slump. This house would be smaller than if we sold our current home, but the primary need is related to a school district situation.
Question is: If I reduce my 401(k) contributions to save for the down payment and eventually fund the new mortgage, (say, down to 6 percent or so to meet the match minimum), is that a good idea, an OK idea, a bad idea or a really bad idea? Thanks! Dean, Atlanta, GA
Answer: No, it’s an idea well worth thinking through. There’s a lot to consider, but in this answer I want to focus on a different issue than your 401(k). A critical issue you need to address is whether you’re ready to be a small-business owner? There’s a big difference between owning a home and owning a rental business (as well as a home).
Many people are familiar with the demands of homeownership, even if they’re unhappy with the recent implosion in home values. The shelter that comes from homeownership involves a down-payment, a mortgage, property taxes, maintenance, insurance and the like.
In sharp contrast, owning and managing a rental property is a business, with different costs and accounting demands. If you rent out your current home you’ll be a small-business owner. You need to evaluate the rental option through the cashflow lens of an entrepreneur.
For example, how is the rental business in your neighborhood? What kind of price could you end up charging for rent? You get some tax advantages and an income from the rental, but there are also costs to consider, such as maintenance, bookkeeping, and property and casualty insurance coverage. The quality of tenants is critical. The rental business is highly regulated and you’ll need to become familiar with the landlord regulations in your area. You’ll want to figure out the potential cashflow that could be generated from the rental property.
Don’t get me wrong: Renting can be a really good business, depending on your area and your skills. Lots of entrepreneurs do well with their rental properties. No, the question to think through is whether you want to own a rental business. I think it’s a big deal.
That’s my main response. Another thought is I would go out and see what you could buy in the neighborhood you like in the current market. I would also get a conservative estimate on what you would get selling your home. I know you don’t like the idea that the financial price of a low return on your current home will be cushioned by a lower price to buy on your next home. But I would do some research to see what that really means. How much could you get for your home and how much would it cost you to buy? Are you better off after netting out all the prices and costs or not?
Clearly, you and your wife are good savers. While you’re figuring out your next move, I would maintain your 401(k) contributions. You can then decide whether it’s a sensible move to build up a down payment by reducing your 401(k) contributions down to the match. I don’t have a problem with that since you’re still saving money. You’re simply putting the savings into a different pot.
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