Property vs 401K

[MuleyFever]

Given the vast diversity on this forum I figured I would ask for opinions here.

My wife and I both max out our 401k contributions. We would really like to buy a vacation property. We would also like to retire as "sunbirds" with a northern and southern home. We have considered buying vacation property in the near future in MT, ID, SW CO, W WA or maybe WY as our current vacation place. Our current home in S UT could satisfy our long term southern home needs.

My question is along the lines of investment return. Would we be out of line reducing our 401k contributions to invest in real estate? From what I can gather long term market returns are in line with long term real estate returns.

 

[MattB]

Do you get matching funds in your 401-K’s? If so, at least the minimum contribution required to maximize matching should be off-limits for using elsewhere.

Secondly, the benefit of a 401-K is you are putting away pre-tax dollars today which can be used to fund retirement in the future. Tax rates when you start pulling funds should be lower than yours today.

All that said, with investment return in mind it is rolling the dice. Our real estate has outperformed our equities over the past 10 years, but there is no guaranty that will continue. Like freeway lanes during rush hour, jumping out of a slow lane into one moving faster will usually result in the car that was behind you in the slow lane passing you shortly thereafter. The point being, you need to figure out exactly how you think that the property will outperform your 401-K and objectively test that theory. How will that investment provide the funds in retirement that otherwise would have been available from your 401-K?

Real estate can be a great investment, but it is not liquid like stocks. Once you start having substantive taxable gains, you can get locked into a strategy and RE is among the least flexible in that regard.

Sometimes in life though, you need to make non-investment financial decisions which are discretionary. I will say though that I was able to retire at 52 in large part by avoiding those sort of purchases, but everybody’s path is different.

 

[MuleyFever]

Do you get matching funds in your 401-K’s? If so, at least the minimum contribution required to maximize matching should be off-limits for using elsewhere.

Secondly, the benefit of a 401-K is you are putting away pre-tax dollars today which can be used to fund retirement in the future. Tax rates when you start pulling funds should be lower than yours today.

All that said, with investment return in mind it is rolling the dice. Our real estate has outperformed our equities over the past 10 years, but there is no guaranty that will continue. Like freeway lanes during rush hour, jumping out of a slow lane into one moving faster will usually result in the car that was behind you in the slow lane passing you shortly thereafter. The point being, you need to figure out exactly how you think that the property will outperform your 401-K and objectively test that theory. How will that investment provide the funds in retirement that otherwise would have been available from your 401-K?

Real estate can be a great investment, but it is not liquid like stocks. Once you start having substantive taxable gains, you can get locked into a strategy and RE is among the least flexible in that regard.

Sometimes in life though, you need to make non-investment financial decisions which are discretionary. I will say though that I was able to retire at 52 in large part by avoiding those sort of purchases, but everybody’s path is different.

Thanks. Just to be clear we would still contribute the minimum to get employer matches.

 

[Atlas9214]

only piece of advice I could give is remember that Realestate is the number one maker of millionaires in the country. So never really a bad investment.

 

[100 others]

Do you plan on renting out the vacation property while you're not there?

 

[MattB]

only piece of advice I could give is remember that Realestate is the number one maker of millionaires in the country. So never really a bad investment.

I wholeheartedly agree that RE is the best way for us little people to become millionaires. But there is a difference between investor real estate which produces positive cash flow and 2nd homes which are generally cash flow negative. One is a good investment, the other isn't.

 

[100 others]

only piece of advice I could give is remember that Realestate is the number one maker of millionaires in the country. So never really a bad investment.

Net worth doesn't really count.

 

[Beendare]

I wholeheartedly agree that RE is the best way for us little people to become millionaires. But there is a difference between investor real estate which produces positive cash flow and 2nd homes which are generally cash flow negative. One is a good investment, the other isn't.

Yep

Matt makes some Good points….just buying buying RE and banking on appreciation is no guarantee- cash flow needs to be factored in.

 

[GunsAreFun]

As others have said, merely buying another property is only going to cost you money. You can’t get any return unless you rent it or sell it. Selling it doesn’t do any good in your situation as you described a desire to use it.

I am in a similar situation where I max my 401k. I have bought some small hunting properties (vacant land) as an alternative investment that I can also get use out of recreationally. The difference is, I plan to sell most, if not all of them, if and when the cash flow is necessary.

