New trend..using 401K to buy land

Discussion in 'Homesteading Questions' started by Elizabeth M, Jun 15, 2005.

  1. Elizabeth M

    Elizabeth M Well-Known Member

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    I just heard on the news the other night that there is a growing trend in America of people using their retirement funds or 401K's to invest in land.

    They said that you will get a better profit than putting your $$ in retirement accounts or savings accounts and don't have the risk of stocks...after all the price of land never goes down...

    Do you all think this is a good idea?
     
  2. airotciv

    airotciv Well-Known Member Supporter

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    I have also heard this, my thought as of right now is that land prices are to high, do to low interest rates. When talking to our accountant he is also concerned with the land prices being so high. Great question would also like to know what others think. I live in Oregon and the price of land has sky rocketed.
     

  3. boxwoods

    boxwoods Well-Known Member

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    Land is a good investment providing you have the income to back up expenses of insurance and taxes . Those two items will continue to rise along with the value as long as the taxes don't go too high. You might have to set on the land as long as you set on stocks.
     
  4. marvella

    marvella Well-Known Member

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    thanks for bringing this up. i've been considering this, so am interested in what folks have to say.
     
  5. rambler

    rambler Well-Known Member Supporter

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    Hummmm. I'm less than a 1/2 century old, and in my lifetime I saw the same piece of farmland across the road from me sell for $600, $2000, $900, not get sold for $800, and today would probably fetch $3500 an acre tho it is not for sale now. I would expect to, sometime in my lifetime, see that plot sell for around $1200 again.....

    _Just like stocks_ land prices trend upwards, but they have lots of peaks & valleys. If you can time out your needs with a land price peak, great. If you happen to have bought it all when the price was peaking, & are forced to sell it when the prices are at valley - then you likely made nothing or less.

    _Just like stocks_.

    I'm sure it is one way to go with your retirement, and can be a good option.

    I'm not sure it is _the_ best option tho? Myself I kinda like diversity, and can see this as a portion of a retirement plan.

    Fuel & raw commodity prices such as fertilizer, lumber, steel, etc have shot through the roof on price, and the EPA & other govt regulation will ensure these items will not come down. We either need to cool off demad for these items, or we need to have lots of inflation to correct the gigantic price increases. A law of nature we try to avoid, but can't no matter how we pretend....

    Building is going to slow down, as will the demand for land. Intrest rates will go up. Land sales with slow to almost none.

    For a time, until the next cycle starts up.

    I don't know that land is a great investment is you are buying today & plan to sell 10-15 years from now.... That might be a loser. Depending on location of course.... If you buy land 5-10 years from now, and sell in 25 years, you can be a big winner. Anyhow odds are. IMHO

    Stocks roll with similar but different inputs - mostly confidence in how things are. I see them as also generally rising in value (or money shrinking actually), and if you have 20-40 years to invest the money, some of both stocks & land will likely pay off for you as that is too far to predict any kind of hills & valleys.

    --->Paul
     
  6. Runners

    Runners A real Quack!

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    Two years ago, after struggling with a 401k that was losing money unless you moved everything to a cash money market - we pulled the plug and bought the 27 acres and house we now live in.

    We're still putting money back in, but not much at all. The farm appears to be a better long term investment, even with most of it financed, the interest rates are below 6%, which is less than the 401k would have lost (most of my co-workers stuck-it-out, to the tune of 25-30% losses two years ago, and no real gain in sight). Even with our employer's matching, we STILL kept loosing money.

    It's not for everyone, but since I was raised a farmer/rancher (and got cut out of the farm... ahem...), and my wife is the outdoorsey type - it works pretty good for us.

    A consideration that pushed us along - lots of Baby Boomers have big $$$ tied up in the market. As that money comes out, I believe the market will continue to soften up - the days of big profits in the market probably won't exist for the average person. This is our first home (that made a difference), it's nice to have land under our feet we can call 'ours'.

