401k contributions or Real Estate Investing
Member since 2023 · 37 posts · 32 votes
401k contributions or Real Estate Investing
Most Popular Reply
Rental Property Investor · Somewhere over the Rainbow · Member since 2021 · 1k+ posts · 1k+ votes
2yIt's mind boggling to me when I come across people (mostly realtors or people heavily in the RE industry) that have zero retirement other than rent houses. I do get it's a strategy, and it may work, I just don't love it honestly
A 401k is hard to beat - I'm saving 32% right off the top (already hard to beat that return in RE), my employer is matching 5% (free money), the money that's not taxed now is now growing in my 401k. And over the long term you can expect an 8% return (I invest in fidelity's s&P 500 tracker) again a solid return over the long-term
I personally do a Roth IRA on top of that. Tax free gains. Another thing that's hard to beat.
Then I do an HSA - again saves me 24-32% depending on the bracket at this point. Tax free growth again. Can convert 35k into a roth IRA in later years as well, if I remember right
Then I do a 529 for education.
Then I do a regular contribution to a taxable brokerage (S&P 500 tracker)
"Savings" stays in an HSA and I keep the minimum in my bank accounts
I invest in RE after all this. I don't get to save on the taxes now (can't be REP due to W2 and can't deduct due to income limitations) so I have to pass the tax savings forward...until I retire essentially or make less than 150k and have passive income/gains I can deduct from. RE for me is diversification, increasing net worth through equity by buying at a discount, and a small monthly cash flow. Over the long term (think 20+ years) you'll have some equity paydown and appreciation as well. This is where RE shines, in the very long term. Retiring on LTR cashflow is, in my opinion and for my lifestyle, not realistic unless you are running a really big operation (which most mom and pops are not)
59 Replies
- Flipper/Rehabber · CA · Member since 2023 · 1k+ posts · 1k+ votes2y
Quote from @David Fals:
It's the end of the year and I am considering investing in a rental property as a first-time owner, who already owns a primary home. However, I am also thinking about whether I should max out my 401k like I did this year. The pros and cons of both options are driving me crazy!
IMHO If you're getting employer matching dollars, I'd take advantage of that free money. If you want to put away more for retirement I'd use a roth IRA. Real estate investing is a component of a well balanced portfolio.
- Member since 2019 · 7k+ posts · 4k+ votes2y
Quote from @David Fals:
It's the end of the year and I am considering investing in a rental property as a first-time owner, who already owns a primary home. However, I am also thinking about whether I should max out my 401k like I did this year. The pros and cons of both options are driving me crazy!
max the 401k, but change allocation to bond. Bond would perform better than equity in 2024 big time.
- Investor · Hillsboro, OR · Member since 2016 · 304 posts · 153 votes2y
What kind of self directed 401k options do you have ?
- Member since 2023 · 37 posts · 32 votes2y
Quote from @Alan F.:
Quote from @David Fals:
It's the end of the year and I am considering investing in a rental property as a first-time owner, who already owns a primary home. However, I am also thinking about whether I should max out my 401k like I did this year. The pros and cons of both options are driving me crazy!
IMHO If you're getting employer matching dollars, I'd take advantage of that free money. If you want to put away more for retirement I'd use a roth IRA. Real estate investing is a component of a well balanced portfolio.
Thanks for your comment. However company match is 50% max at 6%. It’s just how I have to wait until 59 and still pay taxes that worry me.
- Member since 2023 · 37 posts · 32 votes2y
Quote from @Christie Gahan:
What kind of self directed 401k options do you have ?
I do have a rollover IRA from one of my old employers where I can choose my investments and only have Roth and Traditional 401k as options from my employer.
- Member since 2023 · 37 posts · 32 votes2yThat's a new one. Never been a fan of bonds, so I'm stuck with the 2050 fund.
