401k vs REI - Data tells the story?

29 Replies

The debate on the efficacy of REI investing over a 401(k) has raged for a long time on BiggerPockets. Thanks to a message from @Christopher Throop, I revisited the topic when he let me know a file I used during an earlier discussion wasn't working. (Link to the file below).

Well, I took the file and went a little nutty with it. And it turns out a 401(k), even with a 100% match, won't touch prudent, leveraged real estate investing over the long-term.

My assumptions:

  • You can initially save $200 per month.
  • You currently have nothing in savings.
  • The purchase price per door is $50,000 today and you only buy SFH as soon as you have enough saved.
  • Inflation causes everything to go up by 4.02% per year (average for last 30 years). This is also the "rate" you get while you are saving for your down payment.
  • Mortgage requires 25% down, 20 year note, 8.47% interest (avg for last 30 years)
  • Goal is $100/door cash flow to start so CAP rate is 10.2%
  • S&P 500 Compounded Annual Growth Rate is 11.4% (avg for last 30 years) and you don't pay any fees.
  • You get a 75% match of your savings in the 401(k)
  • All rental cash flow is plowed back into the business (just like reinvesting the dividends/gains received in the 401(k)) to make this an apples-to-apples comparison.

After 10 years:

  • The 401(k) would supply you with $843 of monthly income
  • Rentals only give you $371 of monthly income

After 20 years:

  • The 401(k) would supply you with $3,886 of monthly income
  • Rentals supply you with $4,209 of monthly income

After 30 years:

  • The 401(k) would supply you with $13,963 of monthly income
  • Rentals supply you with $34,426 of monthly income

What's really cool is the Net Worth of the investor. A conservative estimate (because the math was too difficult in a single-tabbed, dynamic spreadsheet without doing some programming) puts the rental investor at $3.0M in equity. The 401(k) owner has $1.5M in their account.

Change up the numbers a bit in the spreadsheet to see different scenarios. Change the parameters so you start with $50K in savings, $400/m savings, buying only 4-plex or more at $40K per door. At the 20 year mark, you'll be making $27K per month with rentals versus $12K per month with the 401(k). And check out the net worth (again, very conservative for the RE investor).

Monthly "Income" 5 yrs 10 yrs 15 yrs 20 yrs 25 yrs 30 yrs
REI $976 $3,370 $9,566 $27,681 $81,241 $225,864
Mutual Funds $1,150 $2,427 $4,764 $8,993 $16,578 $30,111
401(k) $1,391 $3,149 $6,402 $12,324 $22,992 $42,079
Net Worth
REI $97,426 $294,326 $861,366 $2,531,095 $7,034,454 $19,607,643
Mutual Funds $122,705 $258,444 $506,980 $956,433 $1,762,636 $3,200,930
401(k) $148,603 $335,652 $681,546 $1,311,058 $2,444,984 $4,473,632
First $100K/yr Month w/ REI 170
First $100K/yr Month w/ Mutual Funds (no match) 233
First $100K/yr Month w/ 401K (match) 204

Obviously, this is only a scenario. There are risks associated with REI and their are risks associated with the S&P 500. But the numbers don't lie. If you buy prudently, if you manage correctly, you can build a better income over the long-run with real estate than you can with the stock market.

Conversation? A couple of starters...

  • Diversification is important and buying only rentals is probably not what you would do over your whole career
  • You'll have some "pigs" (as @Ben Leybovich likes to call them) from time-to-time that won't work out. Just ask @Engelo Rumora.
  • You'll probably have a lawsuit or two that will reach into your assets (just ask @Brian Burke)
  • I assume you'll hold these properties into infinity. You should probably rebalance your portfolio over time, selling some to buy others, etc. Most of the time, that should end up with you owning better, more profitable property but I couldn't account for it in an easy spreadsheet.

What other issues do you see with the spreadsheet or my logic? I'm all for a healthy debate and/or you telling me I fouled up on the calculations.

Check out the file located at https://www.biggerpockets.com/files/1049/download. You can use LibreOffice or OpenOffice to open it. I couldn't save as Excel because some of the calculations are from Excel 2007 or later and LibreOffice won't save beyond Excel 2003. Look at the "Details" tab for all of the nitty-gritty math and stuff.

