Out of College, Should I Invest in Real Estate or Retirement Accounts?


Recent college grad? Congratulations! Now comes the hard part: making a living.

Let’s say for the sake of argument you found an entry-level 9-5 job in a field that interests you. The pay isn’t great, but you’re gaining experience and building a resume.

Despite not bringing home boatloads of bacon, you know how important investing is, so you set aside 15-20% of your paycheck for investments. But where should you invest? They didn’t teach that in college.

What makes a better investment, retirement accounts or real estate?

Reasons to Invest in Retirement Accounts

Unless you die young in a tragic noodling accident, you’ll probably want to retire one day. Uncle Sam doesn’t want you living in an alley when you do, so the IRS offers some great incentives to encourage retirement savings.

In 2016, younger adults can invest up to $5,500 in their IRA or related funds like Roth IRAs (for deferred savings on taxes) and SEP-IRAs (for self-employed people). That income is tax-free, deducted from your taxable income (unless you choose the Roth option, in which case your later returns and withdrawals are tax-free instead).

But IRAs aren’t the only option available. You can also use a 401K or related funds, which have a higher contribution limit of $18,000. If you’re self-employed, it’s harder to set up your own 401K than it is a SEP-IRA, so 401Ks are usually a perk for full-time employees. There are Roth options available for 401Ks as well, if you want to pay taxes now and save on the returns later.


Related: How to Use Real Estate to Retire MUCH More Comfortably Than Your 401K Would Allow

If you’re really excited about retirement investing, you can invest in both a 401K and an IRA for a combined maximum of $23,500. Above a certain income level, that option phases out, so talk to your accountant if you’re that gung-ho.

Assuming you go the traditional route, rather than Roth, you’re effectively earning an instant return on all money you invest tax-free — saving the 20-40% you would have otherwise lost to taxes.

Best of all, many employers offer matching contributions. They’ll match whatever you contribute to your account up to a percentage of your income. Read: free money.

Reasons to Invest in Real Estate

There are entire books written on this subject. Volumes. Best-selling series, even.

But we’ll do a 30-second lightning-round review of the biggies:

  1. Passive income from rental properties. Money comes in every month, but you didn’t have to work (much) to earn it. It’s ongoing, residual income.
  2. Higher net worth. As you build equity in properties, both from appreciation and lower mortgage balances, your net worth bulges and expands. Equity gains are also largely passive, with little work required on your part.
  3. Opportunities for quick profits. I don’t need to elaborate — you’ve all seen Flip this House or some variation thereof. It’s possible (but far from guaranteed) to make a quick buck on property flips.
  4. Tax advantages. Thought tax advantages were only for retirement accounts? Think again. You can deduct every conceivable expense, plus a few paper expenses like depreciation. Travel, entertainment, and home office expenses? Also deductible.
  5. Leverage-ability. You can use other people’s money and other people’s time to build your own income and assets.

There are many other reasons to invest in real estate, like enforced savings, but to list them would risk this article metastasizing into a tome.


Setting Goals

“So you’re telling me they’re both good? What use is that advice when I’m trying to make a decision here?” Glad you asked.

Everyone has their own financial and life goals, and they’re all different. One person might be best off avoiding real estate altogether and maxing out their retirement accounts. Another might become the next celebrity real estate mogul, cigar and mustache included free of charge.

Before you do anything, think long and hard about your long-term financial goals. This inevitably means thinking about your career path as well: Do you intend to work your entire career in a relatively stable sector, like government or healthcare? Or will you ride the winds of fate to see where they blow?

People with long-term careers in stable industries with good benefits usually think more in terms of building a large nest egg. They may not feel compelled to branch into alternative income streams.

Others, like myself, crave financial independence: enough income from investments that you’re no longer dependent on a job to pay your bills.

Related: How to Go From Zero to $8k/Month in Retirement Income (With No Remaining Debt)

What are your goals? Do you want to go travel the world? Are you tolerant of the risks and labors of being a landlord? Are you interested in putting in the work to become an expert in a real estate niche? Or do you enjoy the stability of working in one career and gradually building a nest egg?

There are no wrong answers, only personal goals.

Doing It All

Who says you can’t have your cake and eat it too?

First of all, you can leverage your retirement accounts in your real estate investing. You can “borrow” money from your 401K, at far lower cost than traditional loans. Or you can invest in real estate as your investment of choice within the retirement account!

To do so, you need a self-directed IRA or 401K with a custodian that allows it. But instead of investing in a specific stock or mutual fund, you can invest in a property. The proceeds still need to be reinvested back in the retirement account, though.

Or go the more conventional route and just put money in both retirement accounts and real estate investments.

Most real estate investors start investing on the side while working a full-time “normal” job. You can learn the ropes of real estate investing during your off hours, and it’s not so hard to create more time for your investing work while working full-time. The more you learn, the lower the risks become in real estate investing.


So Wait, What Should I Do With My Money?

Unequivocally, you should always, always take advantage of employer matching contributions. If your employer will match your 401K contributions up to 5% of your income, invest at least 5% of your income into the 401K. To do otherwise is to turn down a free 5% bonus from your employer.

