401k contributions or Real Estate Investing
Member since 2023 · 37 posts · 32 votes
401k contributions or Real Estate Investing
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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
- 2ySamuel CoronadoPro MemberInvestor · Huntsville, AL · Member since 2016 · 348 posts · 182 votes
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.
But keep those contributions on stocks to buy them while they are down.
- Rental Property Investor · Somewhere over the Rainbow · Member since 2021 · 1k+ posts · 1k+ votes2y
Quote from @Basit Siddiqi:
Stock market returns is normally less than real estate
Prove it. I'd argue that the returns from RE are generally lower than the stock market
This is HIGHLY subjective and CAN BE very far from the truth
- 2yBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
Quote from @Jeremy Horton:
Quote from @Basit Siddiqi:
Stock market returns is normally less than real estate
Prove it. I'd argue that the returns from RE are generally lower than the stock market
This is HIGHLY subjective and CAN BE very far from the truth
I looked at the S&P 500 Ticker SPY.
It had a price of $148 on January 1 2000
It now has a price of $468
appreciation is 216% over 24 yeras which is 9% annually
Real Estate had a average price of $131,539 on Janaury 1, 2000
It now has a price of $403,683
Appreciation is 206% over 24 years which is 8.6% annually
However, real estate likely has cash flow / cap rate of around 5% natuionally while the dividend rate for the ETF is around 2%
Real Estate = 8.6% + 5% = 13.6%
Stocks = 9% + 2% = 11%
Basit Siddiqi CPA4.880 Reviews Hi all,
has anyone dealt with Horizon trust for SDIRA / LLC accounts and property management with JWB of Jacksonville, FL? I'm buying a rental property in JAX FL with SDIRA funds, JWB being the seller & eventually the PM of the rental. anyone with experience with either one?
I relied totally on JWB & Horizon to guide me thru the process, but as I'm getting closer to closing the deal, I'm getting cold feet realizing that I should have done all of my homework myself. what if it's a mistake and certainly don't want any legal issues. do I need to register my LLC in FL as a foreign entity doing business there since it'll be collecting rents?
Great to put so much effort in. Thanks for trying to keep it apples and apples.
May I comment: what about dividend compounding on the S&P ETF? For my clarification, are you assuming the cap rate is after capex and repairs? And, how might you account for depreciation recapture which public equities do not directly have (or just leave it as a gross calc?)?
Yes, I'm not entirely a fan of real estate. Which is to say its not the "absolute best." Even trying to achieve these returns can be difficult.
Thanks.
- 2yKaaren HallBusiness MemberFinancial Advisor · Irvine, CA · Member since 2011 · 113 posts · 63 votesSounds like you are already familiar with the homebuying process so that's a plus. With a SDIRA, you need to keep in mind that you will pay all expenses (closing costs, earnest money, utility bills, rehab costs) from the IRA and NOT PERSONALLY. Similarly, all proceeds return to the IRA.
Because you are not allowed to do the physical work on the house, you may wish to bring on a property manager. In this way, repairs and maintenance can be handled at arm's-length.
Happy to disccuss further. Contact information in my bio. ~Kaaren
uDirect IRA Services, LLC4.6190 Reviews - Rental Property Investor · Somewhere over the Rainbow · Member since 2021 · 1k+ posts · 1k+ votes2yFrom 1980 through 2023 the US housing market average annual growth rate was 8.6% - source Federal Reserve Bank of St.Louis House price index for the United States.
Quote from @Basit Siddiqi:
Quote from @Jeremy Horton:
Quote from @Basit Siddiqi:
Stock market returns is normally less than real estate
Prove it. I'd argue that the returns from RE are generally lower than the stock market
This is HIGHLY subjective and CAN BE very far from the truth
I looked at the S&P 500 Ticker SPY.
It had a price of $148 on January 1 2000
It now has a price of $468
appreciation is 216% over 24 yeras which is 9% annually
Real Estate had a average price of $131,539 on Janaury 1, 2000
It now has a price of $403,683
Appreciation is 206% over 24 years which is 8.6% annually
However, real estate likely has cash flow / cap rate of around 5% natuionally while the dividend rate for the ETF is around 2%
Real Estate = 8.6% + 5% = 13.6%
Stocks = 9% + 2% = 11%
Over that same period the S&P 500 returned ~12%
So over the last 40 years, the last 23 years, and the last year the stock market has had higher returns.
