Why Ramit Sethi Says You Shouldn’t Take This Huge Risk When Buying a House

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It’s a move you might sorely regret. 

When it comes to making investments, it’s a good idea to take a long-term approach. This holds true whether you’re buying stocks, index funds, or real estate.

In fact, it can especially take time for homes to appreciate in value. And so if you’re going to invest in a home, it’s important to proceed with caution — and that extends to not raiding your retirement savings to make a quick profit in real estate.

A dangerous move that could backfire on you

In a recent tweet, financial guru Ramit Sethi told the story of a couple who cashed out a pension and used it as a down payment on a home. The goal was to hold it a few years and then sell it at a profit.

The problem, though, is that this couple bought their home last year — when property values were already sky-high. And now, home prices are starting to fall. So rather than sell at a profit, this couple may end up taking a loss on that property.

That’s why if you’re going to raid your retirement savings to buy a home, you shouldn’t do so in the hopes of making a quick buck. It’s okay to take a chunk of money out of your IRA or 401(k) plan to finance a home to occupy, because you need a place to live. And if you buy a home during retirement and stay there for, say, a decade, there’s a good chance that if you then decide to sell it after 10 years, you’ll be in a position to walk away with a profit.

But you shouldn’t raid your IRA or 401(k) to put money down on a home, stay there for a couple of years or rent it out, and then hope to sell and make money. If anything, you might end up losing money.

Plus, there’s always the chance you won’t find a buyer. And that means you may get stuck with that home and the mortgage that comes with it.

Be careful with real estate in particular

Not only should you not try to get rich quickly with real estate, but you should also be aware that owning property is a risky thing due to the many costs that can raise. These include things like added maintenance and repairs you weren’t anticipating.

It’s an especially scary thing to take a huge sum of money out of your retirement nest egg and invest it in a single asset that may not pan out as an investment. So before you follow in the footsteps of the couple Sethi described earlier, consider different ways to make money in real estate. One option is to put money into REITs, or real estate investment trusts. You can buy shares of publicly traded REITs in your brokerage account.

Of course, many retirees own income properties — homes they don’t occupy, but rather, rent out. That’s not necessarily a poor choice. But if you’re going to buy a home to rent out, plan to own it for a number of years so you can eventually sell it at a profit. And be especially careful about buying a home at a time when real estate values are up across the board.

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