Author Topic: 401(k) vs. Real Estate Investing  (Read 2985 times)

Jalapeno

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401(k) vs. Real Estate Investing
« on: December 06, 2016, 04:10:40 PM »
What is your take on investing in the stock market with pre-tax money vs. investing more in real estate?

Sorry to open a hotly debated topic but I really want to get people's opinion on the matter. I've read a lot on the topic on BiggerPockets but I don't like to take BP advice when it comes to the stock market because most people on BP are anti-stocks which I'm not. Here is my current situation: my wife and I max out my 401(k), we max out both of our IRA's (Roth), and we max out an HSA account. We do not contribute to her 401(k) because it has kind of high fees plus there is no company match. After all of this we are able to save about ~$40k which we want to use to grow (or start for now) our real estate business.

While I understand the advantages of investing pre-tax dollars over time I have also always wanted to be my own boss and start my own business. I think that if we max out the second 401(k) I will be shooting myself in the foot and greatly delay my real estate investing progress.

jinga nation

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Re: 401(k) vs. Real Estate Investing
« Reply #1 on: December 07, 2016, 11:07:12 AM »
RE investing depends on where you want to invest. Depends on prices, rents, etc.

I do both. When the RE market was bad locally, I bought some rentals. Now I can't as prices are high but returns are lower. So recently I started maxing my 401k contributions. in 2017, my wife will also max her SIMPLE IRA, and we'll open Roth accounts.

We still keep a 100k liquid in a savings account as a powder keg when I find a sucker distressed seller. This is based on experience.

Jalapeno

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Re: 401(k) vs. Real Estate Investing
« Reply #2 on: December 08, 2016, 04:33:58 AM »
RE investing depends on where you want to invest. Depends on prices, rents, etc.

I do both. When the RE market was bad locally, I bought some rentals. Now I can't as prices are high but returns are lower. So recently I started maxing my 401k contributions. in 2017, my wife will also max her SIMPLE IRA, and we'll open Roth accounts.

We still keep a 100k liquid in a savings account as a powder keg when I find a sucker distressed seller. This is based on experience.

Thanks for the response. What do you use as a criteria to determine whether to invest in a deal vs. putting the money in the market? Also, is the 100k intended to buy a property for cash and refinance later or do you finance your properties from the very beginning? In which case, how many properties do you think you could buy with your 100k in a good RE investing market?

I'm asking because we have saved up almost $70k which I think is enough to buy 1 property in my area cash plus fixing it up. The idea would be to refinance after a seasoning period and re-use that money.

Another Reader

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Re: 401(k) vs. Real Estate Investing
« Reply #3 on: December 08, 2016, 06:43:58 AM »
Because asset prices are high now and no one knows the future, my approach is to pay off real estate debt at higher rates and invest in a combination of assets.  I maintain a large amount of cash for two reasons.  I own a lot of rentals and there are capital improvements to be made every year, some of which are unpredictable, plus if the market changes, rents may drop and vacancy and collection loss may increase substantially.  Second, if any of the asset markets turn suddenly, I have cash to pick up assets at fire sale prices.

Your approach of buying for cash and financing after repairs and upgrades makes sense if you know what you are doing.  If you can accurately evaluate properties for the work needed and the rent they will generate, you should be ok.  Be realistic in determining your ability to do a lot of varied work on a property and your interest in doing the work.  Also, be conservative in evaluating the financial aspects of the property.  Assume it will take longer and cost more to rehab the property than you think and that you will get the lower end of the rent range of truly comparable properties.

jinga nation

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Re: 401(k) vs. Real Estate Investing
« Reply #4 on: December 08, 2016, 07:27:10 AM »
RE investing depends on where you want to invest. Depends on prices, rents, etc.

I do both. When the RE market was bad locally, I bought some rentals. Now I can't as prices are high but returns are lower. So recently I started maxing my 401k contributions. in 2017, my wife will also max her SIMPLE IRA, and we'll open Roth accounts.

We still keep a 100k liquid in a savings account as a powder keg when I find a sucker distressed seller. This is based on experience.

Thanks for the response. What do you use as a criteria to determine whether to invest in a deal vs. putting the money in the market? Also, is the 100k intended to buy a property for cash and refinance later or do you finance your properties from the very beginning? In which case, how many properties do you think you could buy with your 100k in a good RE investing market?

I'm asking because we have saved up almost $70k which I think is enough to buy 1 property in my area cash plus fixing it up. The idea would be to refinance after a seasoning period and re-use that money.

All my rental condos/townhouses are bought in cash. There's a reason C@$H IS K1NG! Fast closing, beat out higher financed offers. I could buy 2 units with my powder keg.

