Woodland Hills, CA · Member since 2016 · 98 posts · 40 votes
I have about $0 saved up for REI. It all went into the purchase of my primary residence a year ago, and now that I'm stepping up my REI game I'm regretting that. Live and learn.
My down payments with HMLs comes from my parents, who will earn interest from me matching the HML's rate. I have little of my own cash in the game thus far. Obviously the intent is to change all that with profits from flips and BRRRs over the coming years.
I have various retirement accounts with not a TON of cash in them--only about $25k-- and in analyzing the returns I'm averaging about 6% in my current 401, and that includes the growth