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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Robin Brown
Member since 2021 · 15 posts · 16 votes
4y
I have read in quite a few books that these gov retirement funds wont ever generate as much as if you took control of your own investments and also you don't end up paying the yearly fees to have your 401K (super for aussies) managed. This does of course mean you need to actually educate yourself on what to do with it, whether shares or realestate or small business. Otherwise it's just gambling anyway. If you don't have the time then these retirement funds work.

I have since stopped adding extra to these and started my own investment journey and education - I have a very long way to go.
1 Reply
Chad McMahan
Residential Real Estate Broker · Sedona, AZ · Member since 2017 · 751 posts · 504 votes
4y
For me, it's always a matter of, what I put in and what I get out. Real estate is the consistent winner.
1 Reply
Joel Patterson
New to Real Estate · San Antonio · Member since 2021 · 17 posts · 5 votes
4y
Many good points from all parties. One thing to consider is your age, what your total amount of 401k value is, how much your employer matches and what the vesting period is. Then you need to run the numbers. For example, my employer matches my contribution up to 5% of my salary dollar for dollar, and it vests immediately. So then I get a 100% percent gain on my money. I'm also 59 1/2 plus so I can contribute up to 5% of my salary, get a 100% gain and then withdraw the money at my income tax rate whenever I want. I doubt that anyone can match 100% percent gain in REI considering in my case that is an instant gain, I don't have to leave it sit. Moral of the story; everyones situation is different and I would calculate all the veriables. As it is I don't put more money into my 401k than my employer matches as I'd rather get the REI cash flow that beats 401k fund gains all day long.
If you haven't read Brandon's book the Multifamily Millionaire Vol 1 then I recommend you read it. When I read the chapter on Cap Rate x NOI equals the property value (commercial only so 5+ units) and the scenrios he presented my head almost exploded and I really wished I had started REI years ago, now I'm playing catchup... Best of luck!
2 Reply
Jack Bobeck
Rental Property Investor · Jacksonville, FL · Member since 2008 · 784 posts · 528 votes
4y
@James Somers
If you need to ask, stay out of the thing your least experienced with……….
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Michael Ablan
Real Estate Broker · Watertown, NY · Member since 2016 · 1k+ posts · 1k+ votes
4y
@James Somers - The answer is different based on the individual.
I'd definitely say take the free money (employer contribution), especially if that still leaves you with a significant amount of left over $ to invest with.
From here it's tricky without knowing more about you and your situation. You should definitely reach out to a financial advisor who has clientele in both real estate and money-market investments
2 Reply
Justin WindhamPro Member
Banker · Nationwide · Member since 2015 · 4k+ posts · 1k+ votes
4y
@James Somers
Hi James,
A 401k can be a great vehicle for deferring taxes (or having investments grow tax free) as long as you have access to the appropriate investments. It's unfortunate that the vast majority of 401k plans are restricted to traditional assets to the point that people so often compare "401k vs REI." The good news is you can have both the tax advantages of an IRA or 401k AND the benefits of assets such as real estate with a self-directed 401k (or IRA).
A 401k plan with a current employer may not allow for "in-service distributions" meaning you would not be able to access that money to transfer to the Solo 401k while working. In fact, most plans do not allow for in-service distributions, but it is probably worth asking your plan administrator.

Whether your plan allows for in-service distributions or you have to wait to transfer those funds to a more flexible retirement account, it is widely recommended that you contribute enough to your plan to take advantage of any employer match that is offered.