Because asset prices are high now and no one knows the future, my approach is to pay off real estate debt at higher rates and invest in a combination of assets.  I maintain a large amount of cash for two reasons.  I own a lot of rentals and there are capital improvements to be made every year, some of which are unpredictable, plus if the market changes, rents may drop and vacancy and collection loss may increase substantially.  Second, if any of the asset markets turn suddenly, I have cash to pick up assets at fire sale prices.

Your approach of buying for cash and financing after repairs and upgrades makes sense if you know what you are doing.  If you can accurately evaluate properties for the work needed and the rent they will generate, you should be ok.  Be realistic in determining your ability to do a lot of varied work on a property and your interest in doing the work.  Also, be conservative in evaluating the financial aspects of the property.  Assume it will take longer and cost more to rehab the property than you think and that you will get the lower end of the rent range of truly comparable properties.
^ Speaks my mind. Worst-case analysis is the best analysis.

Jalapeno

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Re: 401(k) vs. Real Estate Investing
« Reply #5 on: December 08, 2016, 06:31:55 PM »
Because asset prices are high now and no one knows the future, my approach is to pay off real estate debt at higher rates and invest in a combination of assets.  I maintain a large amount of cash for two reasons.  I own a lot of rentals and there are capital improvements to be made every year, some of which are unpredictable, plus if the market changes, rents may drop and vacancy and collection loss may increase substantially.  Second, if any of the asset markets turn suddenly, I have cash to pick up assets at fire sale prices.

Your approach of buying for cash and financing after repairs and upgrades makes sense if you know what you are doing.  If you can accurately evaluate properties for the work needed and the rent they will generate, you should be ok.  Be realistic in determining your ability to do a lot of varied work on a property and your interest in doing the work.  Also, be conservative in evaluating the financial aspects of the property.  Assume it will take longer and cost more to rehab the property than you think and that you will get the lower end of the rent range of truly comparable properties.

I am planning on contracting all the work and walking the properties with a GC before putting in an offer. And I completely agree on using conservative numbers before submitting an offer.

RE investing depends on where you want to invest. Depends on prices, rents, etc.

I do both. When the RE market was bad locally, I bought some rentals. Now I can't as prices are high but returns are lower. So recently I started maxing my 401k contributions. in 2017, my wife will also max her SIMPLE IRA, and we'll open Roth accounts.

We still keep a 100k liquid in a savings account as a powder keg when I find a sucker distressed seller. This is based on experience.

Thanks for the response. What do you use as a criteria to determine whether to invest in a deal vs. putting the money in the market? Also, is the 100k intended to buy a property for cash and refinance later or do you finance your properties from the very beginning? In which case, how many properties do you think you could buy with your 100k in a good RE investing market?

I'm asking because we have saved up almost $70k which I think is enough to buy 1 property in my area cash plus fixing it up. The idea would be to refinance after a seasoning period and re-use that money.

All my rental condos/townhouses are bought in cash. There's a reason C@$H IS K1NG! Fast closing, beat out higher financed offers. I could buy 2 units with my powder keg.

Because asset prices are high now and no one knows the future, my approach is to pay off real estate debt at higher rates and invest in a combination of assets.  I maintain a large amount of cash for two reasons.  I own a lot of rentals and there are capital improvements to be made every year, some of which are unpredictable, plus if the market changes, rents may drop and vacancy and collection loss may increase substantially.  Second, if any of the asset markets turn suddenly, I have cash to pick up assets at fire sale prices.

Your approach of buying for cash and financing after repairs and upgrades makes sense if you know what you are doing.  If you can accurately evaluate properties for the work needed and the rent they will generate, you should be ok.  Be realistic in determining your ability to do a lot of varied work on a property and your interest in doing the work.  Also, be conservative in evaluating the financial aspects of the property.  Assume it will take longer and cost more to rehab the property than you think and that you will get the lower end of the rent range of truly comparable properties.
^ Speaks my mind. Worst-case analysis is the best analysis.

Jinga Nation, do you refinance your properties after buying cash or do you just keep them as is? What sort of return do you consider to be good enough to invest in?

jinga nation

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Re: 401(k) vs. Real Estate Investing
« Reply #6 on: December 09, 2016, 09:13:01 AM »
Jinga Nation, do you refinance your properties after buying cash or do you just keep them as is? What sort of return do you consider to be good enough to invest in?
No. Keeping them as is. Neither am I hurting for cash nor is there enough inventory that I could refi to pull cash out for quick purchases.
I don't see the point of refi-for-cash to build a slumlord business of cards, if leveraged incorrectly, could collapse if one renter defaults on me. I'm very conservative on my risk tolerance. I have no qualms buying 2 condos for 50k a pop within 14 days but refi for cash ain't my thing.

