Property vs 401K

[HNTR918]

Remember Pre-tax & Roth 401k limit is $22,500 but the limit for After-tax is 66,000 and can be backdoored into a Roth IRA.

 

[elkyinzer]

1) Don't take financial advice on the internet
2) Max out tax-advantaged savings vehicles if your goal is to save money on taxes (duh)
3) Consider liquidity
4) If you want a vacation property and can afford it, buy a vacation property, but don't justify it as an investment. It's usually not.

 

[txjustin]

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% this. I’m a real estate investor and can best the market easily and sometimes by multiples. I, however, buy undervalued properties, force appreciate and cash flow them. Completely different than buying a 2nd home.


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[dirtytough]

Remember Pre-tax & Roth 401k limit is $22,500 but the limit for After-tax is 66,000 and can be backdoored into a Roth IRA.

You have to have a specific 401K to be able to backdoor $66k. None of my employers have ever allowed it.

1) Don't take financial advice on the internet

I bet Bogleheads has the absolute best financial advice available, and it's on the net. Not only that it's free.

100% this. I’m a real estate investor and can best the market easily and sometimes by multiples. I, however, buy undervalued properties, force appreciate and cash flow them. Completely different than buying a 2nd home.


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Did you leverage the real estate? That is one thing I never see mentioned. The market would kill real estate investments if you leveraged the market like people leverage to buy real estate.


If you buy a vacation place I would try to use it as an STR. It would help pay for itself and might actually make you money.

 

[Dos Perros]

You have to have a specific 401K to be able to backdoor $66k. None of my employers have ever allowed it.

Roll your old 401k's to a Traditional IRA, then backdoor.

Backdoor Roth IRA: Definition, Rules and How To Open One - NerdWallet

A backdoor Roth IRA lets you convert a traditional IRA into a Roth IRA, which could save on taxes. Backdoor Roths are an option if your income is too high for a Roth IRA.

www.nerdwallet.com

FWIW, we have consolidated all of our old 401k's to Traditional IRA's for ease of management, increased investment options, and reduced fees. Else, we'd probably have double the amount of open investment accounts right now between current 401k's, HSA's, and Roths.

 

[CorbLand]

Make sure that you also factor in the what will make you happy in retirement vs the financial side of the investment.

Sometimes its better to do things now and have them taken care of before you need them. If you know that is what you want to do, it may be worth getting the property bought, set up how you want and paid off over the remaining working years versus trying to do it after you retire.

Think of how much farther ahead you would be if you bought 4 years ago before prices went insane and you would have a 2.5% rate.

 

[Coopsdaddy]

Who can afford goog real estate in todays time.
It’s like the cattle bussiness,you better start young or inherit it.

 

[Throwin Darts]

I have invested in a hunting property and am currently in the market for a lake property. I don't view either as an "investment" but rather something I can pass down to my kids. I hope to leave them some money but find more value in leaving them something tangible such as a hunting and lake property.

However, I would not forgo a year of not maxing out my 401k to buy a property. You get that tax advantaged opportunity once a year during your income earning life and each year you miss on not maxing it out you never get it back. I'm 42 and have maxed out my 401k for the past 20 years and its been the best financial decision for me. I'd find other places to cut back on expenses to come up with the funds. With interest rates where they are now I'd be socking back cash wherever I could and hope to catch falling rates in the next 2 to 5 years and then be ready to move on a property.

 

[southLA]

Bear in mind that 1) just because millionaires own real estate does not mean that they became millionaires BECAUSE OF real estate and 2) real estate can offer better gains because typically it is leveraged and/or because you have to manage it (moreso than equities anyway).

 

[Charlie-NY]

I considered buying a second place many times. After discussing all the issues/options with others who had second properties my wife and I decided to NOT buy. Buying a place that you are not in full-time can have real problems. Vandals know who is not in FT residence. Storms, fires and mishaps of all kinds happen when your not there to mitigate the situation. You've got to pay taxes and utilities whether you're using the place or not.

Renting is another issue onto itself. You have to find clients that want to be there around your schedule. They have to be vetted and, hopefully, will respect and protect your property. That isn't always the case. You will also need some type of property manager. What happens when there is a plumbing problem and your 500mi away, or there is some other issue that needs immediate attention when the renter is screaming on the phone? Who preps the property between short term tenants?

In the end, we decided that it's much less expensive to just rent what we want for whatever period of time we want. Renting isn't cheap but it doesn't require a large outlay of funds and you can come & go as you please. We vacation in different areas depending on a variety of factors, including seasonal climate & local weather. Look at the entire southern half of the country lately. It's been baking in the unexpected heat. I wouldn't want to be tied into a summer place where the conditions are brutal.