1 Reply
Justin WindhamPro Member
Banker · Nationwide · Member since 2015 · 4k+ posts · 1k+ votes
4y
@Kunal Mishra
A Solo 401k is generally not subject to UBIT tax on passive investments. In situations where a 401k would pay UBIT tax, it does not necessarily defeat the purpose of it being "tax free." Sometimes an investment that incurs taxation can offer the highest returns to your 401k net of that taxation and from there, the account can continue to grow tax deferred or tax free. I consider that to be a more advanced strategy and there are plenty of investments to pursue that would not generate UBIT. The Solo 401k is exempt from UBIT on debt leveraged real estate, but would be subject to UBIT on earnings from an active trade or business. An active trade or business has to be regular or ongoing to generate UBIT. So only one flip per year might not meet the test. The more flips that are done, the more likely it is that this activity would be subject to UBIT. This would be looked at on a case-by-case basis and unfortunately, there is no set number of flips that is either shielded from or subject to UBIT.
Conventional financing generally does not work for a Solo 401k purchase because of the prohibited transaction rules. You will need a non-recourse loan to make sure you are not signing a personal guarantee for any properties your Solo 401k buys with financing.
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Jeff SchemmelBusiness Member
Real Estate Agent · Saint Paul, MN · Member since 2014 · 384 posts · 401 votes
4y
@Cameron Tope I did the exact same thing, it's nice to pay yourself that interest isn't it?
1 Reply
Scot Howat
Investor · Hoffman Estates, IL · Member since 2014 · 434 posts · 185 votes
4y
If you put in 6% of your paycheck into a 401k and your employer also puts in 6%, then YOU are funding 50% of your retirement.
If you put down 20% on a rental property, your TENANTS will be funding the other 80%. Which would you rather have?
11 Reply
Frank Rodrigues
Investor · Kansas City, MO · Member since 2021 · 110 posts · 65 votes
4y
James,
Because I don't know how much money you have in your 401K, what you are earning, your financial goals and your age it's difficult to give you solid advice but because I have helped a lot of people (100's) switching from a 401k to a SDIRA to more than triple their returns annually I am a big supporter of this move. But since I don't know your situation fully it's hard to say but if you want someone who has experience in this to talk about the advantages feel free to PM and I would love to help. Best of luck to you!
2 Reply
John Nachtigall
Santa Rosa, CA · Member since 2017 · 325 posts · 701 votes
4y
The math is very simple, a 401k is the best option. When you add in risk/effort adjusted returns it is not even close.

Example 70,000 a year salary

401k: contribute 6% with a 3% match Invest in SP500 which has a 10% return (dividends reinvested) for more than 100 years with no effort whatsover. Grows tax free. Assume your salary grows at 5% per year (which is low my salary, as an engineer, has grown 10x in 25 years it comes out to 10% a year annually). Feel free to plug it into the calculator below but it comes out to just a little over 5 million in 40 years, with zero effort and almost no long term risk.

https://www.aarp.org/work/reti...

You are not going to get that in real estate with zero effort. BRRRR requires you to buy properties at 60-70% of actual value. So you have to make 40-50 offers to get 1 acceptance. You have to find those distressed sellers. You have to fix up the properties, be a landlord, have excellent credit to get refinanced, etc. Additionally the short term variations matter a lot more in terms of timing the market