Updated almost 3 years ago

The file is available on my file downloads page. I found an error with it and had to update, which changes the link. https://www.biggerpockets.com/files/user/ron_perich

Originally posted by @Ronald Perich :

The debate on the efficacy of REI investing over a 401(k) has raged for a long time on BiggerPockets. Thanks to a message from @Christopher Throop , I revisited the topic when he let me know a file I used during an earlier discussion wasn't working. (Link to the file below).

Well, I took the file and went a little nutty with it. And it turns out a 401(k), even with a 100% match, won't touch prudent, leveraged real estate investing over the long-term.

My assumptions:

  • You can initially save $200 per month.
  • You currently have nothing in savings.
  • The purchase price per door is $50,000 today and you only buy SFH as soon as you have enough saved.
  • Inflation causes everything to go up by 4.02% per year (average for last 30 years). This is also the "rate" you get while you are saving for your down payment.
  • Mortgage requires 25% down, 20 year note, 8.47% interest (avg for last 30 years)
  • Goal is $100/door cash flow to start so CAP rate is 10.2%
  • S&P 500 Compounded Annual Growth Rate is 11.4% (avg for last 30 years) and you don't pay any fees.
  • You get a 75% match of your savings in the 401(k)
  • All rental cash flow is plowed back into the business (just like reinvesting the dividends/gains received in the 401(k)) to make this an apples-to-apples comparison.

After 10 years:

  • The 401(k) would supply you with $843 of monthly income
  • Rentals only give you $371 of monthly income

After 20 years:

  • The 401(k) would supply you with $3,886 of monthly income
  • Rentals supply you with $4,209 of monthly income

After 30 years:

  • The 401(k) would supply you with $13,963 of monthly income
  • Rentals supply you with $34,426 of monthly income

What's really cool is the Net Worth of the investor. A conservative estimate (because the math was too difficult in a single-tabbed, dynamic spreadsheet without doing some programming) puts the rental investor at $3.0M in equity. The 401(k) owner has $1.5M in their account.

Change up the numbers a bit in the spreadsheet to see different scenarios. Change the parameters so you start with $50K in savings, $400/m savings, buying only 4-plex or more at $40K per door. At the 20 year mark, you'll be making $27K per month with rentals versus $12K per month with the 401(k). And check out the net worth (again, very conservative for the RE investor).

Monthly "Income" 5 yrs 10 yrs 15 yrs 20 yrs 25 yrs 30 yrs
REI $976 $3,370 $9,566 $27,681 $81,241 $225,864
Mutual Funds $1,150 $2,427 $4,764 $8,993 $16,578 $30,111
401(k) $1,391 $3,149 $6,402 $12,324 $22,992 $42,079
Net Worth
REI $97,426 $294,326 $861,366 $2,531,095 $7,034,454 $19,607,643
Mutual Funds $122,705 $258,444 $506,980 $956,433 $1,762,636 $3,200,930
401(k) $148,603 $335,652 $681,546 $1,311,058 $2,444,984 $4,473,632
First $100K/yr Month w/ REI 170
First $100K/yr Month w/ Mutual Funds (no match) 233
First $100K/yr Month w/ 401K (match) 204

Obviously, this is only a scenario. There are risks associated with REI and their are risks associated with the S&P 500. But the numbers don't lie. If you buy prudently, if you manage correctly, you can build a better income over the long-run with real estate than you can with the stock market.

Conversation? A couple of starters...

  • Diversification is important and buying only rentals is probably not what you would do over your whole career
  • You'll have some "pigs" (as @Ben Leybovich likes to call them) from time-to-time that won't work out. Just ask @Engelo Rumora.
  • You'll probably have a lawsuit or two that will reach into your assets (just ask @Brian Burke)
  • I assume you'll hold these properties into infinity. You should probably rebalance your portfolio over time, selling some to buy others, etc. Most of the time, that should end up with you owning better, more profitable property but I couldn't account for it in an easy spreadsheet.

What other issues do you see with the spreadsheet or my logic? I'm all for a healthy debate and/or you telling me I fouled up on the calculations.

Check out the file located at https://www.biggerpockets.com/files/1049/download. You can use LibreOffice or OpenOffice to open it. I couldn't save as Excel because some of the calculations are from Excel 2007 or later and LibreOffice won't save beyond Excel 2003. Look at the "Details" tab for all of the nitty-gritty math and stuff.

