This post may contain affiliate links; please see our disclaimer for details.
Real estate is a very hot investment topic and an incredible tool to help achieve FIRE (Financial Independence Retire Early).
âNinety percent of all millionaires become so through owning real estate.â
Andrew Carnegie
Many think a lot of money is needed to start investing in real estate, but this is wrong.
You may have heard of people who have achieved great success in real estate investing. Our success may seem small to some but we would like to share our story.
When we purchased our first real estate property, we were just college students at ages 21 and 23. We did not have a lot of money and did not have high-paying jobs!
We started our real estate investment journey with only $20,000.
Now $20,000 has become $250,000 in 4 years while going to school.
We have bought three properties total but sold our first one in order to graduate student-debt free!
We donât have a lot of money, so there is no way we can afford to buy rental property directly like some people or spend a lot of money to hire professional contractors to do remodeling.
Our real estate investment strategy
Buy as owner-occupied (residential property).
Do some easy remodeling while living there.
Save up a downpayment for the next property.
Buy the next house and rent out the previous one.
Now Iâd like to dive into our own investing experiences!
I hope our stories can provide you with knowledge and inspiration for your own investing journey.
First Real Estate PropertyâTownhome
Shortly after my wife and I were engaged, we started to discuss whether to rent or try and buy a place after we were married.
My in-laws owned real estate in China so my wife possessed a very great investment perspective â regardless of us just being college students.
Many people would tell me, âJust rent! most college couples rent then slowly build up to purchasing their first homeâ.
My wife would tell me she would not pay rent to a landlord. This will be our first property and not our forever home.
So we decided to buy a place to rent out in the future!
She also mentioned the location we were looking at was an excellent location â close to two colleges!
The townhome we found was $100,000. It was an older, cute townhome built-in 1970 with two bedrooms and 1.5 baths.
The previous owner had some nice remodeling done such as repainting and new flooring.
We were so happy when our offer was accepted!
In total, our downpayment was $20,000. Since the downpayment was 20% of the house price we did not have to pay mortgage insurance, woohoo!
Our monthly mortgage payment was around $850 with HOA, taxes, etc.
I still remember on closing day when the employee at the title company said, âwow! your monthly mortgage payment is even cheaper than couples who are renting!â.
After living at the townhome for a little over one year we bought our second property (condo) and rented out the townhome.
We did some simple remodeling on the townhome such as switching old appliances to new (most affordable) ones, repainting, fixing some damages, etc.
The enhancements and repairs were really just simple. The total expenses occurred from this were around $4,000.
Repainting First Property Front Door
We were happy to find a very nice newlywed couple as our first tenants! The rental income was $1000 a month which gave us $250 extra cash flow each month!
We had been renting it out for around two years then in order to graduate debt-free, we sold it for around $140,000 total.
The original price we bought it for was around $100,000.
Second Real Estate PropertyâCondo
Before buying our second property (condo) I had received a job offer as an account manager at a financial software company.
At that time I switched all of my college classes to online so my schedule could be more flexible.
Upon receiving the job offer we started looking for another property in Utah. We decided only to do a 5% down payment for a new property.
The reason we didnât do more than 5% is that we did not have a lot saved and we wanted to purchase a place as soon as possible. The housing market at the time was quite hot.
We knew the sooner we could close the sooner we could start building equity.
Being our second property, we could only apply for a conventional loan with a minimum requirement of 5% down.
We also had to pay PMI (mortgage insurance) since the down payment did not reach 20% of the loanâs total amount.
We eventually found a cozy 3 bedroom/2 bath condo built-in in 2002. The previous owner had new painting and flooring done which made the property very attractive to a young couple like us.
The location was also very close to our college, our first property, and my new company.
On top of that, the condo was also only 3-5 minutes from Walmart, Costco, and other shopping districts! Talk about a great location!
The total price of the condo was $171,000. Our down payment + closing costs were $10,000 total.
The monthly payment with HOA and mortgage insurance included was just about $1,200.Â
When COVID-19 happened, the interest rates dropped significantly. We noticed these amazing interest rates and decided to refinance this condo!Â
After refinancing, our monthly mortgage payment went down to around $1,000 (with HOA fees), saving us $200 a month!
After living in the condo for around 2 years we rented it out for $1,300. This gave us around $300 a month in cash flow!
Similar to our first property, we did some simple remodeling before renting it out.
We painted all the old cabinets fresh white! Painting is the cheapest remodel method and only costs us $100.