Real estate has a lot more involved - loan paydown, potential tax advantages, time spent since it is quite a bit more "hands-on" than the stock market, repairs/maintenance etc. A lot of this is impossible to quantify accurately - and there are both benefits and downsides.
But if you're looking at long term average annualized returns the stock market wins guys, if you keep picking/changing timeframes, you'll always come up with different answers. Both markets "go up" when looking at a large timescale, yet its still very easy to lose money in our personal investing timelines.
Meanwhile, these are averages... You can't personally invest in real estate "on the average." People are always cherry picking --- you have to take Title to something. Of course, the public markets you can pick individual stocks and do very well, or very poorly.
On a different note, I think if people took similar time studying a portion of the public markets as they try the real estate market, they'd find good investing opportunities, especially at smaller price scales to complement real estate investing. Its almost too bad this is a real estate investor forum, and not an "investing" forum.
- Rental Property Investor · Somewhere over the Rainbow · Member since 2021 · 1k+ posts · 1k+ votes2y
Quote from @David M.:
guys, if you keep picking/changing timeframes, you'll always come up with different answers. Both markets "go up" when looking at a large timescale, yet its still very easy to lose money in our personal investing timelines.
Meanwhile, these are averages... You can't personally invest in real estate "on the average." People are always cherry picking --- you have to take Title to something. Of course, the public markets you can pick individual stocks and do very well, or very poorly.
On a different note, I think if people took similar time studying a portion of the public markets as they try the real estate market, they'd find good investing opportunities, especially at smaller price scales to complement real estate investing. Its almost too bad this is a real estate investor forum, and not an "investing" forum.
THIS is the whole reason I personally invest in Real Estate - it's because I can control the deal down to a micro level. I would say my personal RE investments beat the stock market - sometimes.
But I can control the price I buy at (equity capture at the buy), the financing terms (leveraging), long term appreciation, loan-pay down (very long term), tax deductions (not for me due to REP status and income limitations, but it's still there), monthly cashflow etc
I think controlling the deal down to the details is where RE shines for the mom and pops like us. But look at Zillow - they took a huge L a couple years ago. They just had a post on here about syndications the other day where a ton of people aren't getting their expected returns, dividend payments have been paused etc. REITs (I don't even have to check) but I know they don't perform as good as the S&P over the long term
Point I'm making is this - If I buy 100k worth of stocks and I buy a 100k investment house and hold them for 50 years then cash-out - the stock investment will be valued higher. That's it - the annualized return will be higher over the long term.
Yeah, I hear you..
Same but different. I'm liquidating my rentals now, pay the tax (only once to uncle sam..), and investing portion (I only need a portion) in high income producing equities and some private lending.
Pick "quality" houses... Pick "quality" stocks/funds... then shrug your shoulders LOL
- Investor · Tampa, FL · Member since 2015 · 63 posts · 59 votes2y
Point I'm making is this - If I buy 100k worth of stocks and I buy a 100k investment house and hold them for 50 years then cash-out - the stock investment will be valued higher. That's it - the annualized return will be higher over the long term.
You’re ignoring the effects of leverage. Most people finance investment properties instead of paying cash and that magnifies the return. So instead of $100k worth of real estate earning x% return, you’ve got $400k earning that return. Yes, there is a cost (interest) you have to pay but it is tax deductible. In 50 years, your $400k in real estate will be paid off and will be worth WAY more than a stock portfolio. That’s the magic of real estate, the ability to leverage it.
On the topic of traditional 401k/IRA vs Roth, it is just a question of the tax rate. If you think your tax rate will be higher in the future, you should do the Roth and pay the lower rate today, if tax rate is lower in the future, traditional and pay the lower rate in the future. If same tax rate, it doesn't matter which way you go.
The list toward the beginning of this thread listing the pros and cons of 401k’s left out the biggest con: high fees. I would put money in the 401k to get the match but not a penny more.
One last thing, it’s interesting to hear people’s biases. When I was a financial advisor, other financial people were against real estate as being “too risky.” Among real estate investors, many are against the stock market claiming 1: Wall Street is rigged 2: Wall Street is a casino and/or 3: houses don’t go to zero.
