Real Estate or Roth IRA?

20 Replies

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?

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.

@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

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.

@Garrett Pyros

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. 

Originally posted by @Braden Downs :

@Garrett Pyros

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.

Originally posted by @Braden Downs :

@Garrett Pyros

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

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.

@Braden Downs

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!


@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...

  • Purchasing properties likely takes more funds than you'll have accumulated so early in the game
  • Effective real estate investing requires learning through observing and personal experience
  • There are real estate market investments that require less initial capital and reserves: e.g., tax liens, tax deeds, notes, private lending, etc.
  • Tax liens, tax deeds, notes, private lending, etc. provide a very effective way to learn about real estate investing
  • Unlike buy-and-hold real estate, those other real estate investments (tax liens, tax deeds, notes, private lending, etc.) DO NOT have any built in tax-shield (no depreciation, no mortgage interest deduction, no property tax deduction, etc.) and therefore benefit most from being invested in through a Roth IRA.

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.

@Braden Downs

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:

  • There may or may not be value to diversifying. Warren Buffet famously presented one perspective when he said, “Diversification is a protection against ignorance. It makes very little sense for those who know what they’re doing.”
  • To the best of my knowledge, there's no Jack Bogle approach to investing, but I suppose you're referring to passive investing using low-cost index funds. (Jack Bogle's Book: Common Sense on Mutual Funds is among the first books that I read on investing. It's a bit technical but provides invaluable perspective to investors. It's invaluable for both those committed to investing in publicly traded securities and those that want to contrast publicly traded securities with real estate investing.) It would also be helpful to consider Mr. Bogle's expectations for the stock market - they're in the most recent publication of the book.
  • The key "John Bogle Concept" to be aware of is: efficient market theory, which says that in the stock market there is little opportunity to do better than the market. Of course, some do better and some do worse - but that is either (a) a result of increased risk or (b) is completely random, as statistical theory dictates. The proof is in the pudding - almost no mutual funds or hedge funds consistently outperform the market. 
  • Assuming the stock market is efficient, stock investors are best off putting their money into index funds and just riding the market wave of crests - and troughs.
  • Index investing will likely have help people grow their funds over time. However, they should anticipate high volatility, with their asset values going up-and-down by 40% at times. They should not expect cash flow. They should not expect it to be life changing. They should not expect it to impact their lifestyle. They should not expect to derive (too much) current benefit from their stock portfolio. They can't in any way influence investment performance. They can't add value to their holdings through any effort of their own.
  • One can invest in real estate and achieve "diversification" through the public markets using multiple vehicles - most prominently through Real Estate Investment Trusts, or REITS. We do not need BP to get "exposure" to real estate through the stock market.
  • We DO need BP to to learn how to directly invest in real estate and leverage it's potential to be life changing - by exploiting inefficient real estate markets and taking advantage of value-add opportunities in real estate
  • Great real estate investment returns are not easy to obtain and are not guaranteed - but incredible opportunities do exist for those with some combination of commitment, drive, smarts, knowledge, network, education, and luck. BP is invaluable for tapping into resources that will make that journey smoother and shorter.

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. 

@Bernard Reisz

I'm not sure where we are disagreeing. I guess a few points:

  • Warren Buffett is great. But you must always be careful of survivorship bias --- it's arguably the most common bias that smart people fall into. It's incredibly common on BP. 
  • I also do have to point out that your Buffett quote is a bit misleading. Buffett's point was that if you want to beat the market --- or even blow up like he did --- you have to take tremendous risks. And often times, taking tremendous risks require you to have a razor focus. But for every Buffett, there are a countless number of people who fail.
  • It's also worth noting that Buffett and Bogle talks a lot and agree on most things. It's also worth noting that Buffett is definitely "diversified" when it comes to his net worth. Just maybe not in the "traditional" sense of how financial managers use the term.
  • Just out of curiosity, I just checked my passive investments (e.g. IRA, old 401K, etc.). The rate of return is around 24%. Is that sustainable in the long run? Of course not. But it's been about a year since I even logged in. Again, I'm not really expecting a 24% return for a long time. It could crash tomorrow. But it's also not bad for literally doing nothing.

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.

@Chris K.

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.  

  • Warren Buffet: With you all the way. Regardless, of how we perceive his success - from a statistical perspective and how much weight we give his words - he's certainly an astute and prominent (an understatement, if there ever was  one 😀) individual that's given to pithy remarks. As I wrote, "Warren Buffet famously presented one perspective" - not the only perspective.
  • Buffet and Bogle: Buffet is the strongest advocate for passive investing there is and has dictated that after he's gone that's how he'd like "his" assets managed. However, for those that want to alter the trajectory of their lives through real estate-based investments - the choice to do so is theirs. (A lot of financial big-names - Dave Ramsey, Suze Oreman, etc. - provide guidance to protect individuals from (a) less-than-qualified and less-than-scrupulous "advisors" and (b) from themselves and their own poor choices. To a certain extent, I think Buffet's advocacy fulls into the same category.) But each investor must choose their own approach and live with the favorable or unfavorable consequences. They should make those choices with their eyes wide open and with the best info available - hence, the value of BP.
  • Stock market returns: Well-said. Ironically, index-investing has gotten so popular that the pendulum has swung so far in the opposite direction. I just spent a long-time trying to explain to a new investor that the S&P 500 does not return 15% every year.

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. 

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