The microwave broke when we lived there so we bought a new one which was under $200! It was a returned one at Best Buy but had no issues. They had a hard time selling it so the Manager gave us an extra discount đ
Currently, we are renting out this amazing condo.
We checked condos in the same community and found the value of our condo has increased by at least $100,000 since we purchased it.
We are so grateful for the equity being built in this cute condo.
Third Real Estate Property â Single Family Home
Originally, we were not planning to buy a third property anytime soon. The plan was to wait until I graduated first with my MBA.
We started to look around at different builders just for fun. One of the builderâs sales agents wrote down our contact information and within one week he told us new lots were being released soon.
Since the location was close to my parentsâ house, we decided to check it out but still just for fun.
Two days later the agent told us there would be a price increase of $5,000 for any new homes built. Any contract signed within the next few days would keep the lower price.
We thought it through and decided to go under contract.
The prices had been steadily increasing and we felt it would be a good decision to lock in â especially since the house-building process takes many months.
The new home was under construction in July of 2020. The building process was very interesting and took ten months to finish.
We officially closed on the house / third property in May 2021!
The total price of our new single-family home was just around $340,000 (with upgrades included).
We only did a few upgrades and chose the cheapest home base model so we could have a very healthy cash flow.
The square footage of the home is 2,300 with a lot size of 0.12 acres. We put down a 5% down payment which cost us $20,000 total.
Our locked interest rate is 3% with mortgage insurance being about $35. In total, our mortgage payment each month is $1,600.
We finished our entire yard 2 months after we moved in to welcome our sweet Samoyed puppy named Tofu!
Now we are working on furnishing our 833 sqft basement before our daughter is born. Itâs a lot of work, but Iâm learning many valuable handyman skills! đ
The cost for finishing both our yard and basement will be approximately $20,000. A lot we did by ourselves but some parts were hired out.
We have checked the current prices for the same home (model) as ours in our community. Especially with the basement and yard finished, our third real estate property has increased at least $100,000 in value.
Conclusion
The story above is of our three real estate properties that we bought in the time period of 4 years while in college.
You can see that we didnât spend a lot of money to renovate our first two real estate properties.
There are two reasons for this â
I did not have a lot of handyman skills back then.
As college students, we didnât have money to hire contractors.
But still, we make some nice profits! Just try your best to start saving now for a down payment!
One more thing I want to say is that we are also been very fortunate.
The past few years have been a very good time to invest in real estate in Utah. We were able to buy a house when the price was still relatively cheap, and then watch it increase in value.
The value is still increasing and having rental income as passive income is an amazing thing!
We are so grateful we have been able to see our real estate investments jump from 20K to 250K in 4 years during college.
We do not place all of our investment eggs in real estate but it has been a powerful FIRE tool!
Weâd love to hear your thoughts! Feel free to drop a comment or question below.
Disclaimer:
We hope the information in this article provides valuable insights to every reader but we, the Biesingers, are not financial advisors. When making your personal finance decisions, research multiple sources and/or receive advice from a licensed professional. As always, we wish you the best in your pursuit of financial independence!
This post may contain affiliate links; please see our disclaimer for details.
You have finally saved up enough for a down payment and planning to give an offer on the house of your dreams. The thought of a bidding war may have already crossed your mind.
Youâve looked at a lot of houses and finally found the house that best suits you and your family.
Now youâre ready to put down your offer hoping it gets accepted sooner than later.
We wish getting an offer accepted was that easy and smooth. In recent years the housing market has become the sellerâs market.
Especially after the COVID-19 Pandemic outbreak, things have become much crazier with bidding wars. In another article Iâve outlined some of the positive and negative takeaways from Covid-19 that you can check out today.
YouTube Video On How to Win a Home Bidding War
What is the Sellerâs Market?
Compared to the buyerâs market, the sellerâs market is when there are more buyers than houses available for sale.
Utah has been a sellerâs market for a long time now. Iâm sure this is the case in other states and regions.
Even though we were outbid during the bidding war, we didnât give up. It was difficult at first for sure but we quickly adjusted ourselves.
We became more ready for the next property we found, a cozy three-bedroom/two bath condo built in 2002.
Fortunately, our offer was accepted!
So, what can you do to get the perfect real estate property you have been looking for?
In this article, I share Six tips we learned from being outbid.
Utilizing these tips may push your offer to the forefront and give you a better chance of having your offer accepted!
Tip #1: Check regularly for new houses on the market.
Searching for new homes on the market
Remember, itâs important to always aware and check for new houses to come out on the market.