 

[SDHNTR]

Not maxing out 401k is missing out on a tax deduction. The easiest deduction you’ll ever have. And you are foregoing liquidity for illiquidity. Liquidity matters, especially as you age.

 

[jtevanMT]

Here is an option….start an LLC (limited partnership), purchase the property and rent it to cover mortgage, interest and taxes. You will need to research the rental markets in each city. The renter can make your payments while you build equity each month. Visit your rental in September or October and write-off the trip. You should be able to break-even with payments and gain equity each month (not an income property, an investment property). Keep putting the max investment into your 401k in the meantime, if you have the down payment to purchase the rental. There are advantages to this method and possible disadvantages when you sell (if you write-off depreciation).

 

[Yoder]

only piece of advice I could give is remember that Realestate is the number one maker of millionaires in the country. So never really a bad investment.

That's good, you will need to be a millionaire to buy property in Montana.

 

[aaronmn]

We did a similar exercise as you a few years ago, and bought a second property on a lake prior to the pandemic. It will appreciate whenever we do decide to sell it, but it has been more expensive than we anticipated to renovate.

We use it as a summer cabin, and absolutely love it. We look forward all winter to being able to go to it in the summer.

There is no substitute for general retirement strategy, but as an addition-to, I think it will end up being solid for us.

 

[MallardSX2]

How old are you?

Someone who is in their 30-40's I might tell them to go for it with the real estate gig.

But if I was in my 50's I would be maxing out my 401K's and Roth IRA's and I would be saving cash on the side preparing for retirement.

If I was within 10- years of retirement, I would not be dabbling and messing around with real estate potentially getting caught up in a massive 2008 downturn (which could easily happen again given the current situation). But that's just me.

 

[wind gypsy]

Agree that its a hard sell as an investment if not providing income or have an intended a future sale date. Vacant land that doesn't have as significant taxes, utilities, and maint costs is probably a better "investment" if just looking at appreciation.

 

[MuleyFever]

A lot of good points. Thanks.

 

[Dust Rider]

Vacant land if it’s a spot you like and it’s affordable. Play the long game and slowly add infrastructure with cash in hand. Visit and stay in a comfortable RV, then build shop, cabin or house as time and money allows.

 

[AK_Skeeter]

Given the vast diversity on this forum I figured I would ask for opinions here.

My wife and I both max out our 401k contributions. We would really like to buy a vacation property. We would also like to retire as "sunbirds" with a northern and southern home. We have considered buying vacation property in the near future in MT, ID, SW CO, W WA or maybe WY as our current vacation place. Our current home in S UT could satisfy our long term southern home needs.

My question is along the lines of investment return. Would we be out of line reducing our 401k contributions to invest in real estate? From what I can gather long term market returns are in line with long term real estate returns.

We became snowbirds when we retired. Wintering in Montana, summering in Alaska.
For us, we decided to rent for the winters instead of touching our 401-k which has grown by $500,000 since
retiring.

Advantages of renting for the winter:
1) Get to check out the area...is it a place we want to settle into as a permanent retirement home?
2) Relatively inexpensive with the option of renting our Alaska home while we are in MT
3) Buying a vacation property includes a risk of vandalism when the property is vacant.
4) More time and $maintenance costs in a vacation home. By renting, more time for hunting and fishing.
5) Post-pandemic real estate may not be a great investment. We bought our Alaska home in 1995 for $110k, and nearly 30 years later it is assessed at $400k...not that great of a return compared to a 401-k properly invested.

 

[LookinforDirt]

Me personally, late stages of working life, I prioritize in this order:
1. Tax “free” investment accounts. 401k, IRA, Roth IRA, etc. Max them.
2. Cash reserve. 3-6 months living expenses.
2a. College fund if that applies
3. Max HSA
4. Brokerage account valued at a couple years of living expenses+ if you plan on retiring much before 59 1/2.
5. Pay off mortgage
6. Other investments

I’d likely switch 4 and 3 if I knew I was going to work to 60 or older. But don’t plan on doing that. I would probably only invest in more real estate if it was generating enough monthly income to pay the expenses of owning it.

 

[Historybuff]

I have 401k, business owner, own vacant river ground in a couple spots and have had a rental house blah blah blah. Best advice I can give without a doubt is study, buy and hold bitcoin long term.