There is a group of very high net worth individuals called Tiger 21 and they put out a summary report of their members asset allocations from time to time. About 80-90% of these investors assets are about evenly split between stocks, real estate, and holdings of private companies with a little bit in other assets like hedge funds, currencies, commodities, etc.
For us regular folks a 50/50 split between stocks and real estate makes sense. They each have pros and cons but having both gives you flexibility. - Investor · Richmond, VA · Member since 2023 · 459 posts · 474 votes2y
As we were building our portfolio we suspended 401k contributions completely because the rate of return is simply nowhere near what I get from renting SFH. We recently restarted our 401k contributions due to high interest rates and the desire to diversify our assets.
The match sounds great! 100% of the first 4% or whatever, but remember, that is only for the first year. So the real return on your original investment drops each year (you have to amortize that initial match over the life of the 401k).
Our ROI for SFH has been in the 30%+ range every year. 401k can't even come close to the sustained return on investment. Do a few cash out refi then reinvest and the return on that original RE investment goes nuclear.
- Member since 2023 · 37 posts · 32 votes2yI agree 50/50 would be great! My employer matches in a weird way, For each dollar contributed up to 6% of eligible pay will match 50% or 50 cents on the dollar
Quote from @Doug Lovett:
Point I'm making is this - If I buy 100k worth of stocks and I buy a 100k investment house and hold them for 50 years then cash-out - the stock investment will be valued higher. That's it - the annualized return will be higher over the long term.
You’re ignoring the effects of leverage. Most people finance investment properties instead of paying cash and that magnifies the return. So instead of $100k worth of real estate earning x% return, you’ve got $400k earning that return. Yes, there is a cost (interest) you have to pay but it is tax deductible. In 50 years, your $400k in real estate will be paid off and will be worth WAY more than a stock portfolio. That’s the magic of real estate, the ability to leverage it.
On the topic of traditional 401k/IRA vs Roth, it is just a question of the tax rate. If you think your tax rate will be higher in the future, you should do the Roth and pay the lower rate today, if tax rate is lower in the future, traditional and pay the lower rate in the future. If same tax rate, it doesn't matter which way you go.
The list toward the beginning of this thread listing the pros and cons of 401k’s left out the biggest con: high fees. I would put money in the 401k to get the match but not a penny more.
One last thing, it’s interesting to hear people’s biases. When I was a financial advisor, other financial people were against real estate as being “too risky.” Among real estate investors, many are against the stock market claiming 1: Wall Street is rigged 2: Wall Street is a casino and/or 3: houses don’t go to zero.
There is a group of very high net worth individuals called Tiger 21 and they put out a summary report of their members asset allocations from time to time. About 80-90% of these investors assets are about evenly split between stocks, real estate, and holdings of private companies with a little bit in other assets like hedge funds, currencies, commodities, etc.
For us regular folks a 50/50 split between stocks and real estate makes sense. They each have pros and cons but having both gives you flexibility. Quote from @David M.:
guys, if you keep picking/changing timeframes, you'll always come up with different answers. Both markets "go up" when looking at a large timescale, yet its still very easy to lose money in our personal investing timelines.
Meanwhile, these are averages... You can't personally invest in real estate "on the average." People are always cherry picking --- you have to take Title to something. Of course, the public markets you can pick individual stocks and do very well, or very poorly.
On a different note, I think if people took similar time studying a portion of the public markets as they try the real estate market, they'd find good investing opportunities, especially at smaller price scales to complement real estate investing. Its almost too bad this is a real estate investor forum, and not an "investing" forum.
I'm glad the mods don't shut down threads like this, great points. Money can be lost in both markets, I've proved that theory a couple of times lol.
- 2yPeter MckernanBusiness MemberResidential Real Estate Agent · Irvine, CA · Member since 2013 · 2k+ posts · 1k+ 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!
Do you what money today or in the future when you retire? That is the best question you can be asking yourself. The real estate investing (if you invest right) can you money in had today with a 401K locked for 20, 30+ years. It's all about your goals you want to hit!
The McKernan Group4.958 Reviews - 2yBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votesI assume Capex is after repairs and reserve for capital expenditures.
Quote from @David M.:
Great to put so much effort in. Thanks for trying to keep it apples and apples.
May I comment: what about dividend compounding on the S&P ETF? For my clarification, are you assuming the cap rate is after capex and repairs? And, how might you account for depreciation recapture which public equities do not directly have (or just leave it as a gross calc?)?
