Real Estate or Roth IRA?
Oklahoma City, OK · Member since 2016 · 62 posts · 37 votes
Hello, I am 22 years old and started investing into a Roth IRA last year. Since then, I found bigger pockets and what real estate has to offer.
How have you decided to balance your type of investments? Theoretically, if I invest $400/m till I'm 60 I'll have $1mil - $1.6mil. But putting $400 a month into my Roth limits how much I can save for real estate, especially with my limited income right now. Did you go all in one route or stick to a even approach?
@Braden Downs You've gotten great perspectives on this forum addressing these apparently conflicting approaches, Roth IRA vs. Real Estate.
The truth is that at this stage of the game - early in wealth building and just getting started in real estate - a real estate focused Roth IRA may be the best strategy. Allow me to explain...
Putting it all together, a Self-Directed Roth IRA for tax lien, private lending, notes, etc. may be ideal, giving you all the tax benefits of a Roth IRA and enabling you to get hands-on real estate experience.
Nice work on savings and thinking towards the future.
You have run the numbers on your IRA. I'd recommend running the numbers on real estate and comparing the returns to your IRA (or any other asset class). You will also want to factor in predictability, volatility, control and the amount of work involved.
I started with retirement contributions and then borrowed from my 401k when I found real estate, flipped some to build up capital, transitioned to more buy and hold, continued to contribute to the retirement account along the way and then increased contributions as I aged and built up income from real estate and W-2 job.
The answer to your question will be more about your interests, abilities and goals as there is no single right path. Since you can't do both, my recommendation would be to try real estate (and then go back to the Roth if you don't like it). You will have clarity then.
IMO, $1 - $1.6 million is not a lot of retirement money, especially 40 years from now.
Keep asking and learning and you will be successful regardless of what you do. Nice work.
One option is to invest your Roth IRA in real estate and all the income flows back to the Roth IRA and it grows tax free.
@Mike Dymski I appreciate the advice and ran the numbers on ten rentals acquired by the time I'm 30, all on 30yr mortgage. It hits in the range of $1 - $1.6 mil, depending on how you structure it all. I like that you continued to build up your retirement with your W-2 and real estate investments.
I have a pension that I have to put money into and it pays out 65% of your last two years, after 25 years put in. But I am not putting all my marbles in that basket.
Best case scenario, I get my 65% pay out + rental property income + Roth IRA = a healthy retirement
You can do both with a self managed Roth IRA. Invest in Real Estate and watch it grow tax free!
Does your company offer a 401(k) match or just the pension? Not much experience with pension and don't plan on researching much because I know they are becoming obsolete, however 25 years in 1 company does not sound like a good ROI since you are so young.
No 401k, only pension, I work at a government agency.
I disagree with you about it being a bad investment. I get more than matching contributions on my pension, great benefits, guaranteed raises, and a job I love. Plus I can retire at 47.
No 401k, only pension, I work at a government agency.
I disagree with you about it being a bad investment. I get more than matching contributions on my pension, great benefits, guaranteed raises, and a job I love. Plus I can retire at 47.
Definitely a government job, but in the private sector having a pension is not ideal especially if it could be cut.
No 401k, only pension, I work at a government agency.
I disagree with you about it being a bad investment. I get more than matching contributions on my pension, great benefits, guaranteed raises, and a job I love. Plus I can retire at 47.
Just be careful with the pension
https://www.washingtonpost.com/news/get-there/wp/2017/02/02/pension-plans-in-peril/?utm_term=.c5ad6d451974
I'm 22, so allow me to share my thoughts:
I trust the my management of my rental property far more than I trust security markets which are influenced by SOO many factors.
I used compounding interest to structure my investment in multi-family homes - I invest in real estate rather than dealing with my IRA. This is my personal preference.
If you're this interested in making money, debating investing via ROTH or REI,... and expect to remain diligent in your savings, I judge it very likely that you will soon have an income high enough to phase out or eliminate your ability to contribute to a ROTH. My advice would be to contribute while you can, just do not make that your only savings bucket as it's locked up until age 59.5.
