401k or Real Estate?

Member since 2021 · 11 posts · 16 votes

I know this may be a weird question to ask on a real estate forum (Im thinking the vast majority of responses will be pro real estate), but I wanted to get some different perspectives from the BP community.

I currently work a full-time job and I am fortunate enough to be able to max out my pre-tax contribution to my 401k each year. As I continue to listen to the podcast and read about people's success in real estate, I have started to ponder if contributing approximately $20k to my 401k each year is a wise investment or should I start using that money for real estate. I also want to add that I do additional savings outside of my 401k however my ability to invest in real estate would significantly grow if I stopped contributing to my 401k.

For reference: I do contribute to my company's 401k so it is not a self-directed 401k, and I have always been told to at least contribute the bare minimum to get the companies match so I am not leaving money on the table.

So BP Community, what are your thoughts?

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Jason WrayPro Member

Banker · Nationwide · Member since 2020 · 2k+ posts · 1k+ votes

James,

I am no fan of 401K's coming from someone who has had thousands of customers complain how they gave up control of their money to a 401K to only lose all of their money due to bad investments of the funds. You also have no control until you hit 59.5 years of age. Not only that but you have fee's on top of fee's that eat into your money. Real Estate on the other hand offers a long term NOI eventually the mortgages will be paid off and you have a ton of equity and cash coming in every month.

Being able to manage your own money and make good decisions on market, sale price, rental schedule/income. Using the equity to buy more investment properties for the long haul.

[email protected]727-637-4289

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Jason WrayPro Member
Banker · Nationwide · Member since 2020 · 2k+ posts · 1k+ votes
4y
James,
I am no fan of 401K's coming from someone who has had thousands of customers complain how they gave up control of their money to a 401K to only lose all of their money due to bad investments of the funds. You also have no control until you hit 59.5 years of age. Not only that but you have fee's on top of fee's that eat into your money. Real Estate on the other hand offers a long term NOI eventually the mortgages will be paid off and you have a ton of equity and cash coming in every month.
Being able to manage your own money and make good decisions on market, sale price, rental schedule/income. Using the equity to buy more investment properties for the long haul.
[email protected]727-637-4289
21 Reply
Account Closed
Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes
4y
Originally posted by @James Somers:
I know this may be a weird question to ask on a real estate forum (Im thinking the vast majority of responses will be pro real estate), but I wanted to get some different perspectives from the BP community.
I currently work a full-time job and I am fortunate enough to be able to max out my pre-tax contribution to my 401k each year. As I continue to listen to the podcast and read about people's success in real estate, I have started to ponder if contributing approximately $20k to my 401k each year is a wise investment or should I start using that money for real estate. I also want to add that I do additional savings outside of my 401k however my ability to invest in real estate would significantly grow if I stopped contributing to my 401k.
For reference: I do contribute to my company's 401k so it is not a self-directed 401k, and I have always been told to at least contribute the bare minimum to get the companies match so I am not leaving money on the table.
So BP Community, what are your thoughts?

Use you 401(k) to invest in real estate.

3 Reply
Michael Reiserer
Member since 2020 · 14 posts · 10 votes
4y
If you have a self-directed 401k you can use the money to invest in real estate. You need to check whether you would qualify for a self-directed 401k. It usually is setup in the name of the trust where you are the trustee. Self-directed 401ks are great because it gives you full check writing authority and what to invest in. I consider it the best of both worlds
4 Reply
David Krulac
Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
4y
@James Somers
@James Somers
7 Reply
Charles Granja
Rental Property Investor · Kansas City/Chicago · Member since 2021 · 126 posts · 113 votes
4y
To start, I am no financial advisor but can give some beneficial clarity.
Everyone must critically evaluate their financial plan to achieve wealth. It is good that you are doing this. There are so many different routes you can take.
Continue your current path
Invest in real estate actively or passively outside of minimal 401k contributions(Rental, Flip/BRRRR, Syndication, REIT, etc)
Invest in real estate with 401k contributions
Some would even say invest in a life insurance plan (Probably shouldn't do this)
No one can give you the best answer because your financial situation is something we are unaware of.
Investing in real estate is a good option amongst other investments. The tax advantages are what make it so great. Depreciation is probably something you are already aware of, also the ability to write off 25k to personal income depending on tax bracket
My advice: Be very critical of who you listen to. And once you fully understand the benefits of real estate: Appreciation, Mortgage paydown, Cash flow, Tax Benefits (Massive), make your decision. The best decision you can make is to invest! I wish the best for you in your investment journey!
4 Reply
Lane Kawaoka
Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
4y
I pulled my retirement funds a while ago. My augment is that you are going to have to pay taxes on your Qualified Retirement Money anyway so you might as well pay now while taxes are lower and not wait decades to finally get access to it. The 10% early withdrawal penalty is nothing, if you are investing in better assets that yield more. In most cases, I see you recoup that 10% in 1-2 years and they rest is all gravy after that.