Quote from @Carlos Ptriawan:
Quote from @David Fals:
It's the end of the year and I am considering investing in a rental property as a first-time owner, who already owns a primary home. However, I am also thinking about whether I should max out my 401k like I did this year. The pros and cons of both options are driving me crazy!
max the 401k, but change allocation to bond. Bond would perform better than equity in 2024 big time.
- Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes2y
Investing and wealth generation are a long game. So, don't be fixated on the 59.5... Since that is the option for you it sounds like, take the deduction now, get at least the company match, and let the funds grow tax free.
If you are afraid of paying taxes later, that's a different problem. Lets face it, normally when you are making money then you are paying taxes. Even in real estate investing. I guess you might have heard about all the benefits of depreciation? Did you hear that you have to pay it back when you sell? Sure, unless you 1031 and defer the tax liability. If and when you ever want to get out, you'll have to pay the tax.
That's just way the system goes.
this just helps you diversify. Remember, people still do lose money investing in real estate, too...
Good luck.
- Investor · Hillsboro, OR · Member since 2016 · 304 posts · 153 votes2yYou might want to research at some point. I own property in a self directed account.
Quote from @David Fals:
Quote from @Christie Gahan:
What kind of self directed 401k options do you have ?
I do have a rollover IRA from one of my old employers where I can choose my investments and only have Roth and Traditional 401k as options from my employer.
- Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes2y
Quote from @David Fals:
Quote from @Alan F.:
Quote from @David Fals:
It's the end of the year and I am considering investing in a rental property as a first-time owner, who already owns a primary home. However, I am also thinking about whether I should max out my 401k like I did this year. The pros and cons of both options are driving me crazy!
IMHO If you're getting employer matching dollars, I'd take advantage of that free money. If you want to put away more for retirement I'd use a roth IRA. Real estate investing is a component of a well balanced portfolio.
With a traditional 401k yes you do pay taxes when you eventually take the money in retirement, BUT that is a SWEET DEAL! Your contributions this year come out BEFORE tax. So, you aren't paying income tax on the money your putting in now. So, all the money you would have paid tax on this year will GROW GROW GROW for many years until you eventually need it in retirement.
In addition, people generally plan to have modestly lower income in retirement and pay a bit less taxes.
PLUS, if you pass away your heirs inherit that tax advantaged account which has benefits.
So, ALWAYS put enough money in to get the company match because that is FREE money beyond that make choices about how you want to invest whether thats in your 401k or real estate.
Also check with your 401k plan to see if they offer a Roth option. That is where you pay the tax on your contributions NOW instead of paying it later when you withdrawl money.
- Member since 2023 · 37 posts · 32 votes2y
Quote from @Christie Gahan:
You might want to research at some point. I own property in a self directed account.Quote from @David Fals:
Quote from @Christie Gahan:
What kind of self directed 401k options do you have ?
I do have a rollover IRA from one of my old employers where I can choose my investments and only have Roth and Traditional 401k as options from my employer.
I just researched and found out you'd have to put down a 40-50% downpayment using non-recourse lender. That's a lot for me, I'm a newbie to real estate and can't take this risk now.
- Member since 2023 · 37 posts · 32 votes2yThanks for the honest opinion. Yes, the deduction is very important now because I am in a higher tax bracket and would love to reduce my tax burden which the 401k helps me with. I was only thinking about wealth generation using real estate which can also help reduce taxes.
Quote from @Kevin Sobilo:
Quote from @David Fals:
Quote from @Alan F.:
Quote from @David Fals:
It's the end of the year and I am considering investing in a rental property as a first-time owner, who already owns a primary home. However, I am also thinking about whether I should max out my 401k like I did this year. The pros and cons of both options are driving me crazy!
IMHO If you're getting employer matching dollars, I'd take advantage of that free money. If you want to put away more for retirement I'd use a roth IRA. Real estate investing is a component of a well balanced portfolio.