    Virginia taxes are very kind to farmers, overall, from a financial perspective, this is a great place to start a home based, farm type business, homestead, etc.


    Wisconsin born,
    high taxes fled,
    and now I'll die..
    Virginia dead.
     
  7. JanO

    JanO Well-Known Member Supporter

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    Using your 401K can be a smart way to buy land, assuming that it's written so that you don't get docked by the IRS. When we bought our first home we "borrowed" from our 401K for the down payment. The extra cash brought down our monthly payment on the house considerably and the pay back to the 401K was very little. Plus the interest that we paid was to the 401k but it showed as a credit to our individual account. So, we paid ourselves interest. We could have taken the money and not done the loan, but then we would have been hit with penalties & such from the IRS. We sold the house at a profit, and by then the 401K money was back in place waiting to be used again.

    Now on land, if you can "borrow" and pay for the land free & clear, then pay the 401K back without hurting your monthly cash flow, then I don't see why it wouldn't be a good idea. In our case the payment was deducted from DH's check at $150. a month or something like that... we never saw it so it didn't seem like a big deal. I don't remember how long it took, but I recall feeling like we had a raise when it was finished. Some plans don't allow you to do this, but a good deal of them do. It's an incentive to get you to make a big purchase such as a home.
     
  8. Pony

    Pony Well-Known Member Supporter

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    This is very interesting, as I'm looking at pulling my TRS (Teacher's Retirement System) funds, and thought I would have to put the money into an IRA or 401K. If I can pay off the farm with it, we'll be sitting pretty.

    Or do you have to buy a new piece of property with the funds?

    Very interesting. Is there a name for this sort of thing so I can research it further?

    THANKS!

    Pony!


    Forgot to use my favorite Will Rogers quote: "Buy land. They ain't making any more of it!"
     
  9. JanO

    JanO Well-Known Member Supporter

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    Pony a lot depends on the terms of the TRS. If you are "borrowing" from it that is different then pulling it and using the funds to buy or pay off land. Some of them let you use it to buy a home, pay off medical bills, send a kid to college, continue your own education or whatever you want.. others only say you can do it for medical expences or to buy a home, but nothing else. It just depends on how it's set up. The terms of the fund may prohibit you from usiing it without paying megga taxes and penalties. Of course, if you get hit by taxes and penalties then your not any better off then if you just continued to pay as you are.

    The IRS can be brutal. I knew somebody once in CA that pulled 20K to buy a home, then they got hit with over 7K in taxes and penatlies on that money for pulling the funds early. They should have borrowed it, but they didn't and they paid a lot for their mistake. So, if you can avoid taking it, per se', and pay it back direct from your paycheck you should do alright. The IRS does't see it as a withdrawl then that way, so they don't ding you. I would check with the HR dept. or whoever is in charge of it then decide what will work better for you.
     
  10. evisr8

    evisr8 Member

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    we are in the process of buying 40.57 acres for 55K. to finance it, we are borrowing 70% from the credit union, 10K against our retirement and the rest in cash. the 10K will be paid in 5 years. with the penalties from the IRS, drawing your pension is suicide. best to borrow against it than to draw it.
     
  11. Cindy in PA

    Cindy in PA Well-Known Member

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    I know a real estate agent who puts land in an IRA type deal. Don't know how it works though. Like anything else investing in land can be good, but is probably not a panacea.. Remember when borrowing from your 401k for any reason, you are paying it back with after tax dollars, which means you are losing more than the interest you paid. Many think that since you are paying yourself it is a great deal, but you are actually paying back more than you think. Borrowing to buy a home and investing in land in your retirement plan are two different things.
     
  12. Michael W. Smith

    Michael W. Smith Well-Known Member

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    I would say it depends. If you can borrow the 401K money to buy property that you live on, that seems like a good deal. I certainly wouldn't cash out the 401k to do it though. As for borrowing money from a 401K to buy land for an investment - land that you have no plan of using - I'd pass.