If you find one you like, you should make an appointment to inspect the house immediately. Zillow has been a good platform to see new homes on the market. Being in Utah ourselves, we have mostly used utahrealeastate.com.
Hereâs a story to illustrate why you should check for new homesâŚ
One time we found a property (condo) we really like and were ready to check it out. We booked an appointment with the sellerâs agent and couldnât wait to see the condo!
BUT! Just like that the sellerâs agent canceled our appointment and told us the seller had already accepted an offer â they had already gone under contract! So that was it, no more showings. đ
Unfortunately, we didnât have a chance to give an offer but we learned some important lessons.
Having a good buyer agent to help you is very important. I still remember my wife found our second real estate property right after it came out on the market, even before our real estate agent saw it. The condo was empty inside with the homeowner completely moved out so potential buyers could go in and check at any time.
The time was around 8:00 pm at night when my wife saw the listing and our agent was still very willing to take us to check it out.
We were the first ones this time to check out the condo and also the first ones to give an offer. The next day our offer got accepted and we were under contract, hurray!!
Letâs discuss more helps tips below â
Tip #2: Ask how many people have checked the property and if there have been any offers.
Sellers and their listing agents are generally not allowed to tell about other peopleâs offers, especially in detail. But the sellerâs agent generally wants to spread the word that a house is in high demand in order to get the best offer in the bidding war.
It is totally ok to let your real estate agent ask how many people have checked the property already and how many are going to check in the near future.
You can also have them ask how many people have shown interest in buying and if they have received any offers yet.
Asking those questions can let you know the demand (how hot) and make a better decision when you make an offer.
This is exactly what we did. You need to have an experienced buyer agent and keep in close touch with the sellerâs listing agent.
Tip #3: Give your best and final offer ASAP.
Giving your best and final offer means you can leave without any regrets if the offer falls through, but donât offer something that you cannot afford! If the final price of the home is higher than you can afford, it is not the perfect place after all.
Speaking with a lender will help you know exactly how much you can afford, but youâll want to have extra cash flow at the end of each month for investments and savings.
âJust because you can make the monthly payment doesnât mean you can afford it.â
Dave ramsey
If you have a real estate agent, he or she should have all resources to help you check on the most recent final selling prices and listing prices of homes in the same community.
Pay extra close attention to the highest-selling ones.
But why?âŚ
Youâll be able to compare the real estate property you like to other homes that have been sold and are in a similar condition.
The highest sold price we saw was for a condo that was in better condition than ours but in the same general location. It was a top-floor unit and had a vaulted ceiling but our condo was on the middle floor. The top floor usually holds more value than the middle floor or bottom floor.
We REALLY liked the middle-floor condo we found and did not want to get outbid again.
After calculating our budget, we decided to add $1,000 more than the highest-sold condo we found. We did this because we really liked the property and the most recently sold condo in the area was sold at a higher price and was in better condition.
We gave our best and final price, and our offer got accepted!
Oh, and donât forget to give your loan pre-approval letter with your offer together. Your lender can help get you a pre-approval letter showing you can afford the loan amount.
Tip #4: Donât ask too many questions before the offer is accepted.
There are a lot of questions that you might have when buying a house that youâll want to ask the seller. Youâll want to know the condition of the house if there is anything that needs to be repaired, and so on.
I totally understand that and you for sure have the right to ask and know.
Weâve found it is really best to wait until your offer is accepted before you start asking too many questions.
Donât let the seller and their listing agents think that you are just asking questions and are very picky. This may make them more unwilling to accept your offer because they will think youâll be difficult to deal with and donât like the property as-is.
We always start asking detailed questions once an offer is accepted. Especially since you will typically have a professional inspector to help you inspect the house condition later on.
Tip #5: Put down a backup offer.
If the seller doesnât choose your offer, ask if you can put down a backup offer.
You never know, some contracts donât always go through! A lot of homes fail to sell at the end because of buyersâ financial situations where they did not obtain the house loan successfully.
Put down your backup offer ASAP and try to be first in line just in case the deal falls through.
This is what happened when my parents sold their house. The family who was going to purchase their property failed to get the house loan due to some financial problems.
Then my parents quickly decided to accept a back offer which worked out great.
Tip #6: Have faith in more dream homes to come!
Donât give up if youâve been outbid!
As mentioned in the beginning, our search to find our second real estate property took longer than we expected and we actually got outbid once.
Being outbid was a disheartening experience no doubt.
We quickly adjusted and learned our lesson from our outbid experiences. There will always have good new properties coming out on the market!