With a traditional 401k yes you do pay taxes when you eventually take the money in retirement, BUT that is a SWEET DEAL! Your contributions this year come out BEFORE tax. So, you aren't paying income tax on the money your putting in now. So, all the money you would have paid tax on this year will GROW GROW GROW for many years until you eventually need it in retirement.
In addition, people generally plan to have modestly lower income in retirement and pay a bit less taxes.
PLUS, if you pass away your heirs inherit that tax advantaged account which has benefits.
So, ALWAYS put enough money in to get the company match because that is FREE money beyond that make choices about how you want to invest whether thats in your 401k or real estate.
Also check with your 401k plan to see if they offer a Roth option. That is where you pay the tax on your contributions NOW instead of paying it later when you withdrawl money.
- Realtor · Hanover Twp, PA · Member since 2018 · 3k+ posts · 3k+ votes2y
Quote from @David Fals:
Quote from @Christie Gahan:
You might want to research at some point. I own property in a self directed account.Quote from @David Fals:
Quote from @Christie Gahan:
What kind of self directed 401k options do you have ?
I do have a rollover IRA from one of my old employers where I can choose my investments and only have Roth and Traditional 401k as options from my employer.
I just researched and found out you'd have to put down a 40-50% downpayment using non-recourse lender. That's a lot for me, I'm a newbie to real estate and can't take this risk now.
If you have a self directed IRA where you can invest in real estate, I would focus on passive investing with it.
For example investing in a real estate syndication as a limited partner. The general partners put the deal together and do all of the active work and the limited partners just invest money. These are often for larger projects such as apartment complexes or commercial properties. - Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes2y
Where are you seeing 40-50% down? That is not accurate. Typically its 20-25% down.
- Rental Property Investor · Boston, MA · Member since 2019 · 2k+ posts · 1k+ votes2y
Invest in Real Estate ! 100%
- Member since 2023 · 37 posts · 32 votes2y
Quote from @Bud Gaffney:
Where are you seeing 40-50% down? That is not accurate. Typically its 20-25% down.
I was referring to self-directed IRA lenders, conventional loans are typically 20-25% down
- Investor · Lancaster, PA · Member since 2022 · 74 posts · 104 votes2y
Do both. Make sure you invest enough to get employer match if you have one, put the rest in real estate.
- 2yEric DeNardoPro MemberReal Estate Agent · Denver · Member since 2020 · 364 posts · 151 votes
Quote from @David Fals:
It's the end of the year and I am considering investing in a rental property as a first-time owner, who already owns a primary home. However, I am also thinking about whether I should max out my 401k like I did this year. The pros and cons of both options are driving me crazy!
Can you do both?
- Rental Property Investor · Somewhere over the Rainbow · Member since 2021 · 1k+ posts · 1k+ votes2y
It's mind boggling to me when I come across people (mostly realtors or people heavily in the RE industry) that have zero retirement other than rent houses. I do get it's a strategy, and it may work, I just don't love it honestly
A 401k is hard to beat - I'm saving 32% right off the top (already hard to beat that return in RE), my employer is matching 5% (free money), the money that's not taxed now is now growing in my 401k. And over the long term you can expect an 8% return (I invest in fidelity's s&P 500 tracker) again a solid return over the long-term
I personally do a Roth IRA on top of that. Tax free gains. Another thing that's hard to beat.
Then I do an HSA - again saves me 24-32% depending on the bracket at this point. Tax free growth again. Can convert 35k into a roth IRA in later years as well, if I remember right
Then I do a 529 for education.
