Property vs 401K

[Beendare]

This is a great thread….showing the plusses and minuses….which are there with every investment segment.

I will have plenty of $$ in retirement due to RE….but to just say “real estate” is a good investment is a half truth- its a huge category.

For example; look at recent Cushman and Wakefield earnings- down over 90%( thats unheard of) …or other commercial office properties that are literally getting slaughtered…bad segment…and more than likely others will follow for the short term. Right about the time everyone is bailing would be a good time to buy.

Warehouse and Apartment buildings are selling at an ungodly valuation- not worth it in most cases.

Single family will always have isolated deals if you know the market and have staying power.

401k is a no brainer….

 

[Marble]

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.

I would only redirect investments in my 401k under the following conditions:

1. My home was paid off.
2. I understood real estate and all of the risks associated. I also would not invest in it if I didn't enjoy it. Because it takes work to manage real estate. 401ks are rather easy.
3. I had cash to pay for the property i planned on getting, or, a rather substantial investment portfolio to back up any debts.

My outlook on money and debt is different than others. I've had severe health issues that had I not planned my finances the way I have, I would have gone under. So I do not put myself into a position where a life circumstance could take my home or other hard earned things away.

Divorce
Death
Disease
Drugs
Debt
Default
Dumb people

All things out of your control that can take away a lot of the things we work hard to accomplish.

Best of luck! It sounds like a wonderful plan!



Sent from my SM-S918U using Tapatalk

 

[wrexstex]

Real estate is a very lucrative investment. Because of the fact that landed properties continue to appreciate in the long run.

 

[Dos Perros]

401k is a no brainer….

This. One can get a job, set up his 401k and contribute, and just work and live his life with minimal attention and effort and eventually be set. It's not sexy, or sophisticated, no grind, no hustle, but it's an easy button for sure. I have spent the time saved having fun. A wiser me would have spent the time saved setting up a side hustle or two, but I wouldn't trade the memories for anything.

 

[MallardSX2]

This. One can get a job, set up his 401k and contribute, and just work and live his life with minimal attention and effort and eventually be set. It's not sexy, or sophisticated, no grind, no hustle, but it's an easy button for sure. I have spent the time saved having fun. A wiser me would have spent the time saved setting up a side hustle or two, but I wouldn't trade the memories for anything.

I agree. Most people are 100% better off going this route.

 

[Beendare]

Its helpful to think in terms of “before tax” and “after tax” dollars

Its almost always better if you can avoid or defer the tax.

401k is before tax investing….so no tax going in….it grows without taxation which is a big advantage …then you pay the tax on the way out at a presumably lower tax bracket when you are retired.

Its similar with owning a business…even if its only a side hustle. You can deduct legitimate expenses which lower your taxable income. Whats the big deal?

Simplified Example; Lets say you have a side hustle where you use your truck and we will use round numbers in cost per year- payments $8,000, Fuel and maintenance $6,000, insurance $1000= $15,000 a year.

assuming income of $100,000/yr….you now pay tax on $85k…lets say its 45% (combined state and Fed ) thats $6,750 a year tax savings On just that one thing. $68k over 10 years…..

This is why its worth thinking in terms of before/after tax.

 

[Traveler]

It’s not exactly the same situation but i was contemplating reducing 401k and investing in other vehicles to avoid big tax penalty in a lump sum withdrawal. That lump sum will be to buy property. (I probably don’t need all my 401k to retire on, for a few reasons). When I did the numbers it was more advantageous to keep investing in 401k and take the tax hit in the future than try to invest outside of 401k now.

 

[dboone3]

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 don't believe this at all. Becoming a millionaire is a slow and steady race - I would wager the 401k has made many more "mom and pop" style millionaires than real estate.

 

[dboone3]

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
4. Max HSA
3. Brokerage account valued at a couple years of living expenses+ if you plan on retiring much before 59 1/2.
4. Pay off mortgage
5. 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.

I would say the HSA should be ranked higher. It has a triple tax advantage. After 55 (I think?) you can use it just like a traditional IRA with no penalty too.

 

[long hunter]

Buy land, they don't make it anymore.

 

[406flyfish]

Our neighbor purchased a townhome in Big Sky for 875k in 2017. Sold it for 2.3m in 2022. Just saw it’s listed for 3.3m. 2m+ profit for 5 years of ownership. Now the town is over run by Texans and Californians..

 

[malpal21]

Definitely real estate if you will still max on your employer matches.

