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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Veronica Montalvo
Real Estate Broker · San Juan, PR · Member since 2021 · 2 posts · 1 vote
4y
@James Somers BOTH, if possible! Look into the viability of converting your 401k or SEP to a Self Directed IRA where you can invest in real estate!
0 Reply
Justin WindhamPro Member
Banker · Nationwide · Member since 2015 · 4k+ posts · 1k+ votes
4y
@Robert Miller
How is the EQRP different from the Solo 401k? I am curious what benefits make it worth the higher price. Thanks in advance.
0 Reply
Robert Miller
Property Manager · CT · Member since 2019 · 27 posts · 8 votes
4y
A eqrp is 100% self managed, you are the trustee. The checkbook holder. Many, most I looked into, solo 401k restricted investment options to a list of funds and many only think reits are authorized real estate options. You still have the same rules from the IRS, but the yearly fee to a pro can keep you in the lines. Eqrp was the only 401k option that provided100% control.
0 Reply
David Krulac
Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
4y
@Robert Miller none of Equity Trust, Quest, or Kingdom have any such restriction that you must invest in Reits for a Solo 401K and I don't know of any custodian who has those restrictions, can you name names?
Bigger Pockets Podcast #82 Guest
2 Reply
Frank Rodrigues
Investor · Kansas City, MO · Member since 2021 · 110 posts · 65 votes
4y
Originally posted by @John Powell:
@Frank Rodrigues I thought the tax benefits are removed with properties in a self directed IRA? Meaning, you can't deduct any expenses while the property sits in an IRA?
Hey John,
You can't claim deductions for property taxes, mortgage interest, depreciation, and other property-related expenses. But any rental income you collect grows tax-free within the IRA.

0 Reply
Mike S.
Investor · Broward County, FL · Member since 2018 · 1k+ posts · 938 votes
4y
Originally posted by @John Powell:
@Frank Rodrigues I thought the tax benefits are removed with properties in a self directed IRA? Meaning, you can't deduct any expenses while the property sits in an IRA?

You are still paying expenses, however, they are not deducted from the gain, same for the depreciation as there is no tax.

However, you can not actively participate in the management of your property. You have to hire contractor to do any work as any personal work would be a prohibited contribution. Also, if you are in need of sudden amount of cash for a major repair, you better have some cash available in the IRA as you won't be able to add money above your annual contribution.
0 Reply
Gord Collins
Toronto, Canada · Member since 2018 · 20 posts · 12 votes
4y
Yes, the stock market will crash, probably in 2023 by the looks of it when interest rates rise. There's some good advice from the commentors. Good idea to ask questions on BiggerPockets. And self-directed gives you full control and a tax advantage. Put your money in rental property somewhere and you're laughing. If there's a crash, it's better to be holding real property than equities in debt ceiling/no housing available era IMHO!
1 Reply
Account Closed
Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ 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!

What happens if the market crashes 30% to 30%?
Let's revisit your options in December after the turmoil. ;-)

0 Reply
David Krulac
Mechanicsburg, PA · Member since 2013 · 3k+ posts · 2k+ votes
4y
@Account Closed Nobody know when and if there will be a crash or a correction or none of the above. And neither do I. But i have been investing and buying, selling, renting and holding real estate. I buy some properties and sell some properties every year, including 2008 when there was the crash, or as some named the Great Recession. I'm always a buyer and I'm always a selling. In 2008 I sold a property then in 2013 sold the identical property next door. The only difference was that on the sale 5 years late being that I took a 60% haircut. But its all good I still made a profit. And if there is a crash, I'll be buying more property, and so should you!
Bigger Pockets Podcast #82 Guest
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Larry Lim Jr
Member since 2021 · 5 posts · 1 vote
4y
Just wanted to say Thank You to everyone in this thread. In the same situation as the OP actually, and looking for my first investment. Learned quite a bit in the span of 4 pages of reading.
0 Reply
Account Closed
Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes
4y
Originally posted by @David Krulac:
@Account Closed Nobody know when and if there will be a crash or a correction or none of the above. And neither do I. But i have been investing and buying, selling, renting and holding real estate. I buy some properties and sell some properties every year, including 2008 when there was the crash, or as some named the Great Recession. I'm always a buyer and I'm always a selling. In 2008 I sold a property then in 2013 sold the identical property next door. The only difference was that on the sale 5 years late being that I took a 60% haircut. But its all good I still made a profit. And if there is a crash, I'll be buying more property, and so should you!
Bigger Pockets Podcast #82 Guest