If you’re reading BiggerPockets, you probably aren’t content with gradually building a nest egg, working into your silver years then flipping the retirement switch.

So find a niche that meets your financial goals! For me, it’s long-term rental properties. I want regular, semi-passive income. Perhaps you like the fast-paced action of flipping. Or maybe you want a portfolio of vacation rentals around the world. Some people prefer the distance of note investments and hard money lending.

Begin by attending local real estate investing association meetings. Meet other investors. Find a mentor and senior partner. Do your first few deals under their guidance, and if you still like them, renegotiate an equal partnership. If not, branch off.

None of this is to say that you should ignore your retirement accounts. Take advantage of the tax benefits. Diversify your equity investments across sectors and regions. Capitalize on compound interest.

If you invested $100/month starting in your 20s and it earned 1%/month (12% per annum) for 40 years, you’d have $1.17 million. Your procrastinating friend who waited until she turned 50? If she invested $1,000/month at the same return, in 10 years, she’d only have $230,000. You’re investing a tenth what she is, but you started earlier, so you’re a millionaire. Compound interest is a beautiful thing.

Ultimately, put your money in what’s most exciting for you, without crossing into the territory of uncomfortable risk. No matter how you invest, find people skilled in that sector or niche, and badger them until they agree to teach you what they know. Learn from the best, and you’ll become the best.

Just starting out? Share your thoughts, and get some feedback from the wily veterans. Or maybe you’re older and wiser, and can regale us with tales of your misspent youth! No judgment from me, I did all kinds of stupid things in my 20s (not all financial, either).

Leave your comments below!

About Author

Brian Davis

Brian is a real estate investor and landlord with 15 rental properties, who writes fascinating articles for SparkRental.com. His rental management is almost completely automated by now, allowing him to travel the world frequently (if not always in style).


  1. Mike Flatow

    I spent 19 years as a Title Agent and during that time my feelings on this exact subject changed several times. I remember when the “Gang of Four” Hurricanes hit Florida in 2004ish, I was so thankful I didn’t own the properties I was doing Title for. Even if your property wasn’t hit hard it seemed everyone was nickel and dimed to death with damage. So I think it depends on your own individual nuisance threshold and experience. The fact that the article is targeted to very young people is interesting and I’m hoping to read comments from them. I mean even in Florida they wont necessarily view hurricanes the way investors did 10 years ago.

    • Brian Davis

      Real estate investments definitely have their own risks. Some of the “gurus” make it sound like real estate is risk-free, but if anything, the risks are magnified when you’re leveraging other people’s money to invest more than you have.

  2. Richard K.

    I enjoyed reading this post and have been wanting to learn more about borrowing against your 401K. I’m separating from the military in December of this year after six years. I neglected to start investing in a TSP (Thrift savings plan, government version of 401K) when I first came in, wasn’t making much. Was going to do it when I made E-5 and started collecting basic allowance for housing, 1900$ a month in San Diego but opted to put as much into my savings account as possible and purchase my first property to invest in while on deployment. I bought a tri-level townhome with no money down using the VA loan. Used my savings account to pay off all closing costs, found a property management company that works with vets and it’s been rented for about the past 4 months now. I will have about 25K in savings when I get out and am trying to figure out how best to invest my money. I haven’t nailed down a job yet, but am looking into fixing medical equipment since it closely relates to what I did in the military with electronics. Don’t know what my employers contribution will be but average salary is 65-70K a year plus overtime. My tenant is a military officer, I’m not very concerned about him moving out or being unable to pay the rent; and I understand that I need a nest egg to protect my property for repairs etc, but should I invest some of the 25k I have saved? I plan to flip vehicles on craigslist to build some capital in the meantime. I want to try P2P lending or invest with Realty shares with my 401K but need to do more research on how this works.

    • Brian Davis

      Hi Richard, congratulations on your first rental property!
      Before you do anything with your $25K in savings, get a job and set a tight budget. Once you have stable income and regular finances, you can then decide how best to start investing your savings to align with your goals. As a side note, flipping vehicles on Craigslist, P2P lending and crowdfunding websites like RealtyShares all involve their own unique risks, so proceed with caution and talk to as many people as possible who are actively doing the same thing before committing money.
      Thanks for sharing your story, and best of luck with your new career and investments!

  3. Deanna Opgenort

    Richard –Echoing Brian – You don’t have $25k “invest-able savings”, you have the $25k fund that will support you until you get a solidly employed. Remember that expenses that you didn’t have to budget for (ie health insurance) are part of your soon-to-be freedom. Excellent move on getting the townhome with your housing allowance BTW. As long as you keep providing good clean appealing housing and keep your military connections open for new tenants you’ll probably do well.

  4. Dmitriy Fomichenko

    Excellent post, and it is indeed a personal choice!

    I like the idea of having passive rental income and building equity over the years. Buying-and-holding rental properties could create wealth over a long period, and in fact, tremendous wealth. I do understand the risks involved in the process, so would suggest practicing your judgment.

    Thanks for sharing1

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