401k vs Real Estate
Caio Ferreira TorresPro Member
Rental Property Investor · Danbury, CT · Member since 2020 · 12 posts · 18 votesI just graduated and got a job as a structural engineer (starting this month). I accepted a salary offer of about 70k a year with a 401k match plan available. However, I want to invest aggressively in real estate. Specifically BRRRR single/small multi family properties. I'm going to continue living with my parents and minimize my bills for at least a year to save up as much as possible. After that I plan to house hack, begin investing in BRRRR deals, and grow a portfolio quickly but cautiously. With that being said, should I put money into the 401k or keep all my money available for me to begin my investing career?
I'd do both up to the match if possible. Do not turn down free money.
If you can be disciplined about your spending and not dip into your investment funds for toys, and learn the right investing principles, you can do much better in real estate than a 401k. If you are the kind of person that spends everything in your bank account, then a 401k may be better for you because the government prevents you from getting at those funds until you leave your company. For many, it is a forced savings account.
@Greg Scott
Yeah I’m very disciplined when it comes to saving! I have a spreadsheet with my income, bills, and expected savings. I agree with you that although 401k match has a 100% return the first year, real estate might be able to give me better returns through cash flow, loan pay down, appreciation, and tax benefits.
@Mike Adams
I was thinking of it that way as well but having that free money tied in the 401k until I’m 60 years old makes me reevaluate it. The possible return from proper real estate investments might outweigh the free money. I feel like as a new investor I need as much money as I can get a hold of. However, 401k would be a guaranteed 100% return.
@Caio Ferreira Torres getting a match is essentially a 100% return if you plan on staying for the vesting period. Also gives you some diversification. Consider a Roth 401k if that is an option also.
Christian
@Greg Scott
Since I want to go all in on real estate investing, do you think 401k is even worth it?
I was thinking more long term. If I pull out the money by the time I’m 60 I’d receive a 100% return the year of contribution plus compound interest over the years that follow. I still think real estate would give me a better return but having some diversification in my investments would be good. Now I’m considering keeping my money to invest during the first 5 years or so. This way I can use all of my money towards investing in real estate. After that I hope to have created a good network of private money lenders (which would fund the deals). I can then contribute to the 401k match program to diversify my investment, or I’ll decide to continue investing fully in real estate haha
@Christian Stoecklein
Yeah, you’re right. I would like to diversify my investments. However, since I’m starting with 0 in my bank account, I feel like keeping the most amount of cash available to begin investing in real estate might be a more profitable move. As I just posted previously, I’m considering using money from the first 5 years to invest in real estate. After a few investments and networking with private money lenders, I can contribute to the 401k to diversify my investments then (if that’s possible).
Would that be smart, or do you think I should contribute to the 401k from the start?
I’ll look into the Roth 401k, thanks!
As a fellow engineer I believe that if you simply do the math, a 401k is a much better investment, especially if you have a company match.
70,000 a year salary
401k: contribute 6% with a 3% match Invest in SP500 which has a 10% return (dividends reinvested) for more than 100 years with no effort whatsover. Grows tax free. Assume your salary grows at 5% per year (which is low my salary, as an engineer, has grown 10x in 25 years it comes out to 10% a year annually). Feel free to plug it into the calculator below but it comes out to just a little over 5 million in 40 years, with zero effort and almost no risk.
https://www.aarp.org/work/reti...
You are not going to get that in real estate with zero effort. BRRRR requires you to buy properties at 60-70% of actual value. So you have to make 40-50 offers to get 1 acceptance. You have to find those distressed sellers. You have to fix up the properties, be a landlord, have excellent credit to get refinanced, etc.