    To totally quit putting money in a 401K to buy land? If you get a match, you are essentially giving up money. If your employer doesn't match your 401k, you would be better off putting that money in a ROTH IRA.

    Historically, over time, stocks have risen in value. Same with land. If you already own some stocks and want to diversify and buy some land, go for it. But be forwarned that land is not always easily sold. If you are putting money into land and need it back in a hurry, chances are you might lose money - providing you can even sell it.

    Personally, I'd never close out or quit putting into my 401K. My company matches my $1.00 with their $.25 - no limit. I put in as much as I can afford, otherwise I'd be giving up free money.
     
  13. Pony

    Pony Well-Known Member Supporter

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    I'm just thinking about the horrible hit some friends took just as they were getting ready to retire -- right around 9/11.

    Their stocks/bonds/mutuals darned near tanked, and they will never come close to recovering the loss. They've really had to adjust the plans they'd made for retirement.

    I don't see anything of real substance in the market. But I do see something real and tangible and finite in real estate. Land is land. There is only so much of it. Improved or not, as I quote earlier, they ain't makin' any more of it. Value goes up either way -- if you leave your land unimproved, it increases in value as other land is improved and open spaces become more scarce. Improve it, and the value still goes up. Even in dicey areas or neighborhoods, people need shelter, they need to eat. Value may go down briefly, but it stands a much better chance of recovery than the market. Win/win situation.

    If (when?) the market crashes, tangible goods will skyrocket. So will real estate. I'd rather be holding the deed to property, free and clear, than a fistful of worthless paper that's not good for much besides burning or wiping, because it certainly won't feed or shelter me or my family.

    I'd better get off this soapbox before I get a nosebleed!! :eek:

    Pony!
     
  14. labrat

    labrat Well-Known Member

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    That's how I'm doing it. I've found 9.5 acres with a small cabin (needs work) for quite a reasonable price. I'm borrowing from my 503(b), that's a 401(k) for non profits or government entities, that the university puts $2 for every $1 I save. It'll be some time before the cabin is truely livable, but we'll be out there weekends to work on the homestead. I'll have to agree, if you're just buying land to buy land and not use it, you really don't what the price will be if or when you actually sell. We might want to heed our forefathers advice - - - -

    Only when the last tree has died
    and the last river has been poisoned
    and the last fish has been caught
    will we realize that we can't eat money.
    - Cree proverb.
     
  15. mysticokra

    mysticokra Well-Known Member

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    There's a big "gotcha" on using 401K money to buy land.

    If you get fired, the company plan may require that you repay the loan within 90 days. iF you don't, then it counts as a distribution. That will definitely bring on taxes and possible 10% penalty. The good thing is most plans limit loans to 50K, so you know your exposure.
     
  16. Elizabeth M

    Elizabeth M Well-Known Member

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    Thanks for all your input.

    I have to admit to being financially challenged. Talking about money just makes my eyes glaze over, which is why I'll probably never have any. :rolleyes:

    I figure that we're in out mid late forties now and just paying the bills with no plans for the future and that needs to change.

    Someone once told me that people who work for their money never get wealthy, but that it's the people who let their money work for more money that are sucessfull. That seems to make so much sense and it is what we're trying to think of a way to do. I guess that's why the rich get richer...Time to quit letting life carry us along at random and make some plans!

    I was thinking of buying a few acres at a time and just sitting on it for about 20 years. I know it is covered on our insurance policy no charge as long as there is no stucture on it. Taxes would be about $60/year here.

    We have borrowed on our 401K in the past, I never thought about doing that.

    Elizabeth
     
  17. DaleK

    DaleK Well-Known Member

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    It can be a good idea but it's also contributing to the destruction of farm families. In some midwestern states more than half of the farmland is now owned by absentee landlords through their 401k money, who drive out to see the land once a year and wonder why so many farmers are leaving the land but don't see that farmers can't compete against 401k money for land purchase.