New Graduate: Invest in Real Estate or Invest in 401k and RothIRA

11 Replies

Hello everyone, I am a recent graduate from college with a job that is paying decently well, approximately mid five figures. I have saved a lot from working throughout college and have approximately 20K in savings. As I begin to pave my way to financial freedom, I have been met with the question of investing in a real estate deal first or focus solely on 401k and a ROTH IRA. According to a financial planner, if I invest in both 401k and ROTH IRA at approximately $800 dollars a month I will be able to retire by 63. This sounds like a substantial money each month and the payoff would be around 40 years away. To be honest, I would like to achieve a level of financial freedom sooner than later. I would love to hear from others about their approach to this dilemma. Do you invest in both? Did you make your first real estate deal before opening an account? Or have you had success with only focusing on real estate? Any advice would be greatly appreciated!

How old is your financial planner?  Are they near retirement?  Most financial planners are taught to tell you the lies that Wall Street makes up.  most financial planners don't make a lot more money than you do right now.

I maxed out my 401(k) for almost 20 years before I realized that vehicle would never allow me to achieve financial freedom.

@Greg Scott Hello Greg, thank you so much for the response! My financial planner is 35 years old, therefore not close to retirement. I have only met with them twice. They recommended maxing out ROTH IRA and putting additional funds into my 401k up to my companies match. They also recommend only keeping only 10k liquid and putting any other cash into a mid-term account invested in mutual funds.

What made you realize that your 401k was not the vehicle to get you to financial freedom? If you were my age (22), what would you have done differently?


Listen closely to what they tell you. The reason they say an IRA and 401K are great is because you defer those taxes until you are retired and your tax rate will go down. Why does your tax rate go down? Because they assume you will be living like a pauper in your old age. Withdrawals from a traditional IRA and 401K are considered ordinary income so the assumption must be you are living on MUCH less than you did while working.

With real estate investing, not only is it possible to defer taxes, I can defer them forever, even well after I retire.

What kind of returns do you get in your mutual funds and how volatile is it?  In 2008 my 401K got cut in half. Thank God I wasn't trying to live off of it.  Volatility would be a killer after you retire.  Most of the time they will say you can expect to get 8-12% return on average over the long run, on your funds.  For my rental property, I typically get that on my cash flow (which has almost no volatility) plus all the other 4 ways we make money on real estate.

You are about the same age as my kids.  We bought them all rent properties to fund their college education and it not only funded it, they had money left over when they were done.  Two of them are now investors themselves.

To clarify one comment, which I realize now may be confusing.  My cash flow typically gets 8-12%, matching total returns of mutual funds.  On top of that I make money several other ways in real estate.  My total average returns have been north of 30% annualized.

@Paige A.

Sounds like you are on the right path and good for you to start looking at your future at your age. I agree with Greg about financial advisors.  Most of them are all the same...Buy, Hold and Pray the market is up when its time to retire. I’m not saying you can’t make money in the market, but the ones making real returns are very active and are experts in it. I’m a firm believer in figuring out what investment vehicle you want and become an expert at it.  You will make far better returns than trying to diversify into everything.  Two books that I enjoyed that changed my way of thinking were:

1: Rich Dad, Poor Dad by Robert Kiyosaki

2. Killing Sacred Cows by Garrett Gunderson

Good Luck!

@Paige A.

I am near retirement and I would tell you to do real estate in your Roth IRA or Roth 401k starting today. It is the same advice I gave my sons who are slightly older than you. I say real estate because we know it and grew up around it. Some people make 15% plus in the stock market but it is like gambling to me-stocks are not for me. Invest in what you know and understand-mitigate risk and maximize return. Use the tax advantaged plans and strategies -it just makes sense and will get you closer to your goal faster. Congrats on thinking this way at your age.

@Paige A. Find someone living the life you want to live in retirement. Then ask how they did it. Let that be your guide. 

With that being said, I think @Greg Scott has already laid out pretty well. The 401k is set up with the assumption you will be poorer when you are old and thus your capital withdrawals at that age will be less taxed. Less you make, less you are taxed.

My question then for you, is your goal to be less wealthy at 63-70 than today, or more wealthy than you are today? If less, than choose the 401k. If you plan on having more wealth, better choose another investment.

I personally don't like all the volatility of the stock market and the lack of understanding on what drives stock performance. Company performance does not equal stock valuation. We can see this at present as hundreds of company stocks are going through the roof while the company performance or quarterly data shows otherwise, (yes Tesla I'm pointing at you).

Back to the first line, find someone at where you want to be at. Copy them. Happy Investing!

This past year, I was one year out of college and purchased a single-family investment. I pulled all of my contributions out of my Roth IRA and spent every dollar I had. I purchased the home for $650k and made about $25k in repairs. It is worth ~$950k a year later. I definitely lucked out with the market.

I would try to purchase an investment property or house hack with an FHA loan.

@Paige A. If you want to be poor spend all your money don’t by assets

If you want to be middle class listen to a “financial planner” and do the 401K and only a personal home way.

If you want to be wealthy learn the rules and how to add value and be great at investing and or business.

Real real estate investors don’t pay income taxes legally.

Really business men don’t pay tax’s legally.

Example real estate billions get enough depreciation to not pay income tax and quality as real estate professionals to write off other income also.

Big time business men invent all the profits in growth so it’s not taxed and then they can simply borrow money against there business for any personal use they want. Larry Ellison for example has a 10billion dollar line of credit with low interest rate using his company’s as collateral and never sells his holdings and is therefore not taxed. He is in the top 10 richest men.

They have the same laws as you and I do by the way don’t believe people that tell you it’s not possible for you too. For example I am a real estate professional and can basically pay no income tax. I also reached financial freedom in my 20’s by fingering out the rules of the game and how to add value.

As I am sure you can already tell, there is no wrong answer here either decision will be a smart one to make. I am 26  and spent my first few years working as an investment consultant/selling financial planning services, so here is my thought process:

If your employer is making matching contributions to your 401k, then take full advantage of the FREE MONEY. If they match up a certain $ amount or have a % they will match, do your best to put in as much as you can to get the most out of them. Also, your 401k can have Roth money in it, so you don't necessarily need to invest in both, especially if you aren't reaching the contribution limit (I can explain all that if needed). So assuming you're not maxing out (and if you are, good for you that's awesome too) each account with contributions I would establish a Roth 401k in your employers plan and stop making contributions to your Roth IRA since that would be redundant. And if they do make matching contributions, be aware itll probably be pre-tax money but thats fine, I'll pay taxes on free money.

Once that is squared away, I would also start saving for a home and get an FHA to utilize the 3.5% down. Look for a duplex that you can house hack, or look for a home in an appreciating neighborhood that you can refi down the road to purchase your next home.

I am not sure if any of that made sense, but I hope that is helpful! Good luck, you're in a great spot!

@Paige A.

Stock market is rigged as evidenced by this gamestop debacle. Property gives cash flow while building equity. I'm 95% real estate (mind you i only have 3 properties, dropped out of high-school and didn't start this until 30, 6 years ago). Why pay out bonuses to execs when I can get those bonuses in the form of sweat equity and appreciation.