My mistake. I should have stated the coming Stock Market crash. I Don't think real estate will crash.
However, Evergrande and 4 other major investment comanies are on the ropes and depending on how it falls, it will affect Blackrock, HSBC, Deutsche and anyone else who has derivatives, in the ensuing contagion. Banks will close HELOCs and lending will grind to a halt.
0 Reply
Nick Barlow
Warsaw, IN · Member since 2017 · 229 posts · 270 votes
4y
@James Somers I read the little book of index investing, little book of value investing, 401(K)aos (Andy Tanner), power of zero (David McKnight) amongst other titles, and concluded that control and tax advantages favor real estate.
You're, right, on a real estate forum more folks will point to REI.
Those same people will argue ardently against non cash flowing rentals when a 401(k)….doesn’t cash flow.
You’ll also hear the comment to invest to get the company match because, like you mentioned, “it’s free money”. It’s great employers largely bailed on pensions (also free money…) in exchange for matching a tiny percentage of what employees are already saving for themselves.
Finally, before my rant is over, it takes DECADES of compounding for the “magic to happen”.
My complaint on RE is it takes so darn much money for a down payment, but that is my preferred route.
Good luck, and like other posters have said, once your research is done, do what makes most sense for you/your family.
1 Reply
James Somers
OP
Member since 2021 · 11 posts · 16 votes
4y
@Patrick M.
This is awesome advice! Thank you!
0 Reply
Justin WindhamPro Member
Banker · Nationwide · Member since 2015 · 4k+ posts · 1k+ votes
4y
Originally posted by @Robert Miller:
A eqrp is 100% self managed, you are the trustee. The checkbook holder. Many, most I looked into, solo 401k restricted investment options to a list of funds and many only think reits are authorized real estate options. You still have the same rules from the IRS, but the yearly fee to a pro can keep you in the lines. Eqrp was the only 401k option that provided100% control.

There are many reputable Solo 401k providers that offer everything that you just described. Several such providers regularly post to these forums and charge a fraction of the eQRP price.

0 Reply
Patrick M.
Rental Property Investor · Red Bank, NJ · Member since 2017 · 1k+ posts · 1k+ votes
4y
Originally posted by @Account Closed:

What happens if the market crashes 30% to 30%?
Let's revisit your options in December after the turmoil. ;-)

The market will crash 30-60 percent in your 30-40 year investing period, maybe even 3 times. EMBRACE IT! Keep investing, you are getting equities on SALE! Reprogram your head... don't be a sheep! Pile in.
Maybe Mike Hern can show us a graph where the S&P did not recover it's losses? Yeah I didn't think so... It comes back and it comes back with a VENGEANCE! It will drop, it may drop a lot, but those drops are only temporary, but it's climb is RELENTLESS!
"Oh, but what about if it takes years to rebound?" Then that is years of you buying stocks on sale!!! Don't be a sheep- reprogram your brain... do a brain hack, as the kids say. Those people who kept contributing through the aughts and financial crisis are millionaires- many several times over.
I LOVE MY REAL ESTATE INVESTMENTS. They are providing me with cash now- some of which helps me max my 401k, some that helps me invest in indexes and 529s. And yes, they will factor in, somehow, to my retirement- but I will be damned if I would forsake a VERY LIQUID vehicle for one that is ILLIQUID and subject to a growing, progressive attack.
Compounding interest is a gift from the gods... it pays off HUGE over time. Patience.
If you find the right RE investment, take a loan from yourself and pay yourself back interest.

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Account Closed
Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes
4y
Originally posted by @Patrick M.:
Originally posted by @Account Closed:

What happens if the market crashes 30% to 30%?
Let's revisit your options in December after the turmoil. ;-)

The market will crash 30-60 percent in your 30-40 year investing period, maybe even 3 times. EMBRACE IT! Keep investing, you are getting equities on SALE! Reprogram your head... don't be a sheep! Pile in.
Maybe Mike Hern can show us a graph where the S&P did not recover it's losses? Yeah I didn't think so... It comes back and it comes back with a VENGEANCE! It will drop, it may drop a lot, but those drops are only temporary, but it's climb is RELENTLESS!
"Oh, but what about if it takes years to rebound?" Then that is years of you buying stocks on sale!!! Don't be a sheep- reprogram your brain... do a brain hack, as the kids say. Those people who kept contributing through the aughts and financial crisis are millionaires- many several times over.
I LOVE MY REAL ESTATE INVESTMENTS. They are providing me with cash now- some of which helps me max my 401k, some that helps me invest in indexes and 529s. And yes, they will factor in, somehow, to my retirement- but I will be damned if I would forsake a VERY LIQUID vehicle for one that is ILLIQUID and subject to a growing, progressive attack.
Compounding interest is a gift from the gods... it pays off HUGE over time. Patience.
If you find the right RE investment, take a loan from yourself and pay yourself back interest.