More details below:

The biggest issue with regular 401k is the crappy options that have heavy fees.

I don't really like Self Directed Roths or any tax sheltered retirement accounts either because you are subject to UDFI (more details below) and cannot leverage your investment which is a pillar in real estate investing. If you want to do one here is a big list of them. Knock yourself out but I cashed out mine a while ago because I plan to live off my cashflow and retire well before the Government allows you to tap into your retirement account.

If you have distrust on where this country is going you need to expect that taxes will go up in the future. How else will we pay out for all these bank bailouts and quantitative easing.

What is the largest source of Revenue for the US IRS?

401K, SDIRA, IRAs, even Roth’s when not if they can change the tax laws. Basically qualified retirement money. People are not spending it and you can bet the IRS is going to get it.

You will pay taxes now or later and you will likely to pay more taxes in the future because you will make more money... so pay it now. Most people think they will be in a lower tax bracket in the future because they plan to downgrade their lifestyle... this is again incorrect money myths that are so prevalent.

By taking you money out early you will incur a 10% penalty but if you understand how you can easily get 20-30%+ returns in real estate a year that 10% penalty is nothing. You can recoup that in 6-18 months.

It's a no brainer... the numbers don't lie. Do the math.

Yes taking money out of your retirement account is a sin for most people.

Just make sure you don't buy jet skis and put it in cash flowing assets like rentals or syndications. Or start a business if your are exceptional at business.

QRPs or qualified retirement plans (Solo 401ks, checkbook IRAs, etc) are the answer to that person with a bunch of money in their existing 401K or IRA.

It's pretty typical that someone listens to the Simple Passive Cashflow podcast, signs up for the investor club, and books a free intro call has 200k-600k locked up in garbage retail investments AKA 401K.

Stop whatever you do don't roll over an old employers 401K into your current employers 401K. If you have money in your current employers 401K its stuck there. You need to quit your job. Well there is this one obscure tactic if you live in a Red state that could work but for you it's easier to take a loan from the existing 401K to start investing in hard assets.

If you are conservatively using prudent leverage and finding decent deals there is no reason you should not be able to retire in 10 years or less and thus negating the very reason for these accounts that you can't touch till you are old.

When you have money in these accounts it sounds good that you are not taxed on gains but you are restricted from getting a Fannie Mae loan. Using SDIRA's you have to get second tier financing options because its more risk for the bank, for example, a Roth IRA can buy real estate on leverage, however, will need a non-recourse loan which is often a fraction high-interest rate and lower LTV. No Bueno!

Caveat: If you are late to the game and already have a 401k over $100,000 then you should convert it to a solo401k. At that point, you should think about putting it into a syndication since you are restricted on how you can leverage it.

