All Forum Posts by: Ronald Perich

@Arthur Banks

I also use rentapplication.net. I like their site because I can take customize the application to include any questions I want to include. That was the biggest drawback I saw with all of the other sites. They only had the questions they wanted to have. I couldn't ask about pets, smoking, how long they planned on staying, etc.

The other nice feature is the applicant can upload supporting documents like a driver's license and pay stubs. So I have everything in one place and it's all done at one time. 

And while I think the $39.95 fee is high for the applicant, I do think it's a deterrent to those who wouldn't qualify. I make it clear that they are paying the company, not me, and I receive nothing from the application process.

@Michelle Elsaid and @Chris Masons,

I invite you to look over to the post I have at a recent post I made and contribute your thoughts.

I like Michelle's point about a Roth IRA... I suggest a self-directed Roth that also allows you to invest in far more types of assets than just stocks and bonds?

@Gabe G. and @Karl Maritato

Thanks for contributing your thoughts. If you take a look at the spreadsheet I developed, you'll see where a matched 401(k) won't perform as well as real estate in the long run. But in the short-term, the 401(k) is better.

I think that was @Scott Trench's point - most people who take real estate seriously end up leaving their day job after 5-10 years. When they do they take their 401(k) money and roll into a self-directed account. I ran that scenario and found that you end up doing even better at retirement when this happens.

I'll agree with the notion that you "earn" money from the match. But that's only one time - when the match is made. It's not continuous. 

The whole point of this post was to help people think more critically about their investments. Employers love 401(k) matches because people think they are getting free money. Fund companies love the 401(k) because employees tend to set and forget while they make a small fee on every one of them. And for the vast majority of the public, a 401(k) is way better for them than real estate. Real estate is a profession, not a hobby, and most cannot or will not spend the energy needed to do it correctly. 

If you are serious about real estate as a wealth building tool, you have to ponder the highest and best use of your hard-earned money. And in the long-run, real estate will beat out the stock market, even when matched with the free money the employer contributes.

I didn't read the link, but Stephan really hasn't gained $1.1M until he sells. And if his rents haven't doubled, then he is perhaps allowing that capital "bank" to be underutilized since it's just sitting in the property. Let's turn this example around (not for you, Bob, but for others struggling with this concept like I did)...

Jack and Jill both start with an investment account containing $900K. After five years...

Jack's account still has $900,000 in it. He makes $90,000 a year off the investment in the form of dividend payments (it's an example).

Jill's account is valued at $2.1M. She makes $90,000 a year off the investment from dividends.

If Jack and Jill were both looking to maximize their income, then Jill is not utilizing her money as well as Jack. She should look to sell her current portfolio and buy a different one that can earn her a higher dividends.

If Jill's account after five years is only worth $450K and she's still earning $90K/yr, she has to ask herself how long can that return be sustained? Can the underlying companies in her portfolio sustain those large dividend payments when the value of their company has dropped so much? Or are those companies in an investment cycle where they are simply undervalued?

In my Jack and Jill example, Jack would be synonymous to a real estate investor in the steady markets like Ohio, Indianapolis, etc. while Jill might be in California, New York, or some other cyclical market. 

So Cap Rate is just one tool in your belt that you can use to while reviewing your portfolio to see if you should take some of the gains or not. It can also help you understand if you have some bad eggs. Finally, it can give you a general idea of the day-one returns you would expect but doesn't do much for predicting the future.

@Scott Trench, I wish I had that type of insight! If I did, I would have purchased a bunch of short sales on the 31st!

To your point, I would much rather have someone with $100,000 in the 401(k) if they were not able to be an active real estate investor. 

But for me, I would much rather have the $70K on the outside or even in a self-directed account (where you could continue tax-deferred gains). 

But that's only because I like to use leverage. That $70K could let me borrow up to $210K more so I can control $280K worth of real estate. Let's say that buys me a fourplex making $500/month in cash flow (not unreasonable I think). And let's say the RE market appreciates only 2.5% per year.

At the end of ten years, I would have made $60,000 in cash. My property has appreciated and is now worth $358,423 (a gain of $78,423). Add in the mortgage paydown over those ten years (on a 20 year note at 5%) of $79,335. Add that together and you made $217,758 over the ten year period. The property has equity of $227,758. That's a 12.522% rate of return but I have also taken $60,000 of cash flow during that ten years. 

If instead of taking the cash I had put it against the mortgage, I would have $305,399 in equity - a 15.872% rate of return (a gain of $235,399).

Even at a 12% annual return, the $100K investment is worth $310,584 - a gain of $210,584... but you weren't able to use 1 penny of that money during that ten year period.

So you invested more money to gain less. And I didn't include depreciation in my calculations, either.

If I didn't use leverage, I'd probably be stuck buying a SFH. Let's say I can cashflow at $500 a month. Cash Flow = $60,000 (same amount) but my property is only worth $89,606, a small gain of $19,606. In total, I've only made $79,606 on the property in ten years. Nice, but nothing to write home about.

So I like the outside investment over the 401(k). Now if it's $100K in a self-directed account that invests in leveraged real estate? Well, you know that's better than the $70K outside.

@Curtis Fergus, don't be nervous about expressing an opinion... because it's your opinion and everyone has the ability to offer it up here at BP. 

@Kelly Stevens, expected expenses are what would concern me at $175/unit/month. Did you factor in Cap EX or Repairs? At that age, even if they are spruced up, you'll want $75-125/month a unit in a separate repair budget. Add $70/month a unit for property management. Not sure about taxes/mo. 

My numbers may be off on this because I don't have the details. Just take a closer look at your expected expenses so you go in eye-wide-open. My best of luck to you!

http://www.bloomberg.com/news/articles/2015-12-31/...

An article that reminds folks stocks don't always go up. It's been twice in the last five years that the market has not risen. Nice gains in se of the other years, though.

@Scott Trench,

Admittedly, this is a one-trick-pony analysis. It does not account for multiple earnings strategies and multiple investment strategies that are available in real estate investing. The whole purpose of my post was to wake people up to the falsehoods still being thrown around that you should save your money in a 401(k) before you should start investing in real estate. And the reason everyone uses? Because you get the match from your employer. Sorry, but the match does nothing for you!

A 401(k) is a retirement engine... and it will underperform REI investing in the long run!

But you brought up an interesting point. What if the person leaves their job after ten years and rolls the 401(k) money into a self-directed account that now invests in REI? They'd be able to buy five SFH at that point. Assuming they do nothing with that account except continue to roll-over all earnings back into property acquisition, that account would generate $37K in monthly income after 20 years. So they would do better under that scenario.

The key to all of this is don't trust your gut. Just because you get a match does not mean you will do better in the long-run.

The other key that Scott helped point out is don't be a one-trick pony. Leverage all of the tools available to you to maximize your returns. Lastly, I'll point out that I don't necessarily recommend you only invest in rental properties. Diversification is a risk-reducer and their are multitudes of options for generating earnings in real estate and through the stock markets.

My last thought. I am becoming more and more aware of how poorly a 401(k) performs for the average individual. It's a trap to keep you tied to selling your time for money. If you like what you do, as I do, fantastic! Keep riding that train! But don't think that you're going to do better in a 401(k) when it comes to retirement planning. It's not going to happen.

@Scott Trench, I think I have the file uploaded as an Excel. Check it out at https://www.biggerpockets.com/files/user/ron_perich and let me know if Excel works. I created it using LibreOffice, so I cannot be certain.

@Scott Trench, I will see if I can't figure a way to save the file as Excel. And when I get a chance, I'll respond with some thoughts to your post. Thanks for responding!