Thanks for the mention Ronald,

It always a pleasure seeing my name next to Ben's.

I sill have a lot of Weetbix to eat before I get to his level tho :)

Have a great day and much success in 2016.

@Ronald Perich  

This is a great discussion - thanks for bringing it to my attention!

First - a nice trick for Excel is to save the files as an .xls instead of .xlsx. The .xls is compatible backwards all the way to 2003 and is an industry standard. It's the format that I usually upload my files to the fileplace in and they seem to work fine. I couldn't open your spreadsheet to comment on it - but I love going through these types of things, so please email me an Excel file if you get a chance!

Second - without looking at the spreadsheet, I assume that one of the base assumptions of the model is that the 401(k) will be invested in commonly available stock funds. Compared to leveraged real estate, this will of course be likely to underperform, especially if you can bring economies to the investment like managing the property yourself, etc.

With regards to overall return, I believe that the 401(k) can no longer be looked at in isolation within a few unattractive (by our standards) publicly available funds. I believe that most Americans that will consider real estate investing are likely to be employed in the short-medium term, and might realistically make the transition away from W2 income to a real estate business/investment income over a period of 5-10 years.

This creates a scenario where the old 401(k) invest-in-high-load-mutual-funds thing no longer applies. Instead, many of these entrepreneurs will have the ability to roll over their 401(k) funds into a solo(k) or self-directed IRAs. The details on the particulars of that process are something I need to look into further, but I believe that there are many custodians and administrators that can make this happen for an insignificant cost, compared to the upside down the line.

With one of those accounts, you can then invest in real estate (or virtually any other type of investment) just as you would with your after-tax non-retirement dollars, but with deferred gains as in the 401(k).

This leads me to this conclusion:

Given the before mentioned benefits of self-directed retirement investment accounts, it seems like a savvy investor could have his cake and eat it too - he might be able to take a great employer match in the early working years, hustle to build a real estate portfolio outside of the 401(k) on the side, and when he makes the transition out of his job, switch the funds over to a self-directed fund and begin investing in real estate through that.

For the past year, I've become extremely interested in these self-directed accounts. I see a several trillion dollar retirement investing industry that provides (in my opinion) lousy service for it's clientele through high fee mutual funds that underperform the market. I believe that we'll see a shift away from that over the next decade or so, on the order of hundreds of billions of dollars. 

That said, the average investor will have to wisen up for that to happen....

My fundamental approach to investing is to control the largest amount of value possible, as soon as possible. I believe that controlling $100,000 in a 401(k) is better than controlling $70,000 outside it, even if after taxes and penalties, the 401(k) value would provide less spendable dollars today. I believe that even though I can't withdraw the money for personal use today, the benefits of controlling the investment account will be extremely favorable to me and that opportunities to exploit that control to my advantage will present themselves, as in the case of the solo(k).

@Scott Trench ,

Admittedly, this is a one-trick-pony analysis. It does not account for multiple earnings strategies and multiple investment strategies that are available in real estate investing. The whole purpose of my post was to wake people up to the falsehoods still being thrown around that you should save your money in a 401(k) before you should start investing in real estate. And the reason everyone uses? Because you get the match from your employer. Sorry, but the match does nothing for you!

A 401(k) is a retirement engine... and it will underperform REI investing in the long run!

But you brought up an interesting point. What if the person leaves their job after ten years and rolls the 401(k) money into a self-directed account that now invests in REI? They'd be able to buy five SFH at that point. Assuming they do nothing with that account except continue to roll-over all earnings back into property acquisition, that account would generate $37K in monthly income after 20 years. So they would do better under that scenario.

The key to all of this is don't trust your gut. Just because you get a match does not mean you will do better in the long-run.

The other key that Scott helped point out is don't be a one-trick pony. Leverage all of the tools available to you to maximize your returns. Lastly, I'll point out that I don't necessarily recommend you only invest in rental properties. Diversification is a risk-reducer and their are multitudes of options for generating earnings in real estate and through the stock markets.

My last thought. I am becoming more and more aware of how poorly a 401(k) performs for the average individual. It's a trap to keep you tied to selling your time for money. If you like what you do, as I do, fantastic! Keep riding that train! But don't think that you're going to do better in a 401(k) when it comes to retirement planning. It's not going to happen.