My advice to you is this. Concentrate on your career, max out your 401k and do a good job to maximize your salary and bonus for the next 10-15 years. That will put the most money in your pocket. Put an extra 5% in your "BRRRR" fund every month and by year 10 you will have 100,000+ to invest in a BRRRR with excellent credit and a W2 job that makes financing a breeze. Then if you want to become the Real Estate Mogul you do it from a position of strength. But per your original question, you cant beat compounding tax free growth at 10% a year with zero effort. 401k is the clear winner
@Mike Adams
I was thinking of it that way as well but having that free money tied in the 401k until I’m 60 years old makes me reevaluate it. The possible return from proper real estate investments might outweigh the free money. I feel like as a new investor I need as much money as I can get a hold of. However, 401k would be a guaranteed 100% return.
Trust when I say it's good to get that match. It's free money and it grows for years. Nothing beats compound interest (money making money). I put 30k or so in my 401k 9 years ago, it's worth over 400k. By 70, it will be worth between 3m - 7m in tomorrow's money. Never put all your eggs in one basket. Check out https://firecalc.com/
@Caio Ferreira Torres Do both if at all possible.
@Caio Ferreira Torres As a 59 year old that didn't save his money when I was young I'd remind you you will need that money when you're old. Do both.
@Caio Ferreira Torres if you’re asking this question in this forum, expect to hear to a lot of folks telling you to put money into real estate and skip out on 401k. Know who your audience is before you ask the question. Of course there will be a few who will advice you to put money into your 401k instead
You still have a long career and time horizon ahead of you. If I were you, I would tread carefully and do both. Focus on building your arsenal of money before you re-deploy it to a specific area of interest. Set yourself a goal say 5 or so years down the line when you have enough money for a house, then re-evaluate. For now, learn as much as you can. Good luck!
Absolutely get the company match; you will not regret the compounding you'll see on that money since you're starting early. This will also bolster your mortgage applications as you'll have 'reserves' from the bank's perspective.
As for the cash part, I'd recommend figuring out 'your number' by determining when (how many years) you want to house hack, then what's your budget going to be for the house (check current listings and add some buffer for appreciation to adjust for when you'll be ready to buy). From there, determine what financing you'll use -- since you'll be in an 'owner occupied' you likely won't need a very big down payment at all... bounce all this information against your take home pay less expenses, and 401k contributions and see how long it will be until you'll be able to have a big enough chunk for that first house hack. If that timeline is too long for you, then maybe consider alternatives... but my guess is, even with the 401k contributions, if you can control your spending then it won't take you very long to have enough cash to get in the game.
Caio-- my advice would be to invest in the 401k only until you reach some target number, say 10k for example. There's other advantages to investing in a 401k than what would show up on an excel spreadsheet. The psychological pressure of feeling like you "have" to put your money to work will be tough if you decide to just save up for RE investing. You could pressure yourself into a doing a bad deal bc you're tired of sitting on the sidelines.
But, you have a substantial chunk in your 401k and THEN start saving for RE it'll take the pressure off since you know your 401k dollars are still working while you look for the right deal.
Plus there's something satisfying about knowing I'm continuing to invest every two weeks in any environment, down markets and up markets. Whatever you choose to do, giving up the employer match (a certain 100% return) would be un-advisable.
Best of luck!
@Caio Ferreira Torres
Invest in Real Estate...
@Caio Ferreira Torres
Nothing is 100%....401ks are based on the stock market....roller coaster ride...granted over time you'll see gains but compounding interest and decades of time are key...arguably, the majority of the wealth in this country was built with REI....
@Caio Ferreira Torres I would say definitely put up to the company match into your 401(k). Based on your age, a Roth 401(k) would be the best choice if the company has this option. If the company matches up to 5-6% it's only a small portion of your income. You could definitely save a significant more than that for real estate if you're living at home.
The beauty of the Roth 401(k) is that it grows tax deferred and it can be transferred into a Roth IRA if you leave the company or become an investor full time. Also, the Roth IRA allows you to take a loan out up to $10,000 for a home purchase. This means if you use an FHA loan for your first investment you could use the IRA for the down payment.
