Should I Conteibute to a 401K??

Question

Hi BP!

My question is pretty simple. I am about to start my first full-time job after graduating college (whoops) and want to start investing in RE in one year after saving 65% of my income for a year. My job offers a 403B (just pretend it is 401K for all intents) that has 100% match for 4% and 50% match for up to 6%. Essentially if I contribute 6%, I'll get 5% matched.

Should I do it or no?

In one corner, my thoughts say "Do it, it is free money" and in the other corner my thoughts say "Dont do it, you will lose out on opportunity cost if you throw that money into the retirement account instead of putting it towards your first REI."

Advice is much appreciated!

Brandon Roof · Answer

If I were in the same position, I absolutely contribute the 6%, another $6,000 in a Roth IRA and the rest towards real estate.  I'd never leave any employer match on the table.  In your case, you essentially receive a 83% return on your investment almost instantly with future opportunity for capital appreciation and dividends.  There are only so many RE investments that would have the same outcome.

Kenneth LaVoie · Answer

I think this is one of the VERY few questions that has only one right answer: Unless you know that you can achieve a 100% return, instantly, via another investment, it's absolutely no question you should put the 6% into the 401K. It's free money.

Marcus R. · Answer

@Eric Sipe

Agree with all the above!  Like Kevin said it makes it easier to get financing and you can also borrow against it to use it as capital reserves.  PLEASE take it one step further and instead of just contributing, make sure you know what you're investing in and how much the fees are for each.

If you wanna have some fun with it call up your 403B provider and ask them why they recommend "their" fund instead of the lower cost better performing index fund...

Eric Sipe · Answer

@Kevin Dean @Brandon Roof

Ah, makes sense! Thank you both for your input! I'm definitely going to do the match then and will look into Roth IRAs as well.

Kevin Dean · Answer

@Eric Sipe

I would 100% agree with @Brandon Roof. Whatever you do don't give up that free immediate gain on your money with the employer match. I see my 401K and stock investments as my backup plan if all else fails in Real Estate. It also provides great diversification for your real estate holdings. When you are just starting off and are looking for financing from Banks, the more money you have in liquid investments, such as stocks in your 401K or IRA, the better.

Banks want to see that liquidity. One reason for the desired liquidity is that if something happens to your property throwing off operations, you can quickly sell stocks in order to generate the cash needed in order to offset whatever issues may be going on with your property.

Brandon Roof · Answer

@Eric Sipe It is the current maximum annual contribution.  In my opinion, It is an amazing investment vehicle.  Too many positives to list here, but the key takeaway that may be of particular interest to you is that in some circumstances you can actually buy real estate with it as well.

Justin Robert · Answer

@Eric Sipe At minimum you have to take advantage of the "free money". The return is too good not to. The opportunity cost of 100% and 50% return immediately is arguably of greater value than putting it in real estate. What is the real difference between saving 65% of your income or saving 59% for RE?

Stick to your 65% plan but know 6% of that will be in 403B. 59% towards RE should still open plenty of doors to invest.

Kenneth LaVoie · Answer

... and keep in mind, you get the investment return on that extra 4-6% as well. So not only do you get 100% return INSTANTLY, but you get DOUBLE whatever return you're getting from the investments in the 401K itself. So if you invest 6K, then employer matches with 5K, and you are invested in a 60/40 portfolio of stocks and bonds and it returns 7% per year on average, YOUR return is actually closer to 12-13% on your investment (because you're getting 7% on 11K, not the 6K you put in yourself)

Josiah Sia · Answer

I would always, 100% of the time contribute up to 100% match. In your case the 5%. The returns you will get form REI will never catch up to 50-100% return.

After the match %, I wouldn't go any higher.

Good luck!

Dmitriy Fomichenko · Answer

@Eric Sipe

Contribute up to the match, it would be foolish to give up guaranteed 50-100% return on your money, you will not get that kind of return in real estate, very unlikely, in the beginning at least.

Should I Conteibute to a 401K??

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