I work with people to come up with a strategy to withdraw their 401k to minimize taxes. Sometimes we need to get creative with oil & gas investments, land conservation easements, or bonus depreciation.
16 Reply
David Krulac
Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
4y
@Lane Kawaoka And if you put AFTER tax dollars in a Roth IRA or a Roth 401K or a Roth Solo 401K, then there is no tax due unless you early withdraw. And if you invest in real estate, you can buy that rental house, that apartment building, that mobile home park, that commercial space or even that raw land, and income generated is tax free and sale proceeds when you sell are tax free. When you are Tax Free, it doesn't matter if tax RATES go up, you're still tax free. There are a few banks that will lend to retirement vehicles, but most of the funding is done from private sources including other peoples retirement funds. Many a rehabber is paying 12% interest or more on hard money lent from a retirement vehicle like IRA or 401K. When banks are paying sub 1%, its not hard to convince private lenders to get maybe 5% long term and 12% short term.
2 Reply
Susane Leguizamon
Member since 2021 · 1 post · 3 votes
4y
We are doing both. We frontloaded our 401k savings with index funds (where you are buying a small part of every company on the stock exchange) that have very low fees and are quite diversified. Once we had a significant amout in our 401ks, we switched gears, lowered our retirement contributions to the 401ks and directed the rest of the savings toward cash for downpayments on rentals.
We are much more risk averse than the typical poster on biggerpockets, but less risk averse than posters on an investing site "bogleheads". That forum is like this one, except for investors of low-cost index funds. I regularly read that site and this one to make sure I'm getting a balanced view. One thread I made myself read before buying was this one https://www.bogleheads.org/for.... It compares stocks to real estate.
After reading the entire thread, I still feel comfortable with dipping our toes into real estate investing.
3 Reply
Cameron TopePro Member
Property Manager · Katy, TX · Member since 2015 · 1k+ posts · 1k+ votes
4y
Hey James,
Even though I love rentals, I'm going against the posts above - keep your 401k.
While I was working my W2, I borrowed against my 401k many times for rehabs or down payments while I was building my rental portfolio, but never made a withdrawal.
The balance between active investments like real estate and passive investments like index funds is ideal.
Rental property cash flow is inconsistent due to lease fees, repairs and turnovers. Rentals are leverageable (which creates those juicy double digit returns) but they are also illiquid.
Index funds are the opposite, they are fairly consistently going to return 8-10% a year, require no time involved and can be sold on a per share basis (at a transparent price) Monday through Friday.
I contributed up to our company match, then invested any excess funds in real estate. This combination, I believe, is ideal for becoming financially independent.
Best of luck!
[email protected]832-770-7090
18 Reply
Taylor L.
Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes
4y
Originally posted by @David Krulac:
@Lane Kawaoka And if you put AFTER tax dollars in a Roth IRA or a Roth 401K or a Roth Solo 401K, then there is no tax due unless you early withdraw. And if you invest in real estate, you can buy that rental house, that apartment building, that mobile home park, that commercial space or even that raw land, and income generated is tax free and sale proceeds when you sell are tax free. When you are Tax Free, it doesn't matter if tax RATES go up, you're still tax free. There are a few banks that will lend to retirement vehicles, but most of the funding is done from private sources including other peoples retirement funds. Many a rehabber is paying 12% interest or more on hard money lent from a retirement vehicle like IRA or 401K. When banks are paying sub 1%, its not hard to convince private lenders to get maybe 5% long term and 12% short term.

Self directed accounts can incur UBIT Tax liability if they use leverage to purchase an investment. That makes lending a somewhat more attractive avenue for self directed accounts.
0 Reply
Peter Morgan
Rental Property Investor · West Des Moines, IA · Member since 2018 · 447 posts · 64 votes
4y
@Lane Kawaoka
Awesome insights, I have a 401k from previous employer with over $100k was thinking in the lines of opening an SDIRA to invest in real estate. Would it make sense to open a Solo 401k ?, I am currently employed fulltime and don't own any LLC
0 Reply
James Somers
OP
Member since 2021 · 11 posts · 16 votes
4y
Originally posted by @Charles Granja:
To start, I am no financial advisor but can give some beneficial clarity.
Everyone must critically evaluate their financial plan to achieve wealth. It is good that you are doing this. There are so many different routes you can take.
Continue your current path
Invest in real estate actively or passively outside of minimal 401k contributions(Rental, Flip/BRRRR, Syndication, REIT, etc)
Invest in real estate with 401k contributions
Some would even say invest in a life insurance plan (Probably shouldn't do this)
No one can give you the best answer because your financial situation is something we are unaware of.
Investing in real estate is a good option amongst other investments. The tax advantages are what make it so great. Depreciation is probably something you are already aware of, also the ability to write off 25k to personal income depending on tax bracket
My advice: Be very critical of who you listen to. And once you fully understand the benefits of real estate: Appreciation, Mortgage paydown, Cash flow, Tax Benefits (Massive), make your decision. The best decision you can make is to invest! I wish the best for you in your investment journey!

Thank you so much for your advice! It's absolutely something that I continue to research and honestly the journey is something I enjoy. The tax benefits and the ability to have control over my finances are why real estate is something I believe will be one of the best options for me.