My advice to you is this. Concentrate on your career, max out your 401k and do a good job to maximize your salary and bonus for the next 10-15 years. That will put the most money in your pocket. Put an extra 5% in your "BRRRR" fund every month and by year 10 you will have 100,000+ to invest in a BRRRR with excellent credit and a W2 job that makes financing a breeze. Then if you want to become the Real Estate Mogul you do it from a position of strength. But per your original question, you cant beat compounding tax free growth at 10% a year with zero effort. 401k is the clear winner
2 Reply
Frank Rodrigues
Investor · Kansas City, MO · Member since 2021 · 110 posts · 65 votes
4y
@Peter Morgan
Hey Peter,
No need to set up a solo 401k if you want to go the SDIRA route (which I highly recommend in your situation) and once you have a SDIRA set up you do not need an LLC. The SDIRA is an entity of its own that you control. I have helped a lot of people set one up so if you have any questions feel free to PM me. I hope that helps and best of luck!
1 Reply
Allen Williams
Realtor · Jacksonville, FL · Member since 2019 · 95 posts · 87 votes
4y
@James Somers
Real estate provides automatic cash flow and freedom today, and if you do not sell it acts like a 401K being tax deferred with the ability to 1031 exchange. A 401K locks money up until 59.5. You can use a self directed IRA to purchase real estate in but I prefer to get benefits today not in retirement so I can retire earlier
4 Reply
Evan Polaski
Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
4y
@James Somers, you mention your employer matches, so how much? As you noted, real estate can be a powerful investment, but only when it goes well. Is it less volatile than the market? Yes, but it is still an investment with its own pros and cons.
But that being said, if your employer is matching at a typical rate of 25% or more, then I would definitely keep that amount of capital at play. Granted if the market tanks, you can lose money, but for all intents and purposes, you have to lose more than their match to actually be behind. And while I don't think real estate values are going to go down, I also don't see them growing at any meaningful rate for a long time.
Since you are employed, typically, you will not be able to roll over or open a solo 401k, since you are not self employed, and very few employers allow for investment discretion within their 401k's.
0 Reply
Brad Jacobson
Realtor · Ogden, UT · Member since 2019 · 338 posts · 415 votes
4y
Hey James,
You're getting 1,000 responses and they're all great but I want to throw in one more concept that helped me choose my own path.
Inflation kills cash value and inflation kills debt value.
Inflation works against your 401k but it works in favor of any leveraged property! If you're funding a 401k with the intent to retire in 10, 20, 30, whatever years, inflation works against you heavily. However, if you're buying and holding real estate for 10, 20, 30, whatever years, you're going to have a freight train of returns that a 401k can't complete with!
Instead of just getting the stock 5-10% annual return minus inflation, you get the return on inflation against your debt, the house appreciation, the cashflow, the tax benefits, etc. Though there's a crazy debate on what these numbers are I would guess that the stock return minus inflation could be 5%ish and the rental return plus inflation is probably 30% or more.
Make real estate the priority!
Good luck,
Brad
9 Reply
Patrick M.
Rental Property Investor · Red Bank, NJ · Member since 2017 · 1k+ posts · 1k+ votes
4y
@James Somers contributing your maximum amount to your 401k is a wise investment. REI can be wise but it is fraught with risk at many levels.
For myself, at this moment, I have never gained so much, so cheaply and with so little work as with my retirement account. It is cheap to administer and I get a free matching contribution. I welcome the risk of equities. But that is not my money. It belongs to a much older version of me- God willing.
I have been extraordinarily fortunate in REI. It did not come cheaply or easily. I repositioned properties which are now worth far more than I paid for them, they have always cash flowed and I have been able to cash flow more. The "fortunate part" is because I was able to extract value from the sweat, money and stress I invested. Many are not as fortunate through no fault of their own.
Present me often looks at my 401k balance and max contributions and thinks, "Man, future me has the potential for a lot of fun!"
Present me looks at my business bank account and thinks, "Man, how lucky am I to put my kids through private school while all their old public school friends "lost" years. Boy, I think we should fly down to Florida for the Christmas break... Europe for Easter. New mountain bike? Regularly fund the 529's and Vanguards. Buy a second home abroad.
Yes- that is really me and it never would have come from our W2's
My only caveat is that I used loans from my 401k to help purchase and reposition my buildings. I paid myself interest. Future me may have been temporarily upset, but now my entire contribution is into the ROTH 401k... so I know he is happy! And, next year starts "catch-up" contributions, which I would never have been able to make while raising a family.
2 Reply
Conn G.
Rental Property Investor · Cincinnati, OH · Member since 2019 · 120 posts · 68 votes
4y
With 401(k) match, you get 100% return on your investment which is hard to find in real estate. A 401(k) match is also completely passive while real estate is not all the time. I do my company match but never go above the match % when contributing. All other money is invested towards REI. Plus, if you ever leave your job you can transfer your 401(k) to a self directed one and invest in real estate.
2 Reply
Gabe C.
Investor · San Francisco, CA · Member since 2016 · 192 posts · 95 votes
4y
@James Somers I struggled with that same decision about 6 years ago. I decided then to stop contributing to my 401k and use all that money instead to build a real estate portfolio. I wasn't able to pull the existing money out since I'd have to quit to do so, but it also was a nice benchmark since it was about 10 years worth of contributions. I wanted to see how long it would take to get to the same place via real estate. It made a MASSIVE difference. In less than 2 years I had already accrued as much in real estate value as I had in my 10 years of 401k contributions (even considering mortgage debt). 6 years later, it continues to snowball and I have made many times the 10 year 401k contribution amount. That also factors in a 40% increase in my 401k since I stopped contributing. In 10 years, the gap will be much, much wider, and in the future when the debt falls off (which is, of course, taking care of itself) and the cash flow quadruples, it's going to be a laughable comparison. Or I'll pull out equity to leverage even more. So many options! People have already enumerated the many benefits vs. 401k (leverage, taxes, appreciation, depreciation, cash flow, full access/control, backed by physical asset, etc).
All I did was redirect money that I would have put into my 401k towards acquiring single family rentals, and reinvest the cashflow. Depending on your aggression and risk profile, you could do a lot better. I'm just going slow and steady and continuing to work a day job that I love, but there is no question that there are better places to put your money to work. The second I have access to my locked up 401k pile, it is going to get redirected to real estate.