We eventually found a cozy three-bedroom/2-bath condo built-in in 2002. The previous owner had new painting and flooring done which made the property attractive to a young couple like us.
The location was also very close to our college, our first real estate property, and my company back then. On top of that, the condo was also only 3-5 minutes from Walmart, Costco, and other shopping districts! Talk about an awesome location!
Remember in the meantime there is more than one way to invest in Real Estate; thatâs why we love Fundrise!
A great way to start investing in real estate without a lot of money is with Fundrise, a crowdsourcing real estate investing platform.
With investment minimums of ONLY $10, you can start making PASSIVE INCOME with your real estate investment portfolio!
Here is a summary of the 6 tips to help you during a bidding war.
Tip #1: Frequently check for new houses on the market.
Tip #2: Ask how many people have checked the property and if there have been any offers.
Tip #3: Give your best and final offer ASAP.
Tip #4: Donât ask too many questions before the offer is accepted.
Tip #5: Put down a backup offer.
Tip #6: Have faith in more dream homes to come!
In recent years it has been a sellerâs market, especially after the COVID-19 Pandemic outbreak where the bidding war has become much more terrifying.
Many properties we knew of received over ten offers in just one day after they went on the market!
One of our friends got outbid six times until his offer was finally accepted.
We hope these experiences and tips can help you win in those crazy bidding wars!
Wish you all the best in finding your dream home that fits your and your familyâs needs. đ
Disclaimer:
We hope the information in this article provides valuable insights to every reader but we, the Biesingers, are not financial advisors. When making your personal finance decisions, research multiple sources and/or receive advice from a licensed professional. As always, we wish you the best in your pursuit of financial independence!
We were college students and did not possess the skills or knowledge of how to be professional landlords.
Now we are more seasoned but looking back at our experiences we wish we would have avoided some mistakes!
In this article I will go over 7 mistakes you will want to avoid as a new landlord.
If you prefer to watch instead of reading this article, please see my YouTube video below.
7 Landlord Mistakes to Avoid YouTube Video
1. NOT doing credit and background checks
Although you may be anxious to rent your house, it is not worth rushing the screening process to find your first tenants. Failing to check each renterâs background and credit history might result in a nightmare tenant.
The correct thing to do is conduct a professional tenant screening process.
We did not conduct any credit checks, payment history, or background checks when finding our very first tenants for our first rental property.
We completely relied on using âface screeningâ when finding renters for two reasons â
First, as we mentioned at the beginning we were only 22 and 24-year-old college students and this was our first experience renting out a property.
We had no experience or knowledge of the screening process and relied on our gut feeling only.
Second, we were in the process of buying our second condo property and were in a little rush to rent out our first property.
We needed to provide leasing documents, rental deposits, and proof of first-month rental income from our tenants to our lender in order to get a house loan.
We were fortunate enough to find good tenants our first time, but we still consider not going through a formal screening process a huge mistake.
You never really know a person during a short meet-up and without any tenant screeningâŚ
Now we have more experience and always conduct tenant screenings. We used Zillow and apartments.com to list our property for rent and send out screening applications.
Signing up was very straightforward and we just used their free services.
2. NOT taking before and after pictures
After you have completely cleaned and have your property ready for renters, make sure to take LOTS of photos before your tenants move in.
Properly document the condition of the property so that you donât hear âit was like that when I moved inâ. All the photos you take become evidence will back you up.
Also, remember to take a lot of photos immediately after your tenants move out and return the keys to you. Check the condition of the apartment and inform them immediately after they move out if there are any issues.
This way they will be less likely to dispute any damages they have caused to your property.
Take out the appropriate repair costs from their deposit if there are damages.
3. NOT treating it as a business
No matter your style of being a landlord, treat your rental property like a professional business.
I still remember when first becoming a landlord. We just wanted to be cool and chill since we are a similar age to our renters.
Since we were young at ages 22 and 24 years old at the time, we even told the people looked at our house that we are chill landlords, etc.
This is not good because it could be taken the wrong way. Your rents could be thinking âoh, they are chill and wouldnât mind if Iâm late on my rentâ.
We also feel bad and would have a difficult time saying ânoâ because we wanted to be nice. Donât be afraid to say no!
We rented out our first townhouse property to a newlywed couple. They were close to us in age and were very, very pickyâŚ
They loved asking us to fix small things and even when many times the contract said it is their responsibility. For example, the main sink in the kitchen got clogged. Instead of having them fix it I went over, added some Drano, and it was fixed in minutes.
