Woodland Hills, CA · Member since 2016 · 98 posts · 40 votes
I have about $0 saved up for REI. It all went into the purchase of my primary residence a year ago, and now that I'm stepping up my REI game I'm regretting that. Live and learn.
My down payments with HMLs comes from my parents, who will earn interest from me matching the HML's rate. I have little of my own cash in the game thus far. Obviously the intent is to change all that with profits from flips and BRRRs over the coming years.
I have various retirement accounts with not a TON of cash in them--only about $25k-- and in analyzing the returns I'm averaging about 6% in my current 401, and that includes the growth from the company matching.
I'm wondering if I should stop my 401 contributions and set aside that $300 per paycheck in a business checking account so I can build up my own cash reserves and not have to rely on other people's money so much. Of course, I lose out on the compound interest and company matching if I do that.
And/or, do I take the hit and pull out my current retirement savings? Dave Ramsey fans would say no, but if having the cash allows me to make other investments could it be worth it?
I'm 33 years old, and hope to build wealth through REI such that I can leave my full-time w-2 within the next 5 years (hopefully sooner).
Thanks, friends!
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
9y
The answer isn't simply, "stay diversified". What if your "diversified" choices stink? Staying in a bad investment, just because it makes you diversified, doesn't make that a good investment any more than investing in your own area just because you know it, makes that area the best place to invest. A bad investment is a bad investment.
Everyone has their own choices to make, but from what I've seen (and calculated), most retirement plans are only good for the retirement of the person that sold it to you. All you have to do to understand this is "follow the money"...and go watch the movie Trading Places. Specifically watch the scene, and the dialogue, between Eddie Murphy and and the Duke brothers when the Dukes are explaining " how it works" to Eddie Murphy. Murphy's comment and reaction says it all.
I'm not saying these funds don't have their place. Everything has its place, but it also has its time...and the time for these investments are at the end. You are not going to make it rich waiting for these investments to grow. That's what REI does for you. The "funds" are investments where your REI profits gain interest...and it's that interest (cash flow) that you can live off of...but, you have to get your "base deposits" into these funds large enough to generate high enough interest income (not interest rate) to live off of them first. That's where REI comes in.
1 - REI grows your seed money
2 - Seed money compounds itself through reinvestment back into RE
3 - Profits from REI is deposited into interest bearing investments
4 - Continued re-use of seed money (you never spend it...just use it an infinite # of times) generates new profits
5 - New Profits from REI are deposited into #3 above
6 - ...repeat until tired, or bored.
...and to your original specific 6% question, my best answer is with a question of my own:
If, you needed $100k a year to live off of in retirement, and your source of "base" generated that 6% in interest per year, which means your "base" would have to equal almost $1.75M, can you rely on that same 6%/year to get there?
Investor · Wichita, KS · Member since 2017 · 584 posts · 813 votes
9y
I am doing the same thing that @Jim S. is doing. With my company plan through Vanguard you can have up to three loans on your 401k at one time. I pay a 4.25% interest rate and I get the interest, very cool. I still contribute 6% to the 401k to get the match from my employer and I can borrow against that again too when it reaches over $2000 more. You typically can borrow half of your 401k total, so right now you can borrow $12,500. The money can be in your account in two days. You can also pay it over 5 years and the payment is very low that way. Do make sure you plan on sticking with the employer or be ready to pay off the loan when you jump ship. Happy investing.
No. It makes him extremely smart. Heis ableto use his knowledge to choose thebest investmemnts and as a result of the "smart" choices, he ended up diversified.
No. It makes him extremely smart. Heis ableto use his knowledge to choose thebest investmemnts and as a result of the "smart" choices, he ended up diversified.
Yep, just because the companies Warren Buffet acquired and added value too are across different sectors doesn't mean he "diversified". He simply applied his models to the opportunities at the time and chose the best. If it was a different sector that didn't matter. What mattered what his business plan and model. What mattered was that it had the right financial metrics, and in the right position for him to implement essentially same plan every time.
No. It makes him extremely smart. Heis ableto use his knowledge to choose thebest investmemnts and as a result of the "smart" choices, he ended up diversified.