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Lane Kawaoka
Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes
4y
You are right. Roth is pre tax but the issue for those doing REP status to lower ordinary W2 income is that you don't get the passive losses from deals that you are investing through any QRP (roth or non roth).
0 Reply
Patrick M.
Rental Property Investor · Red Bank, NJ · Member since 2017 · 1k+ posts · 1k+ votes
4y
@James Somers remember to consider that the many, many, many people who "fail" in real estate do not come to a discussion board to discuss. So those of us who are bullish on RE have succeeded- but just like many small businesses, remember- we are the minority and over represented on BP.

1. Is this for "future you" or "current you"?

If it is for future you- I say no way! And that is my experienced opinion. I would be a miserable person and crappy landlord if my RE was covering costs in the hopes of some great payday in the future. If you do it correctly it involves work and the more you work the more you are going to want to be paid today. But, I have found, that with the right properties, RE is an investment which can readily reward you proportionally to your work, today.

With a W2 that is providing for a comfortable life there is, hands down, no better investment for "future you" than an index fund tied to the S&P/small cap or mix . It requires zero effort and contrary to what has been said- it will more than out perform inflation and many RE appreciations when you factor in true costs. You will not have to buy it a new water heater. Go to court to get someone out of it. Pay very real, today dollars, taxes and quite frankly- work.

If this is for current you- Have at it! Get your company match and redirect the rest into a real cash flow producing property. It is a beautiful thing- really!

Just remember- the 2 are mutually exclusive if you are doing one for current you and one for future you. And don't let anyone downplay or make you believe index fund investing/compounding interest is anything but a gift from the financial gods.

Sure, when I sell I stand to make a very significant profit... but that is future me... and as sad as it is to think, he may never exist. I would have stolen time away from my family and worked for a payday that I never saw... I make great money now and I am paid very well to be the best landlord my tenants will ever have.
3 Reply
Eddy OgbekhiluPro Member
Investor · Lutz Florida . · Member since 2018 · 103 posts · 34 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?

0 Reply
Trevor Bond
Rental Property Investor · Indianapolis, IN · Member since 2020 · 30 posts · 5 votes
4y
@James Somers
Hi James,
I am not a fan of maxing out 401k for a few reasons:
1. We live in a country where taxes keep getting higher so you will be paying more and more on your return when you turn 59.5 or pull it out.
2. You can not touch that money for years ahead so it is a good idea to use it as an investment and buy an asset that will cashflow you money every month… RE returns/dividends are much higher than other investment portfolios.
3. In real estate you are the point guard and with stocks/bonds/funds you are in the stands watching what happens. Your success in real estate is up to you. In stocks, bonds etc. someone else is making your decisions and could turn your investment into cents on the dollar overnight and you have no control. In RE, you make decisions and have an almost-infinite amount of control as to what returns you are likely to get.
Hope this helps!
0 Reply
Chinyere Orie
Real Estate Agent · Baltimore Maryland · Member since 2019 · 98 posts · 74 votes
4y
I'm in the same boat as you. Right now, I'm investing in my 401(k) up to my company's match, and then saving the rest for a down payment on a rental property. I've thought about stopping my 401(k) contribution, but I haven't done so. I think I subconsciously like having that safety net, just as a back up in case I need it. That automatic savings is always a plus for a rainy day. Good luck to you, whatever you decide!
1 Reply
Craig McLaughlin
Rental Property Investor · Robins, IA · Member since 2015 · 45 posts · 18 votes
4y
@Robin Brown do you happen to remember the books and/or articles you read?
0 Reply
Bud Gaffney
Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes
4y
@James Somers Real Estate 🏡🏡🏡🏡🏡
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