Our lease agreement clearly said such problems are the responsibility of the tenant(s), not ours. We always wanted to be nice and so I would go fix it.
When they moved out we noticed scrapes on our wall, floor, and some other small damages. We could have taken some part out of their initial deposit, but instead, we just felt bad and wanted to be nice.
Donât make our mistake, please!
Instead, we just fixed it all on our own with our money and gave them the full deposit back.
We really did not treat our rental property like a professional business at all. The good thing is that we have improved a lot and will continue to improve moving forward.
4. NOT changing home insurance to landlord insurance
Our rental property at the beginning was our primary residential property. When first purchasing the property we bought home insurance. We did not know that we needed to switch to landlord insurance.
During the process of buying our third single-family house property, we talked with our insurance agent and realized we needed to switch to landlord insurance.
One big advantage of having landlord insurance is having the option to have âloss of rentâ coverage if renters are unable to pay rent.
Having this additional coverage was only a little extra than regular landlord insurance but was not expensive at all.
Quick Tip: Generally it will be cheaper when you bundle car insurance and home/landlord insurance together.
5. NOT increasing rent price if you recieve tons of applications
After first posting our townhome for rent we received tons of interested people and applications, I mean TONS.
When this situation occurs, you can definitely increase your rental price a little bit but we had no idea, haha.
We also did not look at various resources to see the current rental price in that community at the time.
Later on, we found out that we could have rented our place out for an additional $100-$200 per month!
Thinking about how much money we lost is a bit disheartening but more important is we are focused on doing better moving forward.
6. NOT raising rent when renewing the lease
Many landlords are happy their rental properties are stably rented out without the thought of increasing rental prices.
Make sure to do your research to ensure that your rent is suitable for your area.
If you have already rented out your property but never increase the rent when the lease is renewed then you are losing out on extra income.
The market price has been increasing but also the cost to make repairs. Periodically having small increases in rent will benefit you in the long run.
You may think renters do not expect their rent to be raided but in fact, many renters expect a small increase every year or so.
Itâs common to fear is the tenant will move out and you need to find new renters if there is a price increase. Weâve seen if you have good long-term tenants and you want them to continue to rent out your house then you can rent them out at a little lower than the average market rental price.
We wouldnât increase the rent too much but instead just a little in order to keep them.
Back with our first tenants we did not do this and kept the price the same, regardless of being under market value. Life is all about learning lessons thought, right? đ
7. NOT remodeling before renting out
During the first year we lived in our first 2 bedroom/1.5 bathroom townhouse we did some remodeling and switched old appliances to new inexpensive ones.
As college students, we both did not have much knowledge on how to remodel/rehab properties. I was also not a natural handyman at the time so we did not do a ton of remodeling before renting out our first property.
Thinking back we kind of regret not doing more remodeling since it would have let us rent at a higher price and add more value to the property.
Here is a recap of each landlord mistake to avoid:
Common landlord mistakes to avoid
We understand every city and location is different. I am sharing our own experiences and lessons while investing in real estate in Utah.
Regardless of location, all of us landlords need to educate ourselves and establish contacts with other experienced landlords and related professionals.
After reading this article, you probably know more than the average new landlord. At least you can avoid the mistakes we made as new landlords!
Weâd love to hear your experiences or tips, feel free to drop a comment below!
Disclaimer:
We hope the information in this article provides valuable insights to every reader but we, the Biesingers, are not financial advisors. When making your personal finance decisions, research multiple sources and/or receive advice from a licensed professional. As always, we wish you the best in your pursuit of financial independence!
The term HSA is short for âhealth saving accountâ. An HSA is an amazing tax-advantaged account! Whenever we hear or see the word tax-advantaged, we pay special attention to learning all we can about it.
This post may contain affiliate links, please see our disclaimer for details.
My wife and I have separate health insurance. She and our kids are under her companyâs PPO (preferred provider organization) plan.
I have an HDHP which is a high-deductible health plan. With an HDHP, I have the option to open an HSA account.
My company matches part of the money that I put into the HSA!
We had our first baby in Oct 2020 and our second is due at the end of February 2021. I will use part of our HAS fund for eligible expenses from the upcoming hospital bill.
We use the remaining amount to INVEST!
You may use your HSA funds on both your spouse and tax dependents. For example, you can use it for eligible medical expenses for your children (not adult children, haha).
So even if youâre like us and your spouse and kids are not on an HDHP plan, donât fear! They can still use the funds from your HSA for eligible medical expenses.