My point: being an absentee property owner, whether you rent or not, has risks. Sometimes things work out and sometimes they don't.

 

[MattB]

One other thing to consider when looking at 2nd homes is the impact of kids. We have had a number of friends/couples who bought vacation homes at Lake Tahoe, ~4 hours away. They initially loved them, but most sold after their kids got busy with sports and couldn’t use the properties often. Most got tired of the overhead and sold.

Much of that was in the days before STR, but that is still a considerationZ

 

[Zeke6951]

There is such a thing as "self directed real estate IRAs". I know very little about them but had a client that I managed timber for that had several. He had the IRAs set up and bought hunting properties. All income from leases, timber sales etc. went into the account tax free I think. All expenses came out of the account. If the land was sold the the money went into the account. When more property was bought the money came out of the account. Just like any other IRA but instead of dealing with stocks he dealt with properties. Taxes were due when accounts were liquidated. I think the Real Estate IRAs became legal under Bush the younger.

 

[HuntHarder]

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.

More like deferral vs. deduction. You will still pay taxes. Everyone's situation is different, but I highly recommend taking advantage of employers Roth 401k vs. traditional and those are tax paid up front. Interest will grow tax free and you will not have a tax liability when you access it. Again, everyone's situation is different.

Investment property vs. 2nd home, are 2 completely different things. One will, in theory, make you money, one will cost you money. I would talk to a financial advisor and let him see your whole financial picture. Without knowing a bunch of info, it is really hard to give you accurate advice.

 

[Green Bullet]

If you can’t afford to do both then I’d prioritize the 401k and save more money or make more money where you have so much excess cash flow it Makes sense to diversify and balance your asset classes. I own multiple homes….I made sure when I bought it I wasn’t house poor.

 

[SDHNTR]

More like deferral vs. deduction. You will still pay taxes. Everyone's situation is different, but I highly recommend taking advantage of employers Roth 401k vs. traditional and those are tax paid up front. Interest will grow tax free and you will not have a tax liability when you access it. Again, everyone's situation is different.

Investment property vs. 2nd home, are 2 completely different things. One will, in theory, make you money, one will cost you money. I would talk to a financial advisor and let him see your whole financial picture. Without knowing a bunch of info, it is really hard to give you accurate advice.

Well, actually a traditional 401k contribution is absolutely a 100% deduction. AND a deferral. FYI, I do this for a living. I AM a financial advisor.

 

[HuntHarder]

Good call, I agree it's both.

 

[txjustin]

There is such a thing as "self directed real estate IRAs". I know very little about them but had a client that I managed timber for that had several. He had the IRAs set up and bought hunting properties. All income from leases, timber sales etc. went into the account tax free I think. All expenses came out of the account. If the land was sold the the money went into the account. When more property was bought the money came out of the account. Just like any other IRA but instead of dealing with stocks he dealt with properties. Taxes were due when accounts were liquidated. I think the Real Estate IRAs became legal under Bush the younger.

It’s just called a self directed IRA. I have a few. You can use them for many different things, not just real estate


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[txjustin]

You have to have a specific 401K to be able to backdoor $66k. None of my employers have ever allowed it.

I bet Bogleheads has the absolute best financial advice available, and it's on the net. Not only that it's free.

Did you leverage the real estate? That is one thing I never see mentioned. The market would kill real estate investments if you leveraged the market like people leverage to buy real estate.


If you buy a vacation place I would try to use it as an STR. It would help pay for itself and might actually make you money.

Absolutely I leverage. My ROI on my rental properties is literally infinity. FYI, they’re leveraged at 75% ltv.


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[dirtytough]

Roll your old 401k's to a Traditional IRA, then backdoor.

Backdoor Roth IRA: Definition, Rules and How To Open One - NerdWallet

A backdoor Roth IRA lets you convert a traditional IRA into a Roth IRA, which could save on taxes. Backdoor Roths are an option if your income is too high for a Roth IRA.

www.nerdwallet.com

What? That has nothing to do with backdooring the max contribution every year. Also there are a lot of reasons why it would be stupid for myself to do that. I do backdoor roths. Not the same as trying to convert pretax 401k's to a roth. The tax liability would be huge.

Sorry OP I will try not to derail any further.

By a vacation home and STR it.

 

[Kenn]

I bought bare property as an investment many years ago and spent a lot of time working it to qualify for a building permit and sell. End result was I got the permit and sold and made less than I would have had I bought a decent mutual fund or ETF. The stress of getting permits and right-of-ways caused many sleepless nights. Property is definitely a good way to get rich but it can bite you in the ass much more than you might think.