@Ronald Perich Did you think that you would look so smart just two days after this post? Did you notice the market just tanked today on the China stuff? 

More to your point - which I think is less "don't invest in 401(k)" and more "don't invest in 401(k) when that means that you set aside a bunch of money each paycheck just because your company and *big brand mutual fund company" tell you it's the smart thing to do.

If you don't understand what you are doing, it seems like you will lose no matter which way you spin it ;). 

On the flip side - I'd love to hear your thoughts on this comment I made:

My fundamental approach to investing is to control the largest amount of value possible, as soon as possible. I believe that controlling $100,000 in a 401(k) is better than controlling $70,000 outside it, even if after taxes and penalties, the 401(k) value would provide less spendable dollars today. I believe that even though I can't withdraw the money for personal use today, the benefits of controlling the investment account will be extremely favorable to me and that opportunities to exploit that control to my advantage will present themselves, as in the case of the solo(k).

What are your thoughts on the logic of that line of thinking? I know that this is not an approach that everyone agrees with.

@Scott Trench , I wish I had that type of insight! If I did, I would have purchased a bunch of short sales on the 31st!

To your point, I would much rather have someone with $100,000 in the 401(k) if they were not able to be an active real estate investor. 

But for me, I would much rather have the $70K on the outside or even in a self-directed account (where you could continue tax-deferred gains). 

But that's only because I like to use leverage. That $70K could let me borrow up to $210K more so I can control $280K worth of real estate. Let's say that buys me a fourplex making $500/month in cash flow (not unreasonable I think). And let's say the RE market appreciates only 2.5% per year.

At the end of ten years, I would have made $60,000 in cash. My property has appreciated and is now worth $358,423 (a gain of $78,423). Add in the mortgage paydown over those ten years (on a 20 year note at 5%) of $79,335. Add that together and you made $217,758 over the ten year period. The property has equity of $227,758. That's a 12.522% rate of return but I have also taken $60,000 of cash flow during that ten years. 

If instead of taking the cash I had put it against the mortgage, I would have $305,399 in equity - a 15.872% rate of return (a gain of $235,399).

Even at a 12% annual return, the $100K investment is worth $310,584 - a gain of $210,584... but you weren't able to use 1 penny of that money during that ten year period.

So you invested more money to gain less. And I didn't include depreciation in my calculations, either.

If I didn't use leverage, I'd probably be stuck buying a SFH. Let's say I can cashflow at $500 a month. Cash Flow = $60,000 (same amount) but my property is only worth $89,606, a small gain of $19,606. In total, I've only made $79,606 on the property in ten years. Nice, but nothing to write home about.

So I like the outside investment over the 401(k). Now if it's $100K in a self-directed account that invests in leveraged real estate? Well, you know that's better than the $70K outside.

Obviously all of us are in real estate so we want to believe real estate is a better investment. I feel there are more risks to real estate(landlording). Than simply investing in an index fund in your 401k. Both offer tax advantages. Both are usually good hedges against inflation. I think the biggest advantage to real estate(if it works out) is the leverage. You can't use margin in a 401k. , when you have the ability to put up 20 percent or 25 percent and borrow the rest, that can really amp of your returns. For example I have 8 rental properties now, that after all expenses(vacancy,maintenance,capex, etc.) nets me around 2200 dollars a month in cash flow. Given stable rents, and no huge disasters, that is money that should be there over the long term, each and every month(as an average). As far as downpayment and money put into the homes to get ready to rent, I have about 85k of my own money invested(but not really, as a lot of that was cash flow off the previous properties) I really probably only have 20-25k of my own money from working into getting the 8 properties. Now ask yourself, how much money would it take in a 401k, to net me 2200 a month?  When you are retired, and depending on the cash off your investments there is no way you can be 100 invested in stocks(or get anywhere near the 11 annualized return of the s and p stated above) a better number to work with is about 6 percent, over a portfolio of stocks/bonds/cash etc.  Using that number, I would need a 401k of about 440k, to equal the cash flow I am currently getting with my 8 rental properties. Which would take a lot of us, almost a lifetime to accumulate. However, I have accumulated the same amount of cash flow, in just over 2 years with rental properties.