I max out my HSA every year!
An HSA has triple tax advantages and can also be considered a retirement account when you are 65.
It is a fantastic FIRE friend to have on our fire journey.
I will first explain an HSAâs Triple tax benefits in this article. Then I will share how to invest in an HSA for retirement!
What exactly is an HSA?
A health savings account is a tax-advantaged savings account. It is available for those who have an HDHP (High Deductible Health Plan).
An HSA allows you to deposit pre-tax funds each year. You can then use those funds to pay for qualified medical expenses.
Each company may have a different HSA contribution limit that must be reached before being able to use the funds to invest.
For my HSA, the requirement is to have a minimum of $1000 saved up before being able to invest in the stock market.
If you have an HDHP in 2022, you can contribute up to $3,650 for self-only coverage and up to $7,300 for family coverage (different HDHP plans).
HSA funds roll over year to year if you donât spend them.
What are the HSA Triple Tax Benefits?
Contributions Are Tax-Free
Withdrawals for Qualified Medical Expenses are Tax-Free
 Investment Growth is Tax-Free
Triple tax benefits can be difficult to come by. Thatâs why an HSA is so amazing.
Here are more details on each of the three tax benefits.
Contributions are tax-free
Taxes do not need to be paid on the money you deposit into your Health Savings Account!
In general, there are two ways you can put money into an HSA. First, your HSA contributions can come straight out of your paycheck through a pretax payroll deduction.
Second, if you choose to make contributions with after-tax dollars on your own, you can claim them as tax deductions when you do your income taxes return.
There is no âuse or loseâ rule like an FSA (Flexible Spending Account). The money saved up in an HSA will roll over year after year.
Withdrawals for Qualified Medical Expenses are Tax-Free
Not only can you contribute money tax-free to an HSA, but also money taken out from your HSA follows the same principle!
As long as you use your HSA money to pay for qualified medical expenses, you wonât need to pay any taxes or penalties on the withdrawal.
Investment Growth is Tax-Free
As mentioned previously, once your account hits a required minimum balance, you can start investing the money you have in your HSA.
For my HSA, the requirement is to have a $1000 minimum saved up first.
Choosing to invest in your HSA has the advantages of tax-free growth and makes a nice addition to our retirement portfolio.
Our HSA is a good FIRE friend on our fire journey!
How an HSA Works as a Retirement Account
BEFORE age 65: withdrawals for non-qualified medical expenses will have a penalty and income tax that must be paid. Usually, the penalty is 20%, ouch!
AFTER age 65: withdrawals from your HSA may be used for anything youâd like without paying the 20% penalty fee, but youâll still have to pay income tax on the withdrawals. It works similarly to a Traditional IRA.
Now you know the HSAâs Triple tax benefits and how it can be used as a tax advantage retirement account! We are grateful we didnât miss such a good triple tax advantage account.
Disclaimer:
We hope the information in this article provides valuable insights to every reader but we, the Biesingers, are not financial advisors. When making your personal finance decisions, research multiple sources and/or receive advice from a licensed professional. As always, we wish you the best in your pursuit of financial independence!
An IRA is a fantastic tax advantage retirement saving and investing tool. When you open an IRA (Individual Retirement Account), you will face two choices: Roth IRA or Traditional IRA.
This post may contain affiliate links, please see our disclaimer for details.
We come from different walks of life and are in different financial situations. Itâs essential to know the differences between both Roth IRAs and Traditional IRAs before choosing one (or both)!
My wife and I chose the Roth IRA because we donât want to worry about tax when we retire. The thought of being a tax-free millionaire in the future is exciting.
The deadline to max out an IRA each year is typically the same as the filing tax return deadline âApril 15.
For example, you can still contribute to your 2021 IRA up until April 15, 2022.
Both the Roth and Traditional IRAs provide generous tax breaks. But which one should you choose?
In this article, I will discuss the 5 key differences between Roth and Traditional IRAs. We hope this information can help you make a more informed choice. đ
YouTube Video Going Over The Topic
The 5 Key Differences between Roth and Traditional:
Tax Benefits
Limited Income
Withdrawals
Early-withdrawal penalties
Distribution Rules (RMDs)
1. Tax Benefits
Both Roth and Traditional IRAs provide generous tax breaks. If you expect to be in a higher tax bracket when you retire or retire without needing to worry about tax, the Roth IRA will probably be better suited for you.
But if you expect to be in the same or lower tax bracket when you retire, then Traditional IRA probably will be a better suit for you. Why? See below:
Roth IRA: You can make an after-tax contribution and the money will grow tax-free.