Ah, to be young and naive (def: "Lacking worldly experience and understanding") But, that is what a free market economy is made of, naive investors. Some, to be sure, actually do benefit from a down stock market & there always are contrarian investors who will do well during that time.

That being said, is it your advice that when you see a train wreck coming and you are in the way, that after you are smashed by the train, "don't worry, over time the pain won't be so bad"?

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Patrick M.

Rental Property Investor · Red Bank, NJ · Member since 2017 · 1k+ posts · 1k+ votes

Year	Total Return
2021 :	17.45
2020 :	18.40
2019 :	31.49
2018 :	-4.38
2017 :	21.83
2016 :	11.96
2015 :	1.38
2014 :	13.69
2013 :	32.39
2012 :	16.00
2011 :	2.11
2010 :	15.06
2009 :	26.46
2008 :	-37.00
2007 :	5.49
2006 :	15.79
2005 :	4.91
2004 :	10.88
2003 :	28.68
2002 :	-22.10
2001 :	-11.89
2000 :	-9.10
1999 :	21.04
1998 :	28.58
1997 :	33.36
1996 :	22.96
1995 :	37.58
1994 :	1.32
1993 :	10.08
1992 :	7.62
1991 :	30.47
1990 :	-3.10
1989 :	31.69
1988 :	16.61
1987 :	5.25
1986 :	18.67
1985 :	31.73
1984 :	6.27
1983 :	22.56
1982 :	21.55
1981 :	-4.91

0 Reply

Patrick M.
Rental Property Investor · Red Bank, NJ · Member since 2017 · 1k+ posts · 1k+ votes
4y
@Account Closed I don't really comprehend your comparison to a train wreck? A market correction are not a train wreck.
And I am absolutely not here trying to convince you of anything. I simply asked you for a chart that everyone except you knows does not exist.

For anyone else, look at the down years, the recessions and corrections- they were preceded by awesome growth years and complete recovery and remarkable growth within 2 - 3 years! WOW.
So why does that matter? Well- as you get closer to your retirement you can shift some of your assets into less risk/ less growth funds... say enough for 4-5 years, so if there is a correction it doesn't even phase you. In fact you will likely dump some of your bonds and buy the fire sale equities.
What is our friend Mike going to do if the market drops or there is another "no rent" event? By golly he is going to take that big, unwieldy, illiquid asset and put it on the market. Hopefully he will get a decent price, because he has to pay the real estate agent, title company, attorney, recaptured depreciation and other taxes, and mortgage... but there will be blood in the water and he will have no 401k to lean on... so he will be like the thousands of other unfortunate landlords who this year had to unload their houses (if they could)... except they had the the benefit of a pandemic market.
I HIGHLY recommend these 2 books:
The Psychology of Money - Housel
The Simple Path to Wealth - Collins
They are very easy reads, very entertaining and you will learn a lot.
Personally I think if I went onto Boggleheads and asked 401k or REI? the thread would probably read like this in reverse. Everyone reading, get a copy of those books- you will love them, really!
0 Reply
Casey Caton
Investor · Member since 2017 · 69 posts · 65 votes
4y
@James Somers
I do both. I make sure I’m getting the most out of the matching, and then I invest the rest a la real estate. Little diversity never hurt anyone. Real estate is fun because there’s so many ways to be successful.
0 Reply
Joe B.
Real Estate Agent · Wilmington, NC · Member since 2017 · 59 posts · 16 votes
4y
One is a business that you manage, one isnt.
The average person should be doing both, but lean towards stocks.
0 Reply
Tony Kim
Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes
4y
Originally posted by @Account Closed:
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!