That's the main advantage of real estate and why I am starting to prefer rentals, over 401k. However, I believe in diversification and still contribute a good chunk to my 401k, every year regardless.

This is a great conversation and something I frequently ponder. I will say, in the end for me, I also like the diversification. You can only put a max 17,5k into your 401 each year (at least for me at particular income level via regulations) and so I don't mind putting that 17 into the 401 and then focus other monies on real estate and other investment opportunities. I, too, don't like to have all my eggs in one basket.
I will say that this weekend I was looked at my past year 401k data and it stated I had a 1% return. However that was on the total money compared to last year. At first I thought that was terrible, but when I separated out how much of that came from "free money" by employee matching, that is a much higher return, in the mid 20%.
So I do think that if you have the means to put that 17 into 401 and it not affect what else you are doing, gets you free money via employee match and allows more diversification, I think it's a good thing.
Given medicine is my profession and not finances, this is all simply my humble opinion.

@Gabe G. and @Karl Maritato

Thanks for contributing your thoughts. If you take a look at the spreadsheet I developed, you'll see where a matched 401(k) won't perform as well as real estate in the long run. But in the short-term, the 401(k) is better.

I think that was @Scott Trench 's point - most people who take real estate seriously end up leaving their day job after 5-10 years. When they do they take their 401(k) money and roll into a self-directed account. I ran that scenario and found that you end up doing even better at retirement when this happens.

I'll agree with the notion that you "earn" money from the match. But that's only one time - when the match is made. It's not continuous. 

The whole point of this post was to help people think more critically about their investments. Employers love 401(k) matches because people think they are getting free money. Fund companies love the 401(k) because employees tend to set and forget while they make a small fee on every one of them. And for the vast majority of the public, a 401(k) is way better for them than real estate. Real estate is a profession, not a hobby, and most cannot or will not spend the energy needed to do it correctly. 

If you are serious about real estate as a wealth building tool, you have to ponder the highest and best use of your hard-earned money. And in the long-run, real estate will beat out the stock market, even when matched with the free money the employer contributes.

I think of it simply. I am 28 years old and put money into a 401k with match while working. I'd rather withdraw from my 401k and get taxed and use the money to buy property. I will make more money and cash flow in real estate than letting it sit and in my 401k.

Also, I did not forget the big "wipe the wealth" aka "great recession". No thanks!

Originally posted by @Scott Trench :

@Ronald Perich Did you think that you would look so smart just two days after this post? Did you notice the market just tanked today on the China stuff? 

More to your point - which I think is less "don't invest in 401(k)" and more "don't invest in 401(k) when that means that you set aside a bunch of money each paycheck just because your company and *big brand mutual fund company" tell you it's the smart thing to do.

Scott, I'm glad you clarified that point. I always think the "real estate vs 401k" discussion is a bit funny because that's not really what is being contrasted here.

Real estate is an asset. 

A 401k is an investment vehicle that can acquire assets. 

Take for example the 401ks that hold real estate as an asset and you'll see what I mean. I agree 100% with the points behind most of these "real estate vs stock market or other non-tangible paper asset that is only some derivative of something else with actual value" arguments. I'm just saying it's not the 401k that is the problem. It's the asset.

I try to point out that you can have that fantastic asset that is real estate AND get the tax advantages that made 401ks popular in the first place before 401k becomes too profane of a word. :-)

@Jacqueline Carrington , you won't necessarily need to withdraw your 401k money to buy real estate if that's something you want to do.

If your plan allows for it, you can take a loan against the employer 401k to use as a means of buying or putting money down on a property. Most plans allow for you to take a loan of up to 50% of the value or $50,000, whichever is less.

You have to pay it off in five years, but the interest rate is low and you gain some fast equity in the property as a result. It's important to understand your financial situation and the return on the investment because of the short amortization period.  I did this to help fund the acquisition of a nine-unit complex. 

If you leave the employer, those loans have to be paid back, so be ready to do that or it becomes a distribution and is taxed and penalized for those under 59.5 years of age. (Who came up with that weird age anyway? Kind of like the 27.5 years of depreciation for rentals. That's why the tax code is so big... they have to explain 1/2 years to everyone).

Also, when you leave your employer you can usually roll over the funds into a different type of retirement account like a self-directed IRA (the kind that lets you buy real estate) or a Solo 401K. You should check out the blogs written by @Dmitriy Fomichenko for info regarding individual 401Ks.

