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401K w/Match vs Real Estate Investment

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hinkley23
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401K w/Match vs Real Estate Investment  Reply with quote  

I currently receive a 50% employer match up to 6%. I'm 42 years old and have been investing for 3.5 years at 6%. I am about to purchase an investment property. It will be a flip or bond for deed most likely but I may hold on to as a rental also.. Moving forward I'm confused as to keep investing in my 401K and the rest into houses or switch all over to real estate. My goal is to stop my 9-5 and switch to a more free real estate investment lifestyle within the next 8 years. At 50 that money will be penalized 10% if I want it, as well as a higher tax bracket taking it all or in a larger amount. Ive had real estate investments in the past, rentals and have flipped some homes too. Unfortunately with a new family 12 years ago and a career challenge, I had to stop. My life is now back at this crossroad again. With my goals, dos the 401K still make sense?[/url]
Post Wed Mar 16, 2016 5:02 am
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littleroc02us
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I'm also in my 40's and have a family of 4. I invest in 401k's with a 100% match from my employer, I invest in 529's for my kids, I usually max out my roth IRA's and I have a Duplex investment properties. What's interesting is because I moderate on a Financial forum and participate in Real Estate Forum, you get both sides. 90% of the time on the Real Estate forum, the posters will tell you that the Stock Market is scary and you cannot make any money and vice versa for this forum where the majority of posts tend to be pro the Stock Market, 529's, 401k's and roth IRA's.
For me it's a healthy mix of diversification. I will have many avenues for retirement with post tax, no tax and cash flow options, so whatever the Government decides to do in the future I feel like I'll be in a good position. In your situation, I'd take the free 50% contribution from your employer. That's free money. I'd also look at possibly contributing some money into a Roth IRA so that you have tax free distributions for retirement. The S&P 500 as has noted her many times on this forum, has seen historical returns of around 11%. And the beauty of it is that there is very little interaction with the investment account, you just deposit your money and let it grow for a long period of time. That's pretty solid IMO.
With Real Estate there are many factors involved. If it's a buy and hold for rental purposes, you have tenant issue, maintenance costs, tenant turnovers, city inspections, city permits for construction, mowing of the lawn or shoveling of snow, the chance of being sued, etc. Even if you have a PM, there are still costs associated with repairs and other cost related issues that come up. In another words if you don't mind dealing with the process of rentals, then you can make a lot of money.
As for moving on from a W2 in the next 8 years, that is a plan I'm hoping to achieve, but it's probably going to require adding another 5 duplex's to my portfolio. Since I don't believe in overextending leverage due to the risk factors involved, it may take me longer then that which is ok, because I'm in it for the long haul. Plus my current employer has incredible benifits that I won't be able to get when I'm self employed, plus I have 2 children to take care of. So maybe your in a situation where it makes sense finacially, but I wouldn't touch your 401k for investing money.

Good luck.

Risk comes from not knowing what you're doing. (Warren Buffet)
Post Wed Mar 16, 2016 2:08 pm
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oldguy
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quote:
keep investing in my 401K and the rest into houses or switch all over to real estate.


I continually loaded the 401k. And removed money from the houses. ( I kept 4 rental houses for a 40-yr period, 1975 - 2015). Whenever a house built up some equity, I refi'd it, removed the cash, and invested it in 401k/stocks.

The 50% 401k match that you get is free money, you get an immediate 50% return on your money when you put it in your 401k, don't turn that down. Eg, say that you put $3000/yr into your 401k - that adds $4500/yr to your account - and you get a $450/yr tax refund, ie you spent $2550/yr out-of-pocket to get $4500/yr on account.

The question - if you have $400,000 worth of rental houses, where do you want to store your money - ie, do you keep it in the house equity - or do you move that equity into stocks? Remember, if the houses increase in value by 10%, that 10% is added to your net worth whether the houses are free & clear - or whether they are d90% mortgaged.

I kept my houses fully mortgaged. All made money - sold the last one in 2015, it cost $48k in 1984, sold it for $170k. The rental income was about $250,000. But the seed money from that house made even more - eg, refi and remove $25k, pay $150/m ($54,000 total). Invest the $25k for 30 yrs @ 11%/yr, that's about $575,000. Repeat that every time that you can pull $25,000 out of one of the houses - those $575k lump sums add up. And you still have the houses to sell.

So - I would NOT quit investing in stocks and switch 100% to real estate - keep a well balanced portfolio of stocks & RE, they complement each other.
Post Wed Mar 16, 2016 3:08 pm
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