What is my best long term option?

5 Replies

To start off I just turned 26 years old and make just over 50k annually. I have approximately 3k in my 401k and am considering cashing it out to invest with additional funds in all cash purchases of sfh/duplexes. My wife is an executive that makes 100k with a full dollar for dollar 8% match to her 401k contribution. We want to retire at 55 so I plan on purchasing the real estate with minimal risk (all cash) to create cash flow to supplement our early retirement using alternative investments. This is to get us to retirement age where we can live off our cash flow combined with her hopefully (ha ha) large 401k. So would you cash out the 401k or keep it going/just leave it be and stop contributing? Also all cash flow until age 55 would be put into buying additional properties

@Aaron Barrett What kind of price points are there per door in your local market? With solid financials like you and your wife have, in some markets you could both retire in five to ten years! I personally would not buy all cash as leverage is one of the best tools you have as a real estate investor. Have you considered just using conservative amounts of leverage? Maybe 25-35% down on each deal?

For me personally, investing in rentals with leverage has allowed me to go from a 4 unit in 2015 to 33 doors between my local Berwyn market and South Bend Indiana. Without leverage, the best I probably could have done would be to put that money in a certificate of deposit for 2% interest!

@Aaron Barrett - Why do you want to buy a property all cash? Leverage is one of the best parts of real estate. You can buy a property with 3.5%-20% down and then use your rental income to pay off your mortgage. If you continue to save, you should be able to buy a property each year and expedite your retirement to ~10 years rather than 30. 

Personally, I think a 401k is silly to contribute you to UNLESS you get a match. Take the free money with the match and invest the rest in index funds or a roboadvisor (I like Betterment) until you have enough for a downpayment on a property. 

With only $3k in your 401k, know that you will like have to give ~50% of that back after the penalty and taxes. I doubt that $1,500 will move the needle too much for you. If you really need it to get into a property, I would say take it out. In 40 years, when you have access to that 401k, if you're really missing $3k, I think you'll have much bigger problems. 

You need to get educated on investing before you consider moving forward. As others have hinted you need to learn the value of cash before you begin. Equity in a income property will kill your cash flow.

Buying with cash will result in you losing a great deal of potential income since it reduces cash flow from the property and in most cases turns real estate from a asset to a liability. It will generate the lowest possible returns.

Your cash would earn a greater return with less hassle invested in a REIT than in actual real estate.

@Aaron Barrett , as @Craig Curelop said, you are in the same position that @Austin Fruechting seemed to be in; now retired in 7 years.

Get inspired by his success in the BRRRR rental method:

https://www.biggerpockets.com/forums/48/topics/429980-officially-financially-free-at-32----exciting-day

He was recently featured in a podcast:

https://www.biggerpockets.com/renewsblog/biggerpockets-podcast-239-achieving-financial-freedom-age-32-austin-fruechting/

Thank you for all the replies. I completely understand the benefits of using leverage. The part I did not mention is we both work in healthcare and we are strongly considering buying a existing healthcare related business in the next few years to accelerate our real estate growth. My worst fear is overextending ourselves with the company and the real estate. Either way we plan on buying the business first. I also receive a 8% match except at .50 on the dollar. All things considered we might be in a better position to just invest in a reit as someone had suggested