@Braden Downs, look into a self-directed IRA like @Turner Monroe mentioned. You change the game with that. You are still contributing to your IRA but you can choose to invest the funds from that IRA in anything you want... even real estate!! Look into it man!! Kudos on starting so early with your financial planning. Wish I had!!
@Braden Downs - Given the contribution restrictions on the Roth IRA, I am going to assume you don't have more than $10k in there. Since it is a Roth IRA (as opposed to a traditional IRA), you are able to use that Roth IRA towards a down payment on your first property without a tax penalty.
My suggestion would be to use you Roth IRA in this way to jump start your real estate investing. As I'm sure you know, your net worth will grow exponentially with real estate and getting started is the hardest part. Once you've gotten past this first one and accumulated some property, that $10k (or whatever it is) in your Roth IRA will be mice nuts.
I'm pretty young as well (24 years old). I'm not sure what your goals are, but if you want to be amongst the wealthy, you'll have to take risks and learn from your mistakes. The younger you start doing this, the better. What do you have to lose right now? Likely a lot less than what you will have 5-10 years from now.
Hope this helps!
Craig
@Braden Downs You've gotten great perspectives on this forum addressing these apparently conflicting approaches, Roth IRA vs. Real Estate.
The truth is that at this stage of the game - early in wealth building and just getting started in real estate - a real estate focused Roth IRA may be the best strategy. Allow me to explain...
Putting it all together, a Self-Directed Roth IRA for tax lien, private lending, notes, etc. may be ideal, giving you all the tax benefits of a Roth IRA and enabling you to get hands-on real estate experience.
I know this is not exactly what you asked, I would try to house hack as your first investment. Correctly done, that will help you reduce the living costs. You can then hopefully contribute to both.
From a bigger perspective, most folks on BP would probably say do real-estate or do self-directed IRA. I personally disagree with that and would diversify. It's a complicated topic but I do think there is some value to diversifying. That's especially true if you take the Jack Bogle approach to investing in the IRA.
Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.
@Chris K. We've interacted on the forum in the past and I've always appreciated your excellent posts. In this case, I also appreciate your excellent post - but must respectfully (and emphatically) point out a few things:
Diversification:In the scenario we're addressing, putting money in the stock market will be at the expense of getting into direct real estate investing. Neither approach is right or wrong - it's a matter of investor personal choice based on their unique preferences, risk profile, expectations - and understanding of opportunity costs.
I'm not sure where we are disagreeing. I guess a few points:
Like everything, it comes to the precise situation and life goals. That's why I just typically say there is "some value to diversifying." I would never say everyone should diversify for sake of diversification. For example, I don't get cryptocurrency and I'm not putting a dime in it. I also never put a single dime in the commodities market.
But if you "emphatically" disagree with diversification, are you saying that folks on BP should put all their money in real estate?
Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.
Keep the great posts coming!
We're not disagreeing - my post says "respectfully (and emphatically) point out a few things:" The words were carefully selected to emphasize that they they are "points" worth mentioning considering the specific scenario being addressed in this discussion.
Diversification is most applicable when one already holds one type of asset and is debating where to deploy additional capital. For those with assets in the stock market, diversification may dictate investment properties - and vice-versa. For someone considering where to deploy their initial investment capital and purchase their first asset - as in this forum's scenario - the decisions tree is very different. Choosing index fund diversification may be at the expense of entering direct real estate investment.
Of course, for those that have already attained a measure of wealth, protecting assets through diversification becomes more important than generating additional wealth, which is an expression of the fact that most humans are risk-averse, the pain of loss outweighs the pleasure of gain.
I certainly don't advocate that folks should put all their money into real estate. But, I certainly advocate that they have the choice to do so - and encourage them to make informed decisions.
Overall, we're in agreement. I just felt that your post did not provide adequate context for the concepts presented.
I agree that diversification is the key.