What happens if the market crashes 30% to 30%?
Let's revisit your options in December after the turmoil. ;-)

The S&P 500 dropped almost 32% last year within a one-month period between Feb and March. We all know what happened after that. I pulled everything I had via HELOC and all my dry powder into Tesla and now have enough to retire on the French Riviera.
Just kidding...that's what I should have done, but of course, like a lot of others I had no idea when the floor would be reached.
1 Reply
Account Closed
Investor · Scottsdale Austin Tuktoyaktuk · Member since 2021 · 4k+ posts · 4k+ votes
4y
Originally posted by @Tony Kim:
Originally posted by @Account Closed:
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!

What happens if the market crashes 30% to 30%?
Let's revisit your options in December after the turmoil. ;-)

The S&P 500 dropped almost 32% last year within a one-month period between Feb and March. We all know what happened after that. I pulled everything I had via HELOC and all my dry powder into Tesla and now have enough to retire on the French Riviera.
Just kidding...that's what I should have done, but of course, like a lot of others I had no idea when the floor would be reached.

Lol. Who knows what the stock market will do, but here is what happened in 1929 - it took 25 years to recover
Can it ever happen again? No, Nein, Ne, Jo, Sega, Non, Qo', Nei, いいえ, 唔係, Het, Na, Όχι, לא, In any language, it can't happen again.
It Can't because we as investors are CONVINCED it will Never Happen Again! Therefore it is forbidden to happen!
Just kidding. I've been around long enough to know that wishful thinking doesn't make it so.
0 Reply
Tony Kim
Rental Property Investor · Los Angeles · Member since 2018 · 844 posts · 1k+ votes
4y
Originally posted by @Account Closed:
Originally posted by @Tony Kim:
Originally posted by @Account Closed:
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!

What happens if the market crashes 30% to 30%?
Let's revisit your options in December after the turmoil. ;-)

The S&P 500 dropped almost 32% last year within a one-month period between Feb and March. We all know what happened after that. I pulled everything I had via HELOC and all my dry powder into Tesla and now have enough to retire on the French Riviera.
Just kidding...that's what I should have done, but of course, like a lot of others I had no idea when the floor would be reached.

Lol. Who knows what the stock market will do, but here is what happened in 1929 - it took 25 years to recover
Can it ever happen again? No, Nein, Ne, Jo, Sega, Non, Qo', Nei, いいえ, 唔係, Het, Na, Όχι, לא, In any language, it can't happen again.
It Can't because we as investors are CONVINCED it will Never Happen Again! Therefore it is forbidden to happen!
Just kidding. I've been around long enough to know that wishful thinking doesn't make it so.

Nikkei hasn't recovered yet either since its high almost 35 years ago back when Japanese business people had achieved mythological status across the world. Loved that movie Rising Sun with Snipes and Connery...kinda makes for good comedy now though.
1 Reply
Frank S.
Specialist · Chicago, IL · Member since 2015 · 870 posts · 345 votes
4y
Originally posted by @Account Closed:
Originally posted by @Tony Kim:
Originally posted by @Account Closed:
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!

What happens if the market crashes 30% to 30%?
Let's revisit your options in December after the turmoil. ;-)

The S&P 500 dropped almost 32% last year within a one-month period between Feb and March. We all know what happened after that. I pulled everything I had via HELOC and all my dry powder into Tesla and now have enough to retire on the French Riviera.
Just kidding...that's what I should have done, but of course, like a lot of others I had no idea when the floor would be reached.

Lol. Who knows what the stock market will do, but here is what happened in 1929 - it took 25 years to recover
Can it ever happen again? No, Nein, Ne, Jo, Sega, Non, Qo', Nei, いいえ, 唔係, Het, Na, Όχι, לא, In any language, it can't happen again.
It Can't because we as investors are CONVINCED it will Never Happen Again! Therefore it is forbidden to happen!
Just kidding. I've been around long enough to know that wishful thinking doesn't make it so.

Here is an example of really bad advice. It's not 25 years. Recall this is compounding interest, add dividends, and obviously tax shelter by buying and holding. REI lacks the compounding interest benefit.
Both are great options. RE is typically better for people with low income W2s.
1 Reply
Cameron TopePro Member
Property Manager · Katy, TX · Member since 2015 · 1k+ posts · 1k+ votes
4y
Originally posted by @Jeff Schemmel:
@Cameron Tope I did the exact same thing, it's nice to pay yourself that interest isn't it?

Yes, it's great icing on the cake!

[email protected]832-770-7090
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