Traditional IRA: You can make pre-tax contributions if you meet income eligibility (check below for point 2 â limited income). Your contribution growth will be tax-deferred.
2. Limited Income
The 2020 and 2021 contributions limit for Roth and traditional IRAs is $6,000 or $7,000 if youâre age 50 and older. You must have enough earned income to cover the contribution.
For Example: If you only made $1000 in 2020, you can only contribute up to $1000 to your IRA in 2020.
Roth IRA: In 2022, the annual income limit is $144,000 for single and $214,000 for married filing jointly. This means if you are above that income, you will not be able to contribute to the IRA.
Traditional IRA: There are specific income (AGI, adjusted gross income) limits that impact much you can contribute in pre-tax dollars. This is divided into two situations: you have a retirement plan at work, or you DONâT have a retirement plan at work.
Roth IRA: Earnings from a Roth IRA can be withdrawn tax-free and penalty-free when you are 59½, and the Roth IRA must have been open for at least five years. However, withdrawals of your contributions can be taken out at any time without a penalty.
Traditional IRA: Earning withdrawals can happen penalty-free after age 59½ but will be taxed at your income tax rate. Contribution withdrawals after 59½ are also subject to tax unless youâve made nondeductible contributions; in that case, only part of your withdrawal will be tax-free.
4. Early-withdrawal penalty
For both Roth and Traditional IRAs, If you withdraw money before age 59½, you might have to pay taxes on your earnings, plus a 10% early withdrawal penalty.
4. Distribution Rules (RMDs)
Roth IRA: You are not required to withdraw any minimum money at any age.
Traditional IRA: Generally, you will be required to make a taxable withdrawal for a minimum amount of money at age 72.
Traditions Vs. Roth IRA: Conclusion
The Roth IRA and Traditional IRA are excellent tax advantage retirement accounts and will help in pursuing financial freedom.
Different people have different fiance situations. Make sure to understand the differences between Roth IRA and Traditional IRA before you make your own decision.
My wife holds her IRA at Vanguard and mine is with Fidelity. Both investment companies have been great to work with!
The most important thing is to start investing early and start now.
M1 Finance is a great investment opportunity with its robust yet simple app. There are ZERO commissions or account management fees.
Deposits $1,000 or more into your M1 Invest account within two weeks of signing up and get a cash bonus of $30-$500 to that account.
It is not just a trading stock brokerage account but also offers an IRA option that allows you to invest in your retirement.
We highly recommend using M1 Finance to open a brokerage or retirement account! M1 Finance can undoubtedly help you on your financial independence journey.
Compound interest is the most beautiful thing in the world. You will see how miraculous it is and how it grows like crazy over time!
âCompound interest is the eighth wonder of the world. He who understands it, earns it ⌠he who doesnât ⌠pays it.â
Albert Einstein
Weâd love to hear which type of IRA you are interested in or using! Drop a comment in the box below. đ
Disclaimer:
We hope the information in this article provides valuable insights to every reader but we, the Biesingers, are not financial advisors. When making your personal finance decisions, research multiple sources and/or receive advice from a licensed professional. As always, we wish you the best in your pursuit of financial independence!
This post may contain affiliate links, please see our disclaimer for details.
The kitchen of our third property located in Utah
Initially, we had no plans to buy our third property anytime soon (in Utah). My wife Shan and I were going to wait until after I graduated with my MBA.
One day we were looking around at different home builders, but just for fun.
One of the builderâs sales agents wrote down our contact information. Within one week, he told us new lots were being released soon.
Since the new community of homes being built was close to my parentsâ house, only a 3-minute drive away, we decided to go and check it (still, just for fun)!
The agent told us two days later there would be an increase of $5,000 to the base prices of all new homes within the next few days. He explained that any contract signed soon will keep the current price and not be increased.
This news impacted our decision to go under contract! After discussing with my wife, we realized if we kept our original plan (to wait), it would become difficult to afford a nice home with the constantly rising prices!
Turns out we made a good decision since our house increased in value by over $100,000 from the time we went under contract to when we closed!
Construction started on our new home in July of 2020. The building process took about ten months to finish. We officially closed on our house / third property in May of 2021!
Price of Third Property
The total price of our new single-family home in Utah was close to $340,000 (with a few upgrades included). The square footage is 2,300, and the lot size is 0.12 acres.
We put 5% down, which was $20,000. Our interest rate is 3%, with mortgage insurance around $35. In total, our mortgage payment is just $1,600 a month!
