Reducing 401(k) Contribution to Fund Real Estate Business?

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Reducing 401(k) Contribution to Fund Real Estate Business?

Christopher Dru
Investor · FL · Member since 2022 · 21 posts · 19 votes

I have been reading a ton of material (including Bigger Pockets books!) on real estate investing to educate myself before purchasing my first property.

I've been scanning the MLS and been in contact with my agent for the past two months looking for a small multifamily or single family home to house hack.

Based on my local market, it's looking like a single family home will be the most realistic first purchase.

My strategy is to put down about 10% (or lower) using a conventional or FHA loan, make value-add minor rehabs to the property where needed while living in the property (live-in-flip), and then move into a different property and place a tenant in the first (and repeat over several years to acquire multiple properties).

I know there are creative methods to finance real estate deals rather than using your own cash. However, for at least my first couple of deals, I want to use my own cash to learn the process from the inside-out (and pursue other financing methods later on).

To increase my cash savings rate in the short term to cover my future down payment(s) and rehab cost, I've considered lowering my 401(k) contribution to an amount that would meet my company's match but no more. This would provide me the capital necessary to fund my real estate business and get it off the ground and also provide a conservative reserve for unknown expenses.

Effectively, I'd be making the decision that I can actively manage my real estate portfolio in a way that will generate a return better than the stock market (index funds via 401(k)).

I've been a passive index fund investor for years and the thought of decreasing my retirement account contribution is painful. However, long-term real estate investing makes sense to me and I can see the value in actively working the business as an investor over a 20+ year period.

I can always increase my 401(k) contribution back to its original rate in the future once I feel solidified with my real estate portfolio foundation.

Has anyone else taken a similar approach when starting their real estate investment journey? Thoughts on deferring traditional retirement account capital to utilize it in the real estate market long-term?

Thank you all so much for being willing to share your expertise. I love BiggerPockets!

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Nathan GesnerBusiness Member
Moderator
Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
3y
Quote from @Christopher Dru:

I have a relative that invested only in the stock market. His portfolio was valued at over $2 million after 40 years of investing. His annual dividends were around $50,000. The value of his portfolio dropped $500,000 in the last two years.

I started investing in real estate in 2016. My portfolio is valued at over $2 million after six years of investing. My annual net income from rentals was over $150,000. Even if the value of my portfolio dropped, my net income will remain the same and it will continue growing every year.

I have a 401(k) but I won't be pouring a lot into it.

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  • V.G JasonPro Member
    Investor · Member since 2022 · 3k+ posts · 3k+ votes
    3y

    What total % of your gross income do you contribute to retirement with current match? Not just 401k, but Roth too. And side accounts that you may or may not be holding till then.

    0Reply
  • Tim Johnson
    Real Estate Agent · Skagit Valley, WA · Member since 2021 · 257 posts · 283 votes
    3y

    @Christopher Dru yes.... on sticking with your 401k to employer-match level. Don't miss out on that.....and emphatic yes.....on moving all other excess and available cash to REI. While feeling scary or painful - at the very least it would represent a better balance and more stability in your investment portfolio. Your plan seems cogent to me.

    1Reply
  • Nathan GesnerBusiness Member
    Moderator
    Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes
    3y
    Quote from @Christopher Dru:

    I have a relative that invested only in the stock market. His portfolio was valued at over $2 million after 40 years of investing. His annual dividends were around $50,000. The value of his portfolio dropped $500,000 in the last two years.

    I started investing in real estate in 2016. My portfolio is valued at over $2 million after six years of investing. My annual net income from rentals was over $150,000. Even if the value of my portfolio dropped, my net income will remain the same and it will continue growing every year.

    I have a 401(k) but I won't be pouring a lot into it.

    The DIY Landlord Book4.7247 Reviews
    WebsiteView Page
    1Reply
  • John Romero
    Member since 2022 · 15 posts · 5 votes
    3y
    Quote from @Christopher Dru:

    I have been reading a ton of material (including Bigger Pockets books!) on real estate investing to educate myself before purchasing my first property.

    I've been scanning the MLS and been in contact with my agent for the past two months looking for a small multifamily or single family home to house hack.

    Based on my local market, it's looking like a single family home will be the most realistic first purchase.

    My strategy is to put down about 10% (or lower) using a conventional or FHA loan, make value-add minor rehabs to the property where needed while living in the property (live-in-flip), and then move into a different property and place a tenant in the first (and repeat over several years to acquire multiple properties).

    I know there are creative methods to finance real estate deals rather than using your own cash. However, for at least my first couple of deals, I want to use my own cash to learn the process from the inside-out (and pursue other financing methods later on).

    To increase my cash savings rate in the short term to cover my future down payment(s) and rehab cost, I've considered lowering my 401(k) contribution to an amount that would meet my company's match but no more. This would provide me the capital necessary to fund my real estate business and get it off the ground and also provide a conservative reserve for unknown expenses.

    Effectively, I'd be making the decision that I can actively manage my real estate portfolio in a way that will generate a return better than the stock market (index funds via 401(k)).

    I've been a passive index fund investor for years and the thought of decreasing my retirement account contribution is painful. However, long-term real estate investing makes sense to me and I can see the value in actively working the business as an investor over a 20+ year period.

    I can always increase my 401(k) contribution back to its original rate in the future once I feel solidified with my real estate portfolio foundation.

    Has anyone else taken a similar approach when starting their real estate investment journey? Thoughts on deferring traditional retirement account capital to utilize it in the real estate market long-term?

    Thank you all so much for being willing to share your expertise. I love BiggerPockets!

    I spoke to my cpa on this exact idea and for me it didn’t make sense. Currently I contribute 13% to my employer 401k which equates to about $15000 per year. If I dropped it to 4% that contribution would change to about $5000. The problem for my situation and tax bracket is that the $10000 less contribution would be taxed and I wouldn’t be able to bring much of that “home”. So check with your cpa if need but as a generality it didn’t make sense. What I did do is start a soloIRA and I’m using that to invest differently than the stock market/traditional way.
    1Reply
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