Max a 401k or save for Real Estate?


#1

I am curious how folks are saving for investments in Real Estate.

My dilemma is whether to max my 401k, which I did last year, or instead focus on using my extra income to save up and buy an income property (duplex, triplex, etc.).

The issue I face is that by maxing my 401k I eat up a majority of my savings, leaving ~$500-$600 a month in additional saving outside of it. At $600 a month, it’ll take years to save up a reasonable down payment when considering costs of such units in my area or surrounding areas ($300k+).

So - what do you all do? Do you get your employer match and then save aggressively for real estate? Some sort of middle ground?

I also really enjoy the tax breaks with maxing, since it drops me into a lower tax bracket… (2018 will be 12% tax vs. 22%, married filed jointly, because of the pre-tax contributions).


#2

I guess I should clarify that I am very interested in buying income properties and want to get into this space asap.


#3

Have you considered doing crowdfunding real estate like Realty Shares (or Fundrise if you’re not accredited) instead? Would allow you to start investing sooner instead of saving up for a down payment and avoid the hassle of landlording.


#4

Max out your 401k, allowing yourself to build a bigger down payment. Then take out the max allowed $50k TAX FREE, and then pay yourself back over a period of 5 years (this part will be after tax money).


#5

You could also look into REIT ETFs.


#6

I’ve looked at some - actually have a very small amount invested in Groundfloor - but I haven’t checked out Fundrise yet.

I’m not necessarily afraid of landlording (family is in commercial real estate + management) and the draw of owning physical property is the continuous monthly income versus investing in loans via crowdfunding.


#7

I’ve heard of this but haven’t looked into too much. Does that $50K actually leave my account? That would hit hard considering I’m in my 20s and have only had a 401k for four years. Would take away a significant base for compounding growth.

I’ll have to look at it more, though. Thanks for the suggestion!


#8

Yes, the 401k money leaves your account.


#9

The answer will really depend on your financial goals. At this point in time which is of a higher priority to your financial picture; the 401k or the real estate purchase? You can’t make up time in the 401k if you choose that route but delaying the saving for the down payment delays the real estate investment. Either way you are losing potential returns. You just need to decide if retirement or cash flow is more important at this juncture and which pays greater long term dividends.

As an added note you could max out the 401k and buy property somewhere you are not geographically located to reduce the price of a down payment. This strategy will necessitate hiring a property management company but it would also allow you to pursue both goals simultaneously.

Is there a reason other than physical proximity you are seeking to start with such expensive properties?


#10

Are you talking about taking out a loan from the 401k? If so you have to pay interest (to yourself, but still) and that money isn’t in the market anymore. If for some reason you can’t pay it back, it becomes a taxable distribution, early withdrawal penalties and all.


#11

Yes, physical proximity and understanding the area/neighborhoods is why I am looking local. And local covers about 3 counties of area in my current state that I am familiar with.

Not entirely sure if I am ready to have my first rental be somewhere I can’t visit with relative ease, but I have heard others talk about this. Something I just have consider if I want to find cheaper options.


#12

I would max out your 401(k) and advise against a loan from it. You’ll lose the cumulative gains related to the balance. And I personally don’t think it’s worth it.


#13

I’ve been thinking about the same situation. I’m trying to figure out a way to do both though maxing out the 401k will definitely slow down any real estate investments. Ultimately, if you don’t plan to touch any of your retirement savings until later in your life, maxing out the 401k probably makes the most sense. If your goal is early financial freedom then building passive cash flow through real estate may be best. The tax benefits of the 401k will be hard to pass up, but it really limits your options until you’re closer to retirement age.

You could also look into putting money into an IRA instead of a 401k. Though you can’t contribte as much annually, IRAs generally provide more investment options including the ability to invest the money in real estate. This could give you the best of both options.

Regardless, definitely contribute to your 401k up to your company match.


#14

Agreed. At this point I don’t think taking the loan is the right move.


#15

I think there may be a good middle ground between maxing and just contributing the minimum to get the employer match. Investment options are great within the 401k so I’d like to stick with it, but perhaps I evaluate what it takes to get the best tax benefits while be save more for real estate.

Either way, feels like I have some research to do and some decisions to make :thinking:


#16

Hey TFS, I own several SFH and duplex rental properties. I used a 401(k) loan once (actually on my husband’s account), so we could purchase a home as a primary residence which we then converted to a rental property a few years later. By purchasing the home as a primary residence, we were able to make it a 15 year payback period, instead of the 5 year period (allowed for purchasing an investment property).

So here’s the thing, the stock market is cranking right now and people say beware of the growth you will miss out on. True. But, you can be making the same or better returns on the real estate investment, generating cash flow and tax write-offs TODAY. Not when you’re 59 and a half or whatever (an age I that I pretend is so distant I don’t even know the rules, ha ha).

Our rental portfolio has generated more asset value in 18 years that anything we could have done with index funds in the market. We have more options for immediate investments and for our retirement because of rental properties. They can be a pain, but I will tell you all day long that owning the actual properties crushes REITs and crowdfunding, etc… You are on the right track with your mindset. Get your employer match and decide if the 401K loan is right for you. If not, find another way to get started! Best of luck!


#17

Thanks Cashflow Kat! I need to just commit and do something about it!


#18

I would suggest a balance. I personally would not be comfortable with the risk involved in a 401k loan, but only you can decide your own risk tolerance there.

I would recommend working backwards. When do you want to get into real estate, and how much money will you need? Take the amount needed, divide by number of years to get there, and you have an annual savings goal. Then put what you can into the 401k while still setting aside enough for your other goal.

If you own income producing property, that can easily be part of an overall retirement plan. No need to depend solely on 401k investments if you’re also getting cash from real estate.


#19

Do you plan to live in your multi-unit, and rent the remaining units?

YES >> Focus on the 401k. You can use a low-down payment loan such as the FHA or HomeReady or Home Possible program to buy with 3.5 percent, or 3% down

NO >> Do what makes you comfortable

Let me know if you’d like a link to find maps where HomeReady and Home Possible can be used.


#20

Don’t put too much pressure on yourself. You are building a strong foundation - spending less than you earn and investing in your 401K. I do agree with @dangreenoh that if you can find a way to make your first investment a primary residence, you can get cheaper financing. So living in one unit of a duplex or multi-unit, or living in a house for a year or two (maybe while you improve it) then move out and make it a rental. Good options for getting started when you don’t have a lot of cash built up. Good luck!