Yes, I'm not entirely a fan of real estate. Which is to say its not the "absolute best." Even trying to achieve these returns can be difficult.
Thanks.
Stocks would have dividend compounding
real estate would have cash-flow compounding.
I think that real estate would have a higher impact here for two reasons
Cash flow from real estate is normally higher than the dividend rates
Cash-flow would normally be shielded from real estate while someone may be paying about 20% tax on dividends(15% federal and an average rate of 5% at the state level).
I think depreciation recapture discussion can be good if the property is never sold or sold via 1031 exchange.Basit Siddiqi CPA4.880 Reviews - 2yBasit SiddiqiBusiness MemberAccountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
Quote from @Doug Lovett:
Point I'm making is this - If I buy 100k worth of stocks and I buy a 100k investment house and hold them for 50 years then cash-out - the stock investment will be valued higher. That's it - the annualized return will be higher over the long term.
You’re ignoring the effects of leverage. Most people finance investment properties instead of paying cash and that magnifies the return. So instead of $100k worth of real estate earning x% return, you’ve got $400k earning that return. Yes, there is a cost (interest) you have to pay but it is tax deductible. In 50 years, your $400k in real estate will be paid off and will be worth WAY more than a stock portfolio. That’s the magic of real estate, the ability to leverage it.
On the topic of traditional 401k/IRA vs Roth, it is just a question of the tax rate. If you think your tax rate will be higher in the future, you should do the Roth and pay the lower rate today, if tax rate is lower in the future, traditional and pay the lower rate in the future. If same tax rate, it doesn't matter which way you go.
The list toward the beginning of this thread listing the pros and cons of 401k’s left out the biggest con: high fees. I would put money in the 401k to get the match but not a penny more.
One last thing, it’s interesting to hear people’s biases. When I was a financial advisor, other financial people were against real estate as being “too risky.” Among real estate investors, many are against the stock market claiming 1: Wall Street is rigged 2: Wall Street is a casino and/or 3: houses don’t go to zero.
There is a group of very high net worth individuals called Tiger 21 and they put out a summary report of their members asset allocations from time to time. About 80-90% of these investors assets are about evenly split between stocks, real estate, and holdings of private companies with a little bit in other assets like hedge funds, currencies, commodities, etc.
For us regular folks a 50/50 split between stocks and real estate makes sense. They each have pros and cons but having both gives you flexibility.I am 100% for real estate but I think debt is not a reason for one over the other(in most cases).
Most publicly traded companies are highly leveraged.
Therefore, indirectly your ownership is in an asset that is leveraged.Basit Siddiqi CPA4.880 Reviews Quote from @Basit Siddiqi:
Quote from @Jeremy Horton:
Quote from @Basit Siddiqi:
Stock market returns is normally less than real estate
Prove it. I'd argue that the returns from RE are generally lower than the stock market
This is HIGHLY subjective and CAN BE very far from the truth
I looked at the S&P 500 Ticker SPY.
It had a price of $148 on January 1 2000
It now has a price of $468
appreciation is 216% over 24 yeras which is 9% annually
Real Estate had a average price of $131,539 on Janaury 1, 2000
It now has a price of $403,683
Appreciation is 206% over 24 years which is 8.6% annually
However, real estate likely has cash flow / cap rate of around 5% natuionally while the dividend rate for the ETF is around 2%
Real Estate = 8.6% + 5% = 13.6%
Stocks = 9% + 2% = 11%Ok and in 20 years are you deducting your hourly rate to manage(even "passively" with a PM) the properties, capex, tenant turnover, vacancy, etc.
Go take that $404k less $131.5k gross spread and deduct those, and let's see your adjusted returns. Let's assume you did the averages-- one roof, two hvacs, 1 water heater, 7% vacancy, $3,000 per tenant turn every 4 years. Call it $25,000 for the capex, $12,000 for painting/tenant turns, 7% vacancy, plus add your PM bill + hourly rate still managing, or just outright hourly rate to manage. I am not even adding the service calls for plumbers, electricians, pest control, etc., you do once every 6 months, and other nonsense.
And before someone says tax savings-- sure it's just a deduction though it's not a realization. And if you 1031 your life out of this, you're just kicking the can down the road. Granted, it's at a new basis. The cap rate versus dividend rate is the only spread you'll see where hard assets>equities in this.