@Mark Nolan

Thanks for the link. The point of my posting this thread was to point out that quite a few people continue to look at employer-sponsored 401(k) plans as being a good investment choice for their retirement money. And almost all of them point to the employer match as being why it is such a good choice.

The math proves it... an employer-sponsored 401(k) plan, even with a huge match, doesn't come close to the returns that a solid real estate investment portfolio will produce over the long term. From what I can see, the tipping point is somewhere in the 12-15 year range.

Using a Solo-401(k) or a SDIRA would be a great way for someone to shelter their REI from taxes and save for retirement.

By the way, I am not suggesting a person yank their money out of the employer-401(k) as a distribution. A loan might be a good option, but go into it with eyes wide-open.

@Ronald Perich

I finally got around to trying out your updated/repaired version of the spreadsheet. I am using it to illustrate not so much the difference in 401Ks vs. REI, but instead the power of real estate investing in general. Your spreadsheet really shows the possibilities of REI--and how time and compounding can work their magic. It's made my day! It took me an hour or two recently do the same thing by hand/calculator but I hadn't accounted for any number of factors that are built into your tool. Thank you very much for taking the time to create the spreadsheet and being willing to share it on BP.

@Christopher Throop ,

Thanks for the nice compliment. Believe me, there is a lot more that's not accounted for in that spreadsheet. The biggest failure, in my opinion, is the paydown in equity. I don't really account for it until the asset is completely paid off (I think that's how I have it).

Or how about being able to re-leverage a property? I like the idea of keeping my properties leveraged smartly. If I have a property with 60% equity, I want to pull some of that out to help me make additional acquisitions. That scenario isn't covered in my spreadsheet.

Depreciation is covered, either.

Even with all of that, RE investing does a great job of helping people build wealth.

BUT I don't think the majority of people out there should stop their 401(k) contributions. They simply don't have the time or ability to start a business. Only 15% of 401(k) customers rebalanced in 2014. There is no way the other 85% is ready to start a business like real estate.

Originally posted by @Ronald Perich :

@Mark Nolan

Thanks for the link. The point of my posting this thread was to point out that quite a few people continue to look at employer-sponsored 401(k) plans as being a good investment choice for their retirement money. And almost all of them point to the employer match as being why it is such a good choice.

The math proves it... an employer-sponsored 401(k) plan, even with a huge match, doesn't come close to the returns that a solid real estate investment portfolio will produce over the long term. From what I can see, the tipping point is somewhere in the 12-15 year range.

Using a Solo-401(k) or a SDIRA would be a great way for someone to shelter their REI from taxes and save for retirement.

By the way, I am not suggesting a person yank their money out of the employer-401(k) as a distribution. A loan might be a good option, but go into it with eyes wide-open.

 Ok, seeing this false claim once was just another day on BP.

Seeing it twice in 1 post was just another every other day on BP.

But 3 times and I can't sit by any longer. I didn't even look at your spreadsheet, and I can already tell how ridiculous this is.

First of all, the entire premise of your argument is flawed. You take your performance for RE and put all kinds of criteria on it, but compare it to the average performance of the S&P 500. I have done an apples to apples comparison elsewhere, where raw averages show that investing in securities (even when not in a tax advantaged account) will perform better than the RE market as a whole. And if you take the BEST RE investor you know, I highly doubt they have a 57% annualized return over the last 3 years, like Glenview Offshore does. 

It's so frustrating when people understand 1 side of an equation enough to tailor it to their needs, and then just throw averages at the other side because they don't have any expertise. The ROTH portion of my old 401k posted a 34% gain last year, that doesn't mean that is the benchmark of 401k performance. 

This made me actually LOL

  • "All rental cash flow is plowed back into the business (just like reinvesting the dividends/gains received in the 401(k)) to make this an apples-to-apples comparison."

That's what constitutes an apples to apples comparison for you? A true apples to apples comparison would require some criteria on what you invested in. For example:

$50k per door in RE, so lets say you should be investing only in stocks with a P/E of 10 or lower, with generous EPS outlook. Cap rate should be 10% so lets say we should only look at investing in stocks with a 5% annualized dividend yield. 