 

[jbw899]

Someone else mentioned this but you’re maxing out your 401k’s, look at a Roth IRA (or back door Roth if necessary). I’d also look into HSA’s, which are the most tax advantaged accounts available.

 

[MattB]

I don't believe this at all. Becoming a millionaire is a slow and steady race - I would wager the 401k has made many more "mom and pop" style millionaires than real estate.

Hard to say, but at the end of last year only 0.8% (280K) of the 35M people who hold 401-K’s at Fidelity had a balance of $1M or more.

In 1Q22, Redfin reported 8.2% of U.S. homes (12M) were worth $1M or more. That statistic doesn’t account for the amount of equity in those homes, but I would bet that there are more millionaires from home ownership than 401-K’s just on relative scale. And that doesn’t account for investor real estate.

 

[kybuck1]

Hard to say, but at the end of last year only 0.8% (280K) of the 35M people who hold 401-K’s at Fidelity had a balance of $1M or more.

In 1Q22, Redfin reported 8.2% of U.S. homes (12M) were worth $1M or more. That statistic doesn’t account for the amount of equity in those homes, but I would bet that there are more millionaires from home ownership than 401-K’s just on relative scale. And that doesn’t account for investor real estate.

I see where you are going with that info. However, I think one must factor in the initial payment/cost of the real estate, interest on any loans for the property, taxes yearly and then the big capital gains tax if you get out of the real estate game.
Having said that I know people in both realms that have killed it, and most have just done ok. A few that have lost, but usually due to a greedy aggressive approach with either modality. A good friend once told me that the key mentality with retirement is to just keep getting base hits vs the home run and there is a lot of truth to that. If you hit that home run good for you, but not likely. I feel like getting base hits with either RE or 401K is very doable for a large portion of the population.
I myself have a small business and 401K/profit sharing for me and my employees that is managed by a company. I have thought many times about dipping into real estate as a secondary stream of income, however after I discuss it with people who do it for a living they always end up talking me out of it. Basically ends up boiling down to I don't want to spend all that extra time/money/stress managing real estate. I have bought a few recreational properties though before land prices skyrocketed so if the itch ever happens I'll have some nice little nest eggs I could cash in on.

 

[dboone3]

Hard to say, but at the end of last year only 0.8% (280K) of the 35M people who hold 401-K’s at Fidelity had a balance of $1M or more.

In 1Q22, Redfin reported 8.2% of U.S. homes (12M) were worth $1M or more. That statistic doesn’t account for the amount of equity in those homes, but I would bet that there are more millionaires from home ownership than 401-K’s just on relative scale. And that doesn’t account for investor real estate.

I see your point, the equity would be interesting to know.

In my area I know plenty of people that live in multi-million dollar houses, but have little to show in terms of accumulated wealth. The "big hat, no cattle" examples given in The Millionaire Next Door about people with high incomes that aren't actually saving and just living large ring very true around here.

I think having a million dollars invested outside of your primary residence is a far different thing than technically being a "millionaire."

 

[Dos Perros]

Hard to say, but at the end of last year only 0.8% (280K) of the 35M people who hold 401-K’s at Fidelity had a balance of $1M or more.

I always wonder about these statistics. How can Fidelity account for the fact that people have 401k's spread all over? I've been working 18 years and have even done some consolidation yet I have 3 different 401k's or Rollover IRA's. My wife has 3 (although 2 are at the same institution). Any one of those institutions would significantly underestimate our retirement position because they only have a piece of it.

 

[Dos Perros]

I also think using your primary residence in a calculation of net worth is sort of a bogus thing since you presumably always need a place to live.

If one said that more millionaires are made in RE outside of their primary residence then that would be more interesting to me.

 

[dboone3]

I also think using your primary residence in a calculation of net worth is sort of a bogus thing since you presumably always need a place to live.

If one said that more millionaires are made in RE outside of their primary residence then that would be more interesting to me.

Agreed, while technically part of your net worth, it's treated more like a consumption item.

The person who lives in a million dollar house probably isn't going to give up their lifestyle to fund their retirement by selling the house and downgrading their residence. They need money outside of the house.

 

[dboone3]

I always wonder about these statistics. How can Fidelity account for the fact that people have 401k's spread all over? I've been working 18 years and have even done some consolidation yet I have 3 different 401k's or Rollover IRA's. My wife has 3 (although 2 are at the same institution). Any one of those institutions would significantly underestimate our retirement position because they only have a piece of it.

You should make sure the other plans aren't charging you administrative fees. They generally aren't a lot, but my last employer's 401k was charging something like ~$60/yr in fees once I wasn't an employee anymore.