Then I do a regular contribution to a taxable brokerage (S&P 500 tracker)
"Savings" stays in an HSA and I keep the minimum in my bank accounts
I invest in RE after all this. I don't get to save on the taxes now (can't be REP due to W2 and can't deduct due to income limitations) so I have to pass the tax savings forward...until I retire essentially or make less than 150k and have passive income/gains I can deduct from. RE for me is diversification, increasing net worth through equity by buying at a discount, and a small monthly cash flow. Over the long term (think 20+ years) you'll have some equity paydown and appreciation as well. This is where RE shines, in the very long term. Retiring on LTR cashflow is, in my opinion and for my lifestyle, not realistic unless you are running a really big operation (which most mom and pops are not)
- Member since 2020 · 351 posts · 329 votes2y
I am in a similar situation and went ahead and bought my first rental property. Conservatively I expect to make 11%-15%(assuming 3-4% appreciation) which increases to 15-20% if I can refinance at 6%. This is better than I expect the mutual funds in my 401k portfolio to perform(10-12%) Plus I would like to eventually use some of the cash flow to supplement my income before retirement age. With that said I will probably be back to maxing out the 401k in 2025 as I will attempt to keep the equity in stocks and real estate relatively even.
- 2yBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
401K Pros
Hands-off - good for people who can't manage their own money.
Grows tax deferred/Free(depending on if traditional or 401K)
Cons
Can't tough the money until you reach retirement age with penalties if you touch the money early
Limitations of stock options depending on broker that your employer chose.
Stock market returns is normally less than real estate
Basit Siddiqi CPA4.979 Reviews - Member since 2020 · 351 posts · 329 votes2y
Quote from @Basit Siddiqi:
401K Pros
Hands-off - good for people who can't manage their own money.
Grows tax deferred/Free(depending on if traditional or 401K)
Cons
Can't tough the money until you reach retirement age with penalties if you touch the money early
Limitations of stock options depending on broker that your employer chose.
Stock market returns is normally less than real estateAlso 401k/IRA protected from lawsuits and bankruptcy. But, you can never put enough in there to be truly wealthy but can prevent you from getting zeroed.
- 2yByron VallesPro MemberMSFP, CFP, Financial Advisor · San Francisco Bay Area · Member since 2020 · 66 posts · 53 votes
Quote from @David Fals:
Thanks for the honest opinion. Yes, the deduction is very important now because I am in a higher tax bracket and would love to reduce my tax burden which the 401k helps me with. I was only thinking about wealth generation using real estate which can also help reduce taxes.Quote from @Kevin Sobilo:
Quote from @David Fals:
Quote from @Alan F.:
Quote from @David Fals:
It's the end of the year and I am considering investing in a rental property as a first-time owner, who already owns a primary home. However, I am also thinking about whether I should max out my 401k like I did this year. The pros and cons of both options are driving me crazy!
IMHO If you're getting employer matching dollars, I'd take advantage of that free money. If you want to put away more for retirement I'd use a roth IRA. Real estate investing is a component of a well balanced portfolio.
With a traditional 401k yes you do pay taxes when you eventually take the money in retirement, BUT that is a SWEET DEAL! Your contributions this year come out BEFORE tax. So, you aren't paying income tax on the money your putting in now. So, all the money you would have paid tax on this year will GROW GROW GROW for many years until you eventually need it in retirement.
In addition, people generally plan to have modestly lower income in retirement and pay a bit less taxes.
PLUS, if you pass away your heirs inherit that tax advantaged account which has benefits.
So, ALWAYS put enough money in to get the company match because that is FREE money beyond that make choices about how you want to invest whether thats in your 401k or real estate.
Also check with your 401k plan to see if they offer a Roth option. That is where you pay the tax on your contributions NOW instead of paying it later when you withdrawl money.
It's really important to know that people giving advice here do not know the specifics of your situation. What may work for them may not necessarily work for you. They may be in a different tax bracket, their personal goals may be different, different investment experiences, etc. Importantly, they may also have different beliefs about debt and risk-taking. Always keep this in mind when considering their advice.
With the above said there were a few things in the thread that caught my eye and I would agree with. Assuming you have an appropriate emergency fund, do contribute at least enough to get the match from your employer, as many have pointed out, that is FREE money. Keep in mind the saying that it's not about how much you make, it's about how much you keep. Consider the tax specifics of your available options. This is a big miss I see on BP forums.