This type of information would at least get your comparison to a somewhat similar place. Lets not forget that in most cases, you can stash tax free (ROTH) money in your 401k. When was the last time you could park money in RE (other than your primary residence), have it appreciate, and then pay 0 tax when you need the money? How sure are you that your local property taxes will stay flat over the next 10 years? And how sure are you that the neighborhood you chose wont go to **** tomorrow and leave you with a D property that you owe way to much on? 

All this not mentioning that in the RE scenario, you're carrying approximately $37,500 in debt for every $100 you plan on collecting. So lets see if you buy 1 house a year for 10 years, at the 10 year mark you still won't have paid off the first house you bought. Leaving you somewhere in the neighborhood of $300,000 worth of debt with $1000.00 a month in cash flow? That's if rents in your area hold out or appreciate. 

Also when was the last time you were able to immediately sell your RE and use the money to take advantage of another investing opportunity. I hope you plan well, since you'll have pretty high opportunity cost (that's what they call it when your money is tied up and you can't invest in something more profitable than your current asset). Oh wait, that's right, in the RE investors mind, debt is your friend. You can just take another loan to offset your opportunity cost... 

And here's my favorite part, where I go off on an insane tangent, these RE investors, who own 10 houses, with mortgages they shouldn't have, will walk away from these houses when they stop being profitable. And when they start walking away, it will drive the RE market lower, which will cause more investors to walk away, which causes people who actually live in houses around yours a considerable deal of grief. And those loans, that these RE investors walk away from, they are probably packaged into a tranche in a CMO somewhere. And when those CMOs go bad no one wants to buy them, and then they become worthless, and then those same CMOs get eaten up by a large insurance company, who sold credit default swaps on those CMOs to banks that bought them. And when enough of those CMOs go bad, banks realize it takes them 30 days or longer to structure these CMOs, so all the mortgages they bought that are still on the books to be securitized are deemed worthless, and get sold off at pennies on the dollar, leaving the owner to deal with an unscrupulous lender who wants 100% payment for a debt that they own for 20% of face value. And because these big banks and mortgage companies were planning on people paying the debt they agreed to pay, they have tons of losses, which weighs on every facet of their business. And to make things better, these banks also have to deal with the widespread economic fallout of a tanking RE market, including people wanting their deposits back.

@Adam Hershman , when you take a look at the spreadsheet and read some of my assumptions, I'll take the time to reply. I hardly used low numbers for the S&P 500 and I had to include reinvestment of the cash flow because that's what a 401k does. If invested in a SDIRA, you'd like do that anyway. So do my the favor and review the sheet spending as much time understanding the data I used before you completely trash me.

And if you earned 34% on your stock investments last year, consider yourself way lucky. Not one of my investment choices I had available made anything over 10%.

I enjoy these discussions.  Thanks for opening the door to an exchange of ideas. 

Anyone saving only $200 a month for retirement is on the path to outlive their assets. This is  a horrible reality, unfortunately.  Many don't save enough and will become a burden to their children.  People should save 20% of their income for 40 years to retire at 70% of their current income at retirement.   At this point, the savings will provide enough cash flow - like an annuity.

The investments should be in low cost broadly diversified index funds with minimal expense ratios.  Sure, the returns are in the teens or lower. However, they will own each and every penny.  If the investment is through a brokerage account, that is a liquid asset. 

REI is an interesting vehicle to diversify, but I don't think it should be the only one. It carries a lot of risk. It's expected that with higher risks, one should get higher returns. However, I see a lot of financial disasters waiting to happen when the REI fails like a domino. This requires education not only on the purchasing side, but also through leverage management

Many ignore the risks. Who will run your business if something happens down the road? Do you have enough cash to survive 6 months without any rent? What if you become disabled?  1 in 4 of today's 20 year-olds will become disabled before they retire.

Finally, 401(k)s vicious traps. They are loaded with fees that destroy the returns. The SEC is a servant of Wall Street and they are dragging their feet to address this. People should aim for index funds in their 401(k)s and keep expenses low. If the fees are unavoidable, people should contribute to the company match, and then go to Vanguard and open a roth or regular IRA.

Run the calcs with the maximum contribution.  Once again, $200 per month is not a reliable base.  Imagine, how long will it take you to buy houses if you only saved that much, anyway.