Another reason I would recommend investing at least up to the company match is for diversification! The stock market moves much differently than real estate does and it's always good to spread out your risk. Also, since the stock markets inception the average return has been 6%. With compound interest and starting right out of college, you could see some serious growth over the years.
@Caio Ferreira Torres, I would max out the 401k, as several have mentioned, since it is free money; at the same time, it forces you to budget yourself and build frugal spending habits early on. Then check if your company allows 401k loans. My company allowed me to take a loan out a couple of years ago on the 401k (up to half of the total, or $50k, whichever was lesser). Some companies have a stipulation that it must be for a primary residence, so check on that.
The cool part about this is that you don't pay the bank the interest, you pay yourself the interest (back into the 401k), so it is a way to get cash right now, but accelerate the re-building of the 401k funds. You should pay no penalties since this is a loan and not an official withdrawal. Drawback is that if you're let go or change jobs, you either have to pay back the lump sum of what is owed at the time, or pay the early withdrawal penalties/taxes on the remaining loan.
If there is an enticing enough deal in RE, then it might be worth looking into this option even if it means there is a chance of paying substantial fees/taxes. I was able to get the funds literally within about 4-5 days after the request was submitted. Good luck!
@Caio Ferreira Torres
You can see if your employer will match contributions to a solo 401k then you can use the funds to invest in properties while still getting the match + you’ll get tax benefits from your RE investing returns.
Here’s a bit more about me:
Im 25 (turning 26 in September). I have a 750 credit score. I have 40k debt in student/auto loans. My plan is to start house hacking by September of next year with a FHA 203k loan (already pre-approved for the price range I want). Based on my plan of living frugal, I'll have 40k saved up by September 2022. I will work 40-50 hour a week and I'm willing to dedicate another 20-30 hours each week towards all things real estate. My structural engineering firm works on commercial/residential properties among others. I've read 10 BP books and watched tons of podcast. With that being said, I know there's a lot more for me to learn once I actually start investing (I'm expecting to be humbled haha).
5 year goal (short term): financial freedom. 15 properties cash flowing 54k a year (300$ a month each).
5-15 year goal (medium term): find my niche. Create a unique strategy that I can excel at. Find a way to mix my structural engineering skills into the niche. For example, offer to be part of a clients deal by adding a residential floor to their building (I’m shooting in the dark here but I’ll figure it out).
15-35 year goal (long term): create an empire. Grow exponentially by starting a syndication to fund those deals and more.
Ultimate goal: a million a year in cash flow. Start a non profit and create a small ripple of good in this world.
As you can tell, I believe in the power of real estate. I think of the 401k as a backup plan. I do believe it can give me great returns just not as much as real estate if I’m actively investing (infinite/ridiculously high return with brrrr). If I contribute to 401k I’ll go from 40k saved to about 33k which makes a big difference at the start of my investing career. However, I want that diversification in my investments. I’m looking into taking out loans against the 401k. I’m also considering a delayed start to the contributions. Maybe wait 2 years to before I start contributing. Thank you all for your advice! I’ve carefully read each and every one. And please feel free to add on or comment on my plans! I appreciate it.
@Caio Ferreira Torres you should definitely put in at least what your company matches - that is free money. Savings up to 15% early on will allow you to compound that investment in your Roth 401k. Then anything after that I would out towards real estate. That is what my family has done and it has worked very well.
Makes sense to throw money into the 401k up to the employer match and no more. If your company wants to give you free money, absolutely take it. Hypothetically, if you switch To another company and roll that 401k into a traditional IRA, you can withdraw up to $10k for a first time home purchase without paying penalty (but still need to pay taxes). There's more flexibility with a 401k than I think people realize. You can also essentially act as your own lender and borrow out of your 401k and then pay yourself back the principal plus interest, however you lose out on any growth during that process. Certainly are pros and cons. I can tell you though, when I graduated and had access to a 401k, I was certainly happy I contributed as much as I did. It helped me buy my first house hack.