Also, reach out to at least three different lenders so you can compare rates and get the best deal at closing.
One of the lenders we spoke with told us they would beat anyone else, even if it meant lowering their commissions.
We went with him because he could give us the best deal for closing costs and interest rates.
Here are the most commonly required documents when applying for a home loan or refinance. Your lender may ask for additional documents on a case-to-case basis.
Common documents when applying for a mortgage or refinance:
2-year tax returns
Pay stubs, W-2s, or other proof of income
Bank statements and other assets
All of your debt monthly payment history
Credit score, credit history
Gift letters (if someone helps you with down payment etc.)
Photo ID, SSN
Rent history if you are renting, mortgage/HOA history if you are a house owner
House insurance company if you have a preference, usually it will cheaper when you bundle with car insurance
If you have tenants, include rent payment history & current lease agreement
Why we decided to buy our third property.
These are the three main reasons we decided to purchase our third property â
1. Higher annual income
2. Low-interest rates
3. Family expanding
1. Higher annual income.
By reading how I graduated debt-free, you will see how I moved up to a new job as a Product Development Specialist after starting the first semester of my MBA program.
Having a higher annual income helped us qualify for a nicer house. Itâs important to always make sure you budget and donât restrict cash flow when purchasing a house.
Just because you can make the monthly payment doesnât mean you can afford it.
Dave Ramsey
2. Low interest rates.
Covid-19 was just starting when I switched to my new job. Due to bad economics, the government approved near-zero interest rate plans to help the economy. See HERE for more details.
The interest rates became amazing to buy a home but also sped the housing market prices like crazy. We are so grateful to have built a house at the beginning of the market housing market boom.
We started to expand our family. Now we have one baby boy and a baby girl on the way. We needed more space in the house and also need a nice sized backyard for them to play and run around.
We also wanted to move nearby my parents. Living close to them would be convenient when we needed their help taking care of kiddos and family events.
Regardless of if you have a family or not, itâs vital to understand oneâs finances and follow a monthly budget.
Are you looking for a robust app to help you gain awareness of your spending habits and stay on top of budgeting? If so, we highly recommend Rocket Money (formerly Truebill). Their app is extremely easy to use and can help you gain better control over your finances and know your net worth. Feel free to check them out today!
Advantages of building a brand new house.
Locked in Price
Extra time to prepare a down payment.
Choose your own design.
Less fixing and maintenance costs.
1. Locked in Price
We could lock in our homeâs final price at the beginning (once under contract). Even when it took 10 months to build our house.
No matter how crazy the house price increased, our price was 100% locked in and would not increase. During these 10 months, our house increased by almost $100,000!
By the way, we did see some news that some builders werenât honest and broke the contract to increase the price. Luckily we did not have any such issues.
2. Extra time to prepare a down payment.
We only needed to pay $3,500 to go under contract. The building process took around 10 months. That means we had an awesome 10 months to prepare everything.
We sold our first property, rented our second property, paid off student debt, and saved up the rest of our down payment by closing!
3. Choose your own design.
The most fun and exciting thing for us was being able to choose your upgrades for both the exterior and interior. At the design center, you can choose the flooring you like, paint colors, and much more.
We didnât do a lot of upgrades because we didnât want to max out our loan. We had to work hard to stay calm in the design center because everything was so attractive and made you want to spend more money!
4. Less fixing and maintenance costs.
The second-hand houses we bought before always had small problems (sometimes big problems!) that needed to be fixed.
Compared to the old properties, the new home we purchased would not need repairs for a long time. This is a big relief having everything inside just new and fresh!
Our third property, a single-family home in Utah, during the building phase.
We officially bought our third property this year in May 2020. During the building period, I was taking Maser courses, and we had our first kid.
It was so fun and exciting to see the whole building process of the house. We just went and checked practically every week. đ
Now we enjoy living there and recently got a Samoyed puppy after moving in. Her name is Tofu. Our baby girl is due at the end of February next year (2022)!
Our lives are becoming better and better! We are excited to share more of our FIRE journey with you in future articles!
Disclaimer:
We hope the information in this article provides valuable insights to every reader but we, the Biesingers, are not financial advisors. When making your personal finance decisions, research multiple sources and/or receive advice from a licensed professional. As always, we wish you the best in your pursuit of financial independence!
Greetings from the Biesingers! Welcome to our financial independence retire early (FIRE) blog! We are so excited you are here and to share valuable financial freedom and health content with you. For more information about us, click HERE.