It's going to be a lot, lot tighter than you think.
Quote from @Basit Siddiqi:
Quote from @Doug Lovett:
Point I'm making is this - If I buy 100k worth of stocks and I buy a 100k investment house and hold them for 50 years then cash-out - the stock investment will be valued higher. That's it - the annualized return will be higher over the long term.
You’re ignoring the effects of leverage. Most people finance investment properties instead of paying cash and that magnifies the return. So instead of $100k worth of real estate earning x% return, you’ve got $400k earning that return. Yes, there is a cost (interest) you have to pay but it is tax deductible. In 50 years, your $400k in real estate will be paid off and will be worth WAY more than a stock portfolio. That’s the magic of real estate, the ability to leverage it.
On the topic of traditional 401k/IRA vs Roth, it is just a question of the tax rate. If you think your tax rate will be higher in the future, you should do the Roth and pay the lower rate today, if tax rate is lower in the future, traditional and pay the lower rate in the future. If same tax rate, it doesn't matter which way you go.
The list toward the beginning of this thread listing the pros and cons of 401k’s left out the biggest con: high fees. I would put money in the 401k to get the match but not a penny more.
One last thing, it’s interesting to hear people’s biases. When I was a financial advisor, other financial people were against real estate as being “too risky.” Among real estate investors, many are against the stock market claiming 1: Wall Street is rigged 2: Wall Street is a casino and/or 3: houses don’t go to zero.
There is a group of very high net worth individuals called Tiger 21 and they put out a summary report of their members asset allocations from time to time. About 80-90% of these investors assets are about evenly split between stocks, real estate, and holdings of private companies with a little bit in other assets like hedge funds, currencies, commodities, etc.
For us regular folks a 50/50 split between stocks and real estate makes sense. They each have pros and cons but having both gives you flexibility.I am 100% for real estate but I think debt is not a reason for one over the other(in most cases).
Most publicly traded companies are highly leveraged.
Therefore, indirectly your ownership is in an asset that is leveraged.I am replying as you are replying, so maybe my answers are being addressed. Apologize ahead, if so.
But most publicly traded companies are highly levered, the better one's have a lower debt ratio. Much like real estate, every location is going to be so polar and different.
The value in real estate is actually high leverage + high risk taking in speculative environment. Cash flow is literally the last realization and area of importance, so cap rate for that is going to be a harder measure apples to apples with equities. In stocks, its likely low to manageable debt ratio and cash flow is paramount. As we see with interest rates, the shuffle causes cliff like moves in areas. Companies with a high debt ratio or poor d/e ratio--which are a lot of companies-- won't sustain living in a high rate environment.
The leverage aspect of real estate-- 30 yr FRM-- is what makes real estate compelling. But's a physical asset, that'll need a lot of liquidity. The cash flow you generate from it is likely, and almost, never realized. It's the underlying location that's the realization and true net gain against equities. The difference in passivity will almost always make equities a better choice, unless you're coming from a very different angle on real estate.
For a 401k, if you don't have much means(meaning reserves upon reserves), personally i would not speculate on real estate. I would stick to equities.
- Rental Property Investor · San Francisco Bay Area · Member since 2022 · 1k+ posts · 1k+ votes2y
Quote from @Kevin Sobilo:
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.This is a great discussion. With RE syndications, people need to do their research. I wanted to get away from the headache aspect of out of state investing investing (find the property, deal analysis, managing the property manager, etc). I talked to 4 syndicators (2 large, 2 smaller). Only one had been through a full real estate recycle (e.g. their GPs had done business since 1988). My money ($100,000 or $50,000 for RE debt funds) would be trapped in the syndication and I can't get it out if I need it. With my own property I have more control over it.
I'm just going to leave my money in high yield savings account and buy index funds and take a break from buying anymore properties while I re-assess my portfolio (getting one SFH prepared to rent out soon). Not saying syndications are bad but be cautious.
Several of these people who invested in this syndication are seeing terrible returns. See this post and comments.
https://www.biggerpockets.com/forums/48/topics/1127261-anyon...
- 2yByron VallesPro MemberMSFP, CFP, Financial Advisor · San Francisco Bay Area · Member since 2020 · 66 posts · 53 votesIt's worth pointing out that OP originally mentioned investing in 401(k) which would mean interest, dividends and capital gains are deferred until the money is withdrawn (usually after 59.5) And then, any withdrawal is taxed at ordinary income. With the right planning, I've seen people pay low and sometimes even zero effective rate on their 401(k)/IRA withdrawals.
