Originally posted by @Mike H.:
I just don't see how the numbers investing in 401k can come close to investing in real estate. Now, that doesn't mean its for everybody. 401k is a true "set it and forget it" investment. If you don't want to work, then do 401k. But if you want to make more money and don't mind putting in the effort to do it, then don't put a penny in your 401k because it makes no sense at all
Lets take a 20 year timeframe to see how the investment would look:
Put in 10k a year into a 401k for 5 years in a row so you have 50k in your 401k.
If you could get 7% returns on that 50k for 20 years, you'd end up with 193.
At 8%, you would end up with 233k.
Now, lets say you take that same 50k and don't put it into 401k. You would have to pay taxes on it (25% goes away) which leaves you with 37,500 and you use it to buy an investment property.
Lets say you get a 130k house for a purchase of 80k with a rehab of 17k (75% LTV).
You then put down 25% (20k) and pay the 17k out of pocket - your same 37k investment that you had put in your 401k. What does that look like then?
Well, you're probably making about 300 to 350 dollars a month in net income off the rent - to start - or 4k or so a year. Over time, that net income should go up as your rents go up. So over the next 20 years, you should pocket about 100k in net income - most of which would be tax free.
In 20 years, the house will be paid down to about 27k remaining on that original loan. And the house, over the same period, should have doubled in those 20 years to be worth roughly 260k - giving you an equity position of roughly 230k there as well.
So your 401k at 8% interest gets you 233k over 20 years. A rental property gets 230k in equity in the house PLUS has earned you about 100k in rental income (tax free).
Now, here's where it really gets interesting. If you cash out your money of your 401k, you have to pay taxes as earned income. But if you sell the house, you only have to pay taxes as a capital gain. 10% savings maybe? or 23k?
But even better still is that once that house is paid off, your rental income may be 1,500 to 2k a month off that house in 25 years or so. What kind of income will that 233k be able to produce once you start taking chunks out of it? And how long will it last?
That house will continue producing more and more income as rents go up.....
To me, its a very simple analogy. The Golden Goose. Rental properties are like the Golden Goose. With rental properties, you never have to kill the Golden Goose and it'll keep laying those eggs. With 401k, once you retire, you have to start tearing away at the golden goose and hope you die before you run out of money. You'll never run out of rental income with investment properties......
I guess this works if you also think the world is flat. Just because a gross oversimplification of something may suit your theory, doesn't make it correct, it just means your bending facts to suit your outcome, not the other way around.
First you make no mention of costs associated with the RE investment. Where is it? Do you need flood insurance, is there a well, sewer, septic, what are the taxes like, and on and on and on and on and on. This only works for you in your specific market, with the specific conditions that make it a good deal. Also assuming you used the 50% rule, the mtg on $75k @ national average rate for 20 years is around $456, so unless your charging around $1800 rent on this house I don't know how you're getting 300-350 net cash flow. Perhaps you're an expert at determining how to turn $17,500 into $50,000 of value, but I assure you that not everyone else is.
Secondly your method also uses debt, which you never encounter in a 401k. You can lose the entire amount in your 401k, but you can't lose more. With debt financing, it's no longer a question of worst case 0, its now a question of you could be forced into net outflows. Again net outflows would never happen in a 401k. If you think I'm wrong ask some heavily leveraged REI if they net 0 in 2009.
Third, "Over time, that net income should go up as your rents go up" sure, but assuming you have a money manager with the same expertise as your proposing everyone have about RE, then your portfolio should grow as well. Another key difference people tend to forget, RE isn't the only investment with income. I can think of 2 stock off the top of my head who have 5%+dividend yield over 25 years of dividend growth (ATT, HCP). Additionally you can rapidly redeploy your capital to provide different returns, say instead of income you think there will be a bull market so you move to capital appreciation securities to take advantage. That takes 3 days in a 401k, how long would it take you to liquidate your portfolio of investments?
I certainly don't advocate for all traditional stocks, or all RE. I advocate a well balanced portfolio of both diverse traditional investments, as well as strategic alternative asset diversification.
My...well...7 cents I guess
Adam