Good luck!
Here’s a bit more about me:
Im 25 (turning 26 in September). I have a 750 credit score. I have 40k debt in student/auto loans. My plan is to start house hacking by September of next year with a FHA 203k loan (already pre-approved for the price range I want). Based on my plan of living frugal, I'll have 40k saved up by September 2022. I will work 40-50 hour a week and I'm willing to dedicate another 20-30 hours each week towards all things real estate. My structural engineering firm works on commercial/residential properties among others. I've read 10 BP books and watched tons of podcast. With that being said, I know there's a lot more for me to learn once I actually start investing (I'm expecting to be humbled haha).
5 year goal (short term): financial freedom. 15 properties cash flowing 54k a year (300$ a month each).
5-15 year goal (medium term): find my niche. Create a unique strategy that I can excel at. Find a way to mix my structural engineering skills into the niche. For example, offer to be part of a clients deal by adding a residential floor to their building (I’m shooting in the dark here but I’ll figure it out).
15-35 year goal (long term): create an empire. Grow exponentially by starting a syndication to fund those deals and more.
Ultimate goal: a million a year in cash flow. Start a non profit and create a small ripple of good in this world.
As you can tell, I believe in the power of real estate. I think of the 401k as a backup plan. I do believe it can give me great returns just not as much as real estate if I’m actively investing (infinite/ridiculously high return with brrrr). If I contribute to 401k I’ll go from 40k saved to about 33k which makes a big difference at the start of my investing career. However, I want that diversification in my investments. I’m looking into taking out loans against the 401k. I’m also considering a delayed start to the contributions. Maybe wait 2 years to before I start contributing. Thank you all for your advice! I’ve carefully read each and every one. And please feel free to add on or comment on my plans! I appreciate it.
Hi Caio, I love your enthusiasm. This is nothing wrong with wanting to change your life and the world for the better. But as a trained engineer, I think you need to fall back on your training with regard to looking at the facts. If people could spend 20 hours a week getting infinite return on BRRRR properties everyone would be doing it. Some thoughts on just the 5 year part of your plan
- The median single family house price in Danbury is 450k. But lets assume for the moment you find properties in the 250k range. You have to by definition, buy with cash because anything you BRRRRR is not financeable. You also need the cost of repair, holding, insurance, etc. So you dont need 40k, you need more like 10x that amount to BRRRR in your area.
- But wait, you say, you will use hard money. Someone with no relationship to you will give a 25 year old with zero experience 400k or more in cash. Totally believable.
- Go to a different area? Of course now the renovation will be managed remotely and you will need to spend 10% on local property management. So you have zero experience and you are going to increase the difficulty and do it remotely.
- 15 rentals means 15 tenet families, with all the associated problems. And remember you bought cheaper run-down properties in less affluent areas, so the tenets are C-D at best. Chasing rent, fights, evictions, property damage, etc. All in 20-30 hours a week
- Oh and you have to source 15 properties. But they cant be any properties, they need to be distressed owners willing to sell at 70% of current value minus repair costs. So you have to compete against every other wholesaler in the area for deals. Every other person who wants to earn infinite returns working 20 hours a week. So to get 15 properties you need to generate a list of about 1500. All distressed, all off market.
Can it be done, absolutely. The podcasts and books have dozens of people who talk about going from 0 to 100 doors in a year. Financial freedom. Dont be a W2 wage slave. You bet, it can be done. That, however, is just selection bias. You don't hear about the tens of thousands of people who tried and failed. If I asked a room of NBA players if "following your dream" is worth it, they would all say yes. But what if I asked a room full of homeless? It can be done, but can you do it?
You will do what you want Caio and that is a good thing. I wish you all the luck in the world. I would only caution you that putting a plan into a spreadsheet is much different than executing it in real life. Good Luck