Goal Setting Advice - Invest in 401k or Investment Properties?

Question

Greetings BPC!

I decided to randomly take a trip this past weekend and self reflect in order to rebase myself and establish my goals for the next 3 years. However, I'm stuck on what I should do in the short term in order to achieve my goal. Any advice would be appreciated!

My Goal
Own a ~$1,000,000 ranch/farm in the suburbs of Philadelphia. This house would also serve as a retirement home for my Grandparents and sprouting for future family.

Money Needed
The estimated mortgage payments would be ~$7000/month. However, I assume interest rates will rise within 3 years thus increasing my monthly payment. In order to afford the mortgage payment, I would need roughly $10,000 in gross cash flow per month.

I currently make $7,000/month gross so I would need an additional $3,000/month in net cash flow to meet my minimum amount required. However, this would leave room for nothing else and I would be negative after accounting for living expenses.

Ideally, I would like to net $2,000/month. From my math, this means I would need a gross income of ~$153,000.
For a house of that amount, I would need ~$200k for 20% down, or ~$50k for 5% if going FHA.

Current Assets
I currently own 2 properties, and are in the process of acquiring a 3rd or more.

Property 1 - $118,000/$135,000 LTV
$700/month mortgage
$1,100/month in rent
= $ 400 Cash Flow pre expense

Property 2 - $0/+200,000 LTV
$0/month mortgage
$1500/month in rent (very conservative)
= $1500 Cash flow pre maintenance expense

Potential Property 3 - $80,000 /$110,000 LTV
$300-350/month mortgage
$1000/month in rent
= $650 Cash flow pre maintenance expense (expenses low due to newer roof)

I can possibly acquire 3 more properties almost identical to property 3 over the next 2 years.

The Dilemma
Knowing the above information. My company offers a 401k matching program of 25% of my contribution up to a maximum of 10% of my salary. If I were to acquire more properties similar to property 3, I would need cash for down deposits. Specifically 20% for investment loans as I don't think an underwriter would be convinced that it is not an investment property since they are all within .1 miles of each other. However, If I were to save money for my long term goal in my 401k. I would have $31,875 to be used for hardship withdrawal for a mortgage payment (assuming I don't get raises/promotions).

In Conclusion
Should I invest in my companies 401k program or use the money to acquire more investment properties? This is a mouthful/rant so thank you to anyone who decides to read this.

Luis Sanchez Rodriguez · Answer

Hey @Anthony ZayasI would take my opinion with a grain of salt since I'm barely scratching the surface on this subject, but to answer your question...No. I would not invest in your company's 401K plan.From my readings, your 401K is highly dependent on inflation and how the stock market is doing.Instead I would say you look into Self-Directed IRAs since your goal is retirement.Summary is you can use the funds you already contributed to your IRA and invest that into a new property. The catch is that you can not benefit from your property. There's a lot to it, and like I said, I'm barely scratching the surface about this stuff.I hope this helps in some way.

Anthony Zayas · Answer

@Luis Sanchez Rodriguez After some googling it seems as though this won't be an option that I could benefit from if I am using my companies 401k matching program. Info on SDIRA

Mark Edler · Answer

Anthony,This is my opinion, but I do not generally advise people to use a self directed IRA for Real Estate investments. People use them, but Real Estate is already tax-efficient as-is if you're not wholesaleing and the IRA will prevent you from using those funds until age 59 1/2, plus they can be expensive to administer since they are not common.As for the 401(k), I typically advise to contribute up to what your company will match. The real question is, will your investments provide better returns than your company's match amount? Additionally consider the timing of your goals. "Hardship withdrawl" is not an easy election to make, so consider your retirement contributions as being stuck in the account until age 59 1/2.A more realistic approach to reaching your goal may be to use the BRRRR method to incrementally build monthly cashflow and use equity from each home's renovations to refinance on an additional property, and repeat until you get up to your monthly cash flow goal.Feel free to message with additional questions. I work with individuals on tax strategy and financial goal planning to come up with a plan that works for their situation.

Luis Sanchez Rodriguez · Answer

@Anthony ZayasFrom what I read, it didn't seem complicated just delicate.What ever you find out please share.Would love to learn more myself.

Anthony Zayas · Answer

@Luis Sanchez Rodriguez I appreciate the response! I remember hearing about this during a BPP but it definitely seemed complicated and I have no idea how I would even proceed with such an endeavor. Thank you for the reminder on the subject, I definitely will research some more!