2 Reply
James Somers
OP
Member since 2021 · 11 posts · 16 votes
4y
Originally posted by @Lane Kawaoka:
I pulled my retirement funds a while ago. My augment is that you are going to have to pay taxes on your Qualified Retirement Money anyway so you might as well pay now while taxes are lower and not wait decades to finally get access to it. The 10% early withdrawal penalty is nothing, if you are investing in better assets that yield more. In most cases, I see you recoup that 10% in 1-2 years and they rest is all gravy after that.

More details below:

The biggest issue with regular 401k is the crappy options that have heavy fees.

I don't really like Self Directed Roths or any tax sheltered retirement accounts either because you are subject to UDFI (more details below) and cannot leverage your investment which is a pillar in real estate investing. If you want to do one here is a big list of them. Knock yourself out but I cashed out mine a while ago because I plan to live off my cashflow and retire well before the Government allows you to tap into your retirement account.

If you have distrust on where this country is going you need to expect that taxes will go up in the future. How else will we pay out for all these bank bailouts and quantitative easing.

What is the largest source of Revenue for the US IRS?

401K, SDIRA, IRAs, even Roth’s when not if they can change the tax laws. Basically qualified retirement money. People are not spending it and you can bet the IRS is going to get it.

You will pay taxes now or later and you will likely to pay more taxes in the future because you will make more money... so pay it now. Most people think they will be in a lower tax bracket in the future because they plan to downgrade their lifestyle... this is again incorrect money myths that are so prevalent.

By taking you money out early you will incur a 10% penalty but if you understand how you can easily get 20-30%+ returns in real estate a year that 10% penalty is nothing. You can recoup that in 6-18 months.

It's a no brainer... the numbers don't lie. Do the math.

Yes taking money out of your retirement account is a sin for most people.

Just make sure you don't buy jet skis and put it in cash flowing assets like rentals or syndications. Or start a business if your are exceptional at business.

QRPs or qualified retirement plans (Solo 401ks, checkbook IRAs, etc) are the answer to that person with a bunch of money in their existing 401K or IRA.

It's pretty typical that someone listens to the Simple Passive Cashflow podcast, signs up for the investor club, and books a free intro call has 200k-600k locked up in garbage retail investments AKA 401K.

Stop whatever you do don't roll over an old employers 401K into your current employers 401K. If you have money in your current employers 401K its stuck there. You need to quit your job. Well there is this one obscure tactic if you live in a Red state that could work but for you it's easier to take a loan from the existing 401K to start investing in hard assets.

If you are conservatively using prudent leverage and finding decent deals there is no reason you should not be able to retire in 10 years or less and thus negating the very reason for these accounts that you can't touch till you are old.

When you have money in these accounts it sounds good that you are not taxed on gains but you are restricted from getting a Fannie Mae loan. Using SDIRA's you have to get second tier financing options because its more risk for the bank, for example, a Roth IRA can buy real estate on leverage, however, will need a non-recourse loan which is often a fraction high-interest rate and lower LTV. No Bueno!

Caveat: If you are late to the game and already have a 401k over $100,000 then you should convert it to a solo401k. At that point, you should think about putting it into a syndication since you are restricted on how you can leverage it.

I work with people to come up with a strategy to withdraw their 401k to minimize taxes. Sometimes we need to get creative with oil & gas investments, land conservation easements, or bonus depreciation.

@Lane Kawaoka

You have really gave me a lot to think about. Everything you are saying is making sense especially with the idea that taxes are going to be higher not lower in the future and I sure don't plan on living a cheaper lifestyle when I am older. Thank you so much for your advice!

0 Reply
James Somers
OP
Member since 2021 · 11 posts · 16 votes
4y
Originally posted by @Cameron Tope:
Hey James,
Even though I love rentals, I'm going against the posts above - keep your 401k.
While I was working my W2, I borrowed against my 401k many times for rehabs or down payments while I was building my rental portfolio, but never made a withdrawal.
The balance between active investments like real estate and passive investments like index funds is ideal.
Rental property cash flow is inconsistent due to lease fees, repairs and turnovers. Rentals are leverageable (which creates those juicy double digit returns) but they are also illiquid.
Index funds are the opposite, they are fairly consistently going to return 8-10% a year, require no time involved and can be sold on a per share basis (at a transparent price) Monday through Friday.
I contributed up to our company match, then invested any excess funds in real estate. This combination, I believe, is ideal for becoming financially independent.
Best of luck!