401(k), 403(b), and most 457 plans

>49 years old $18,000

>49 years old additional $6,000

Roth and Traditional IRA contribution limits

$5,500 ($6,500 if you’re age 50 or older)

https://401k.fidelity.com/public/content/401k/home/vpcontributionlimits

Originally posted by @Frank Sanchez :

I enjoy these discussions.  Thanks for opening the door to an exchange of ideas. 

Anyone saving only $200 a month for retirement is on the path to outlive their assets. This is  a horrible reality, unfortunately.  Many don't save enough and will become a burden to their children.  People should save 20% of their income for 40 years to retire at 70% of their current income at retirement.   At this point, the savings will provide enough cash flow - like an annuity.

Some nice points in your response.

I used the $200/mo savings as an example precisely because that's today's reality. Most people do not save enough. But my example spreadsheet doesn't care if you save $200/mo or $2000/mo for retirement. You can extend it out however you like.

The investments should be in low cost broadly diversified index funds with minimal expense ratios.  Sure, the returns are in the teens or lower. However, they will own each and every penny.  If the investment is through a brokerage account, that is a liquid asset. 

Completely agree that index funds are the best alternative for most investors, especially in a 401(k) fund. The CAGR for the S&P 500 through the last 30 years is now at 10.09% when you include dividend reinvestments. Someone challenged the spreadsheet because it will reinvest all cash flow back into the business. It has to in order to do a comparison with the 401(k) returns. I did not factor in 401(k) expense ratios since they vary wildly between plans.

Agree that the investor in index funds "owns each and every penny" of the fund, but they don't control it. Did you have any control over the China influence on our markets last month (S&P down 5% YTD)? Did you have any control over the influence Sept 11th had on the world economy (S&P down 16.9%)? 

REI is an interesting vehicle to diversify, but I don't think it should be the only one.

Agree 100%. That's why I stated most people should not use REI as a vehicle for their retirement. Fact is, most people have no clue or don't care about their retirement plans. Or simply don't want to invest the time. The vast majority of people never re-allocate their 401(k). They never change their investment choices. They rarely look at their statements.

The whole point of my spreadsheet was to remind those who are investing in real estate that they could do much better with their money if they are running a solid real estate plan. The biggest problem I have with the 401(k) fallacy is that the company match is such a great deal. A well-managed real estate portfolio will outperform a company-matched 401(k) in the long run. Short-term... not so much. Over the long haul, absolutely.

Many ignore the risks. Who will run your business if something happens down the road? Do you have enough cash to survive 6 months without any rent? What if you become disabled?  1 in 4 of today's 20 year-olds will become disabled before they retire.

I expect an intelligent REI has factored in a realistic vacancy rate when they bought the place. I expect an intelligent REI has factored maintenance, Cap-EX, and property management into their purchase.

Finally, 401(k)s vicious traps.  

Completely agree for those who have chosen the market as their investment vehicle of choice. 

Disagree if people are actively involved in building a real estate investment portfolio as their retirement vehicle and they still have more than 15 years to retirement (again starting at $200/mo). Less than 15 years? Get the match and use the rest to buy. 

Run the calcs with the maximum contribution.  Once again, $200 per month is not a reliable base.  Imagine, how long will it take you to buy houses if you only saved that much, anyway.

You can't buy your first rental until the 67th month at $200/mo. 

I re-ran the calcs at $1500/mo. REI starts generating more cash around the 145th month than a matched 401(k). That assumes your employer is matching 75% of that $1500. Highly unlikely.

Let's assume that's a 20% savings rate and your employer only matches 75% of your first 8%. In that scenario, real estate starts generating more cash flow at the 85th month than the 401(k) throws off in earnings.

Again, I don't think real estate investing is a good retirement vehicle for most people. But I disagree with the notion that a smart REI investor will do better for retirement by putting their money into their 401(k) before they invest in real estate.

@Scott Trench made a really good point when he reminded us that most people move around from job to job. According to the Bureau of Labor Statistics, the average worker hops to a new job every 4.4 years. 

Let's assume you move jobs every 8 years. Get the company match! When you leave the job, roll into a self-directed IRA that allows for real estate investing. And then buy a nice fourplex within that IRA.

Work the numbers and the scenarios. Put some thought into this and don't let the fallacies being spread by Wall St and the "gobbler"ment fool you!

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