Quote from @Basit Siddiqi:
I assume Capex is after repairs and reserve for capital expenditures.Quote from @David M.:
Great to put so much effort in. Thanks for trying to keep it apples and apples.
May I comment: what about dividend compounding on the S&P ETF? For my clarification, are you assuming the cap rate is after capex and repairs? And, how might you account for depreciation recapture which public equities do not directly have (or just leave it as a gross calc?)?
Yes, I'm not entirely a fan of real estate. Which is to say its not the "absolute best." Even trying to achieve these returns can be difficult.
Thanks.
Stocks would have dividend compounding
real estate would have cash-flow compounding.
I think that real estate would have a higher impact here for two reasons
Cash flow from real estate is normally higher than the dividend rates
Cash-flow would normally be shielded from real estate while someone may be paying about 20% tax on dividends(15% federal and an average rate of 5% at the state level).
I think depreciation recapture discussion can be good if the property is never sold or sold via 1031 exchange. It have done both types of investing over the last 15 years and this is where we're at.
$100k into 401k type funds that are worth about $150k now.
$30k down on our first house that's now a rental. We have about $250k equity in it now (conservative estimate). Our next house will need 20% down which will take twice as much cash but should still have a better cash on cash return than a 401k. And that doesn't take into account the tax benefits of the rental.
We only contribute to the 401k up to the employer match, just to diversify. And the rest goes toward our next down payment on a rental.
Just my .02
- 2yByron VallesPro MemberMSFP, CFP, Financial Advisor · San Francisco Bay Area · Member since 2020 · 66 posts · 53 votes
Quote from @Justin A.:
It have done both types of investing over the last 15 years and this is where we're at.
$100k into 401k type funds that are worth about $150k now.
$30k down on our first house that's now a rental. We have about $250k equity in it now (conservative estimate). Our next house will need 20% down which will take twice as much cash but should still have a better cash on cash return than a 401k. And that doesn't take into account the tax benefits of the rental.
We only contribute to the 401k up to the employer match, just to diversify. And the rest goes toward our next down payment on a rental.
Just my .02
The question that jumps at me here what was your 401(k) invested in for 15 years? doing the math that comes out to a 2.74% annualized ROI.
https://www.calculator.net/roi-calculator.html?beginbalance=...
Most 401(k) plans will have at least one investment option that gives you exposure to the S&P500 since that is the most widely tracked index. According to multiple sources, the S&P has returned 9.8% annualized over the past 15 years. If you take into account mutual fund or ETF expenses to be conservative and assume an 8% annualized ROR instead, that 100K would be worth $317K today. https://www.calculator.net/investment-calculator.html?ctype=...
I love real estate but other asset classes like stocks and bonds also have diversification, capital appreciation, income, and tax benefits. It's just a matter of understanding them.
- Member since 2023 · 37 posts · 32 votes2yI think I have decided on my plan. I won’t be maxing out my 401K contributions this year since my employer only matches 50% up to 6%. Instead, I plan to diversify my investments. I’m aiming to save 20%, but contributing more to my 401K would stretch my finances too thin, especially considering the need to maintain my emergency fund. Just for context, I’ve been saving and investing in ETFs and Index funds for the past 5 years and am currently working on catching up with the US financial system, being an immigrant. It’s a learning journey!
Quote from @Justin A.:
It have done both types of investing over the last 15 years and this is where we're at.
$100k into 401k type funds that are worth about $150k now.
$30k down on our first house that's now a rental. We have about $250k equity in it now (conservative estimate). Our next house will need 20% down which will take twice as much cash but should still have a better cash on cash return than a 401k. And that doesn't take into account the tax benefits of the rental.
We only contribute to the 401k up to the employer match, just to diversify. And the rest goes toward our next down payment on a rental.
Just my .02
Thanks for the updated..
... and now that you made your decision, just something to think about in the future that I THINK hasn't been mentioned --- getting funds into a tax advantaged account is very limited. e.g. annual contributions to an IRA or Roth variant are limited. same for 401k where you have to have an employer..
Just one more thing to add to the mix for future considerations...
Good luck.
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