Net returns of 8% or over. 7% in a bad year (new A/C, applicance, etc). Some are yielding 10%. As long as the returns equal or beat my index funds, I'm happy.
« Last Edit: December 09, 2016, 10:55:11 AM by jinga nation »

SeattleCPA

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Re: 401(k) vs. Real Estate Investing
« Reply #7 on: December 09, 2016, 03:06:12 PM »
I think something like a 401(k) or IRA beats direct real estate investment. And pretty handily.

With 401(k), you get matching. You get upfront tax benefits that require zero work on your part. You get massive diversification. You have something that's very protected... (in an asset protection sense...)

Where direct real estate investment gets interesting, I think, is when you can't use something like a 401(k).. or when that really is your business... or when you want to save and invest more than is possible with a 401(k) or IRA.

P.S. Green Street Advisors sometimes makes their reports sort of publicly available... and you maybe want to keep your eyes open for those when they compare direct real estate investment to the option of a REIT... they seem to say these two alternatives over time offer very comparable returns. (BTW I just looked now for a Google-able report and couldn't find it.)

jinga nation

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Re: 401(k) vs. Real Estate Investing
« Reply #8 on: December 12, 2016, 06:56:32 AM »
SeattleCPA, good points. I've only invested directly in residential RE locally, and I mean only specific zip codes in my metro. I know these areas better than the lines on my palms, I've lived here over 18 years. I prefer actual RE over REITS, but I have VGSIX in my play account.
If I wanted to invest in RE without doing the hard work, and benefit from a national commercial/residential scale, VGSIX or equivalent would be the way to go.

Car Jack

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Re: 401(k) vs. Real Estate Investing
« Reply #9 on: December 13, 2016, 08:03:17 AM »
Your wife's 401k has no matching and "highish fees".  Can you list the 3 lowest fee funds that she could choose from?  There's a big difference between a 0.41% bond index and a 1.86% actively managed fund.  Also, how long would your wife plan to work there?  If this is a forever job, you'd treat it differently than one where if something better came along, she'd fly.

Real estate investing brings about the same return as 3 fund investing.  The difference in the 2 are with funds, you put the money in, twiddle your thumbs and sleep all night.  With real estate, you buy, you find tenants, you get 3am calls, you have people stop paying rent, you buy stock in Tums because you're taking them 12 times a day.  I am biased against rental buying because my dad did it and it was the biggest hassle I could imagine.

jinga nation

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Re: 401(k) vs. Real Estate Investing
« Reply #10 on: December 13, 2016, 01:24:24 PM »
BiggerPockets is pro-RE.
Bogleheads is pro-markets and balanced portfolios.
MMM is the only place where you can talk about both without the fire of Mount Doom.

CarJack, I understand your POV but did your dad see it as a hassle or did he enjoy it. But also understand that if you screen tenants properly, be pro-active on required maintenance, and have a fixed-fee property manager, then you can sleep without Tums.

I sleep better having a 60% property / 40% funds portfolio. I know my property is real and not subject to price swings induced by the president-elect's tweets or what Buffett says/does or the Fed policy tweaking. I like cash-in-me-pocket ROI, not unrealized numbers on my Vanguard page. I am slowly moving to 50-50 allocation.

In short, create your investing policy statement, decide on you desired asset allocation, and invest. Then twiddle those thumbs.

SeattleCPA

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Re: 401(k) vs. Real Estate Investing
« Reply #11 on: December 13, 2016, 03:59:04 PM »
BiggerPockets is pro-RE.
Bogleheads is pro-markets and balanced portfolios.
MMM is the only place where you can talk about both without the fire of Mount Doom.

CarJack, I understand your POV but did your dad see it as a hassle or did he enjoy it. But also understand that if you screen tenants properly, be pro-active on required maintenance, and have a fixed-fee property manager, then you can sleep without Tums.

I sleep better having a 60% property / 40% funds portfolio. I know my property is real and not subject to price swings induced by the president-elect's tweets or what Buffett says/does or the Fed policy tweaking. I like cash-in-me-pocket ROI, not unrealized numbers on my Vanguard page. I am slowly moving to 50-50 allocation.

In short, create your investing policy statement, decide on you desired asset allocation, and invest. Then twiddle those thumbs.

People need to let me know if this comment (which I'm about to make) begins to sound "broken record"-ish... but there's pretty good evidence that if you want to earn an alpha return, you need to do that in alternative asset classes, like real estate. (Source "Pioneering Portfolio Management," Swensen.)

BTW, me? Other than the stuff I'm forced to have in alternative asset classes (inheritance, private equity, etc.), I use 70% stocks / 30% bonds asset allocation that's build with passive index funds.

NoNonsenseLandlord

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Re: 401(k) vs. Real Estate Investing
« Reply #12 on: December 24, 2016, 06:26:36 AM »
I maxed out my 401K, HSA, Roth or after-tax IRA, and invested in real estate.

Do that.