RE Investing vs a 401(k)

The most commonly accepted retirement plan in the United States today is the 401(k) plan. Did you know this plan wasn’t even intended to be used for retirement when it was founded in 1978? Once companies discovered how much cheaper it was to require employees to fund their own retirements, the 401(k) took off like wildfire.

Investing in stocks through a 401(k) is set up to pay everyone else involved before paying the employee contributing to the plan. Fund managers get paid through fees, the government gets paid from taxes and Wall Street gets perpetually richer through your regular contributions. We are told to keep investing for the long term no matter if the market goes up, down or sideways. Why are we taking all the risk by putting our money for years into these 401(k) plans when the financial advisors, companies, Uncle Sam and wall street get paid no matter how well the market is doing? Most people don’t question this at all because they receive a small match on their 401(k) contributions through their employer, or they are told they are saving on taxes this year. The truth is, they don’t know any other way of doing things. That, and most people don’t want to think about money. They believe since the 401(k) is set up by their employer, or since their neighbor talks about their 401(k), that they must be doing the right thing. As the saying goes…you just don’t know, what you don’t know. So that is why it is so vitally important to educate yourself and take control of your financial future!

The truth is, the 401(k) plan hasn’t even been around 40 years yet! It is still an experimental idea on how to retire, and the only reason it’s been so commonly adopted is because companies started going bankrupt trying to pay employees for life through pensions. This is still going on today as so many major corporations have gotten rid of pensions even to include the United States Military starting in 2018. Of course it makes sense for them to require employees to fund their own retirement plans. Do you know how long real estate has been around? Well, since people have needed a place to live!

The main reason a 401(k) will never work for the vast majority of people is because it is essentially a savings plan. There is no way to “save” your way to retirement. Unless that sum of money stashed away in your 401(k) can be converted to consistent monthly cash flow, it is basically worthless. It is estimated that you will receive a measly 4% on your money to live on once you convert your growing 401(k) to fixed income type securities. Let’s say you are in the top 1% of all 401(k) investors, and you have accumulated $300,000. Good job! A 4% return will generate you $12,000/yr to live on! Let’s say you have a job paying you $80,000 annually. When you retire it would be nice to at least earn this much. After all, the goal is to maintain the same lifestyle you have now, and who knows, maybe even travel some more. To receive $80,000/yr at 4% you would need at least 2 million saved. Furthermore, 4% doesn’t even beat inflation most years! This is just to put things in perspective. The good news is a substantial retirement can be achieved through real estate in a fraction of the time with exponentially higher results!

I challenge you with this question: What age do you WANT to retire at? How do you plan to achieve that? The government decided that 59 1/2 is when we should be done working. The sad truth is the majority of people will work much past this age as their retirement will not even partially support them. Should we really let someone else decide when it is time for us to retire? Furthermore, should it really be this complicated to access our “retirement” money that we have spent the majority of our working life saving for? Personally, I want to retire on my terms & timeline, and that requires taking control of my financial future!

Below are only a few of the ways real estate can exponentially catapult your wealth and help you achieve financial independence in only a few years, no matter what your age. The way to financial freedom is by establishing regular cash flow. In addition to monthly passive income through rent, here are some additional benefits you receive by choosing to invest in real estate. These are the reasons why real estate will continually beat the stock market, and how it can skyrocket your wealth. This is why real estate investing is the IDEAL investment!

I –Income received from rent each month. What is left over after expenses is called cash flow, and this is the key to financial independence.

D –Depreciation is a huge tax advantage of owning rental properties. Divide the home price by 27.5 yrs and that’s what you can deduct each yr.

E –Equity buildup. Your tenant pays down the loan you used to acquire the property increasing the amount of equity over time.

A –Appreciation. Regardless of short term market corrections, home values will increase over time (estimated at 4%/yr in stable markets).

L –Leverage is what really explodes your returns on investing. You get to put in only a small percentage of the capital to buy the home, but you receive 100% of the tax & income benefits! Let’s use an example of investing $20,000.

If you purchased stocks, you would only have $20,000 invested. If those stocks went up 5% that year, you would now have $21,000 and would have realized a true 5% return. Now, lets say you invest that same $20,000 into a rental property. You borrow $80,000 to purchase a $100,000 home. Let’s say that home went up 5% that year and is now worth $105,000. You have $25,000 in equity and realized an actual return of 25%! Say the home produces $200/month in cash flow ($2,400/yr). Just from the income you are receiving a 12% return ($2,400/yr rent income/$20,000 down payment). This still doesn’t include the returns you would receive from tax benefits through depreciation or equity buildup as the tenant pays the loan for you! Do you see how all these factors can be added to produce an enormous return! Even the income alone of 12% will easily beat stocks suggested 7% annual return over time. There is a reason why more millionaires have been made through real estate than any other investment. It’s the math, not magic!

This is a real world example, and we actually have many properties that consistently beat these conservative numbers above. Please reach out with any questions or to learn more about how real estate can provide consistent income for both the short and long term!

What’s your financial freedom number? How much money do you need to retire

We have our clients work backwards to achieve their financial goals. Use this example of someone that decides they wants to achieve a passive income of $75,000 annually to replace their current job. Breaking that down further, it comes to $6,250/month. Using an average rental that cash flows $450/month, they would have to buy 14 properties to reach this goal. If they bought 2 properties per year, they could achieve financial independence within 7 years! Don’t forget, when these properties are paid off, the annual income would more than double to easily achieve a passive income of over $150,000/yr. This beats investing in stocks any day of the week!

One last item to address for all the naysayers. “What happens if the real estate market crashes like in 2008?” Fantastic! Buy more at a discount. Less people will be able to buy homes which drives up rental demand and rental prices! My rentals will have less vacancy and more income!