I agree. The point I was trying to make is that taken out of context the quote could imply that diversification is bad. I think the point he was trying to make is to focus on what you understand. For years he stayed out of the tech sector because he didn't understand it.
Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
9y
I don't think there's a right or wrong answer when it comes to 401k - not without knowing how you intend to use the money. Ultimately, it was an easy decision for me to make. I wasn't contributing much to my 401k to begin with. So 5 years ago when I switched jobs, I cashed it all out.
At the time, I was finding deals at 70% LTV or better and my hard money lender was (and still is) lending me 100% of the purchase and rehab. The only thing I was paying was points and closing costs. So on a typical deal where the house was worth 150k and I was getting it for 105k all in, I was coming out of pocket anywhere from 6 to 8k.
I think I had 50k or so in the 401k. I had the choice to leave it in and it was worth 50k that I wasn't going to be able to touch til I was 65 and who knows what it would be worth by then. OR After taxes, it was about 30k or 32k or something that allowed me to buy roughly 4 houses.
With thse 4 houses, I was able to make about 700 to 800/mo net rental profits (tax free for now at least with depreciation eating up those profits). I was able to pick up 180k+ in equity (4 x 45k or a little more on two of the four).
So you can probably guess whether I think it makes sense to stop contributing to your 401k or not. I turned 50k in stocks into over 180k in equity in the four houses. I turned that 50k which was giving me 0 income today into 700 to 800/mo in net rental profits that were completely tax free (again at least for now while the depreciation is eating all of it up).
And in 20 or 25 years when the loans are paid off and the property is worth double (stuff doubles about every 20 years here in the areas these homes are in), I'll be looking at roughly 1.2 million in real estate that will likely be generating about 1k to 1,200 a month in net rental profits (although I will be paying taxes on all of that by then).
The key to answering the question is what are you going to do with the 300/mo you're putting in there now? Maybe it makes more sense to stick it in your 401k and get the match so that when you do pull it out and take the tax hit, you will have essentially socked it away tax free because the taxes will basically be stripping off your company match and you'll be left with the gross amount you're putting in.
Personally, I would tell you that there is no better investment than real estate if you're looking at buy and hold. The downside is you're going to have to manage that yourself and that requires 100 times more effort than sticking it in a stock and just doing nothing.
But if you buy right and if you stick to areas with both cash flow and slow and steady appreciation, there's no way your returns can be even remotely close with stock than with real estate. Not unless you know some charitable corporation that will let you buy their stock for 10% of the face amount and then let some stranger pay off the remaining 90% of its value over the next 30 years. :-)
It sounds like, with the help of all the input you have received so far, you are going to
"stay the course with the retirement account, possibly move some of the money to some funds that might be a little higher risk, but not reduce my contributions…..I'll also work on changing up my budget so that I can put as much as possible of my second job income into my REI fund."
I agree with that. With returns of 12-14% a year, I think you are doing well, But I would caution on trying to get more aggressive with your 401K allocations given that the stock market is due for a correction, and possibly a large one, after an 8 year run. That is, unless you think you would have the emotional fortitude to hang in there through a 25% drop or more in the value of the 401K.
Instead of moving into funds with higher risk in hope of achieving a higher return, maybe see if there are funds in your 401K plan that do not charge as much for management fees, such as index funds.
On the REI side, it seems you have made several offers but have not been successful. Here too, I would caution against loosening your requirements in order to "get the deal". Not sure which markets you are targeting but I think that with the increasing competition for flips and BRRRs, profitable opportunities will be more difficult to find. That said, there still are many examples of recent successes on BP and I am sure you can learn from them.
Investor · Anchorage, AK · Member since 2016 · 222 posts · 294 votes
9y
@Ashley Benning Most 401K's will let you borrow up to %50 of your total to a maximum of $50,000. I am like you right now.. I have about $20-25K in mine at the moment. I could borrow about $12,500 of it whenever I please. My plan makes me pay "interest" on it also....BUT its interest to myself :). Basically your getting a free loan by using your 401K.