Happy Investing!
Byron
- 2yByron VallesPro MemberMSFP, CFP, Financial Advisor · San Francisco Bay Area · Member since 2020 · 66 posts · 53 votesI love to nerd out on this stuff so let's run a hypothetical for fun. Assuming you make $100K and do the 6% contribution.
Quote from @David Fals:
Quote from @Alan F.:
Quote from @David Fals:
It's the end of the year and I am considering investing in a rental property as a first-time owner, who already owns a primary home. However, I am also thinking about whether I should max out my 401k like I did this year. The pros and cons of both options are driving me crazy!
IMHO If you're getting employer matching dollars, I'd take advantage of that free money. If you want to put away more for retirement I'd use a roth IRA. Real estate investing is a component of a well balanced portfolio.
Thanks for your comment. However company match is 50% max at 6%. It’s just how I have to wait until 59 and still pay taxes that worry me.
$3K FREE from your employer
$6K from your contribution - which lowers your gross income to $94K saving you approx $1K in taxes had you not contributed.
$9K annual contribution assuming an 8% growth rate will turn into $140K in 10 years and $263K in 15 years.
I love real estate and I think it can be a great asset class for many investors, but it's not for everyone. 401Ks on the other hand get a lot of bad reps in these forums. But just like I know many real estate millionaires, I also know many 401k millionaires. The main difference I've noticed is that real estate tends to be a lot more hands-on but also way more flexible than investing in your retirement account.
bonus scenario. If you instead maxed out your 401K like you mentioned.
$3K FREE from your employer$23K from your contribution - which lowers your gross income to $77K saving you approx $5K in taxes had you not contributed.
$26K annual contribution assuming an 8% growth rate will turn into $406K in ten years and $762K in 15 years.
One last thing regarding the 59.5 concerns. Investing for retirement is meant to be a long-term endeavor as someone else already mentioned. But in certain circumstances, you can access the money before 59.5 either through a loan or through a withdrawal without incurring a penalty. Here are just a couple of withdrawal scenarios that would avoid penalties: to pay for higher education, unreimbursed medical bills, health insurance premiums, and first-time home purchase, if you separate from your employer at age 55 or older. Check with your 401(k)/IRA custodian of course.Kindly,
Byron
- Attorney · Columbus, OH · Member since 2023 · 193 posts · 145 votes2y
Quote from @David Fals:
It's the end of the year and I am considering investing in a rental property as a first-time owner, who already owns a primary home. However, I am also thinking about whether I should max out my 401k like I did this year. The pros and cons of both options are driving me crazy!
Finding the right deals in real estate can help you reach your financial goals more quickly. It is like exercising an option in a stock that deep in the money. Real estate can also provide the additional benefit of cash flow. So, right deal with equity and cash flow is like buying a high yield dividend stock at a discount. However, there are more hoops to jump through with accessing your equity (although not difficult).
- 2yBrett SynickyPro MemberSolo 401k and SDIRA Consultant · Orange, CA · Member since 2013 · 873 posts · 497 votes
Quote from @David Fals:
Quote from @Bud Gaffney:
Where are you seeing 40-50% down? That is not accurate. Typically its 20-25% down.
I was referring to self-directed IRA lenders, conventional loans are typically 20-25% down
I'm sure this is what you meant but just as a reminder to all reading, Self Directed IRA's and Solo 401ks only allow non-recourse loans. You cannot personally guarantee the loan, the real estate must be the only security and thus have sufficient cash flow. Usually between 35-50% down. Also the Solo 401k is NOT subject to UBIT on the financed portion of the real estate where as you cannot avoid that in an SDIRA and it scales up to 37%. Sounds like David was referring to a 401k through his employer but if anybody here is self employed with no full time employees...you owe it to yourself to look into a Solo 401k. Great conversation!
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