Thank you for your response! I like to see both sides of the coin and I do think the combination of investing up to the match in my companies plan and investing the rest in real estate is a option I am comfortable with right now. In the future, when I build a large enough real estate portfolio my choice may change. I am not an stock investor who believes he can consecutively beat the market, so I just invest in index funds but I don't like the idea that a random event such as COVID can cause me to lose years and years of gains almost overnight. I know the market will eventually rebound, but its concerning that its entirely out of my control. Thanks again for your advice!

1 Reply
Carlos Gonzalez
Investor · Phoenix, AZ · Member since 2015 · 346 posts · 170 votes
4y
@James Somers
Current stock market is very volatile and so over priced so I would take part of my 401k money and run and diversify it into other assets like real estate.
2 Reply
Darius Ogloza
Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes
4y
I would recommend you listen to @Cameron Tope. If you stay diversified, you are less apt to panic when a relevant market (real estate or securities) takes a sudden dip. If any market, you lose money by selling low. Diversification helps you ride out the inevitable bumps in the road.
3 Reply
Sam Fickel
Lender · Pasco, WA · Member since 2020 · 84 posts · 50 votes
4y
Take out a loan against your 401k to do flips, treat it almost like a HELOC. That way you still have diversified assets (or, at the very least, debt against your own asset) AND you get the benefits of making money in real estate.
This is only if you actually want a 401k. The returns are pretty miniscule compared to what you can do in REI but they're also more long-term and slow-and-steady.
2 Reply
Joe Minteer
Rental Property Investor · Mechanicsburg, PA · Member since 2021 · 47 posts · 22 votes
4y
You can never(almost never) go wrong when you diversify yourself. You can go run the entire risk gamut, so your assets are flexible and can roll with bad times and great times. Lots to listen to, but take it all in, take your time and take your best shot.
0 Reply
Rory Korpela
Specialist · Longmont, CO · Member since 2016 · 30 posts · 17 votes
4y
@Peter Morgan
Listen to the Self Directed IRA podcast and then read their book (2nd edition, easily obtained from Amazon). The information and straight forward advice therein is fantastic for anyone looking to self-direct their IRA.
1 Reply
Warren A.
Bay Area, CA · Member since 2016 · 79 posts · 43 votes
4y
I have read all the posts above. Good points in favor of REI. I'm also concerned about future tax rates when it comes to 401K! That being said, I prefer not "or" but rather "both" Because our family buys in cash flow markets with lower appreciation rate, we use equities (401K) for capital appreciation. So we are roughly 50% equities/50 % REI. I love the benefits of REI but prefer not to put all our eggs in one basket.
0 Reply
Allen Wu
Rental Property Investor · Member since 2021 · 335 posts · 193 votes
4y
@James Somers
Max 401k first then go real estate. Real estate is an alternative play. More risk.
0 Reply
Kunal Mishra
Flipper/Rehabber · Jersey City, NJ · Member since 2016 · 158 posts · 86 votes
4y
@James Somers
You already said it in your post.
Don't leave money on the table, contribute to the point where your employer matches their portion.
Start using remaining portion in real estate, look at the guaranteed returns by using that money let's say for a long term buy and hold , can you make above 12% then you should be good.
Also you can open an LLC and use solo 401K to sheeter more taxable income. Bit it can't be used for passive income. Not an expert on that topic yet.
Kunal M.
1 Reply
Kunal Mishra
Flipper/Rehabber · Jersey City, NJ · Member since 2016 · 158 posts · 86 votes
4y
@David Krulac
Will solo 401k be subject to the UBIT taxes. If it is then it will completely defeat the purpose of being tax free.
Let's say I flip only one property per year will the profits be subject to UBIT?
Also can we look for conventional financing to purchase a rental from the solo 401k?
Kunal M.
1 Reply
David Krulac
Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
4y
only if you borrow. but there are other ways, such as JV. or pay off loan before selling.
0 Reply
Scott C.
Rental Property Investor · Tucson, AZ · Member since 2016 · 20 posts · 5 votes
4y
Not all 401k plans are created equal. Some have low fees, while others have high fees. It's good to check out your plan before deciding not to invest because of the fees.
Also, if you leave a company in the year you turn 55 or after, you can access the 401k with that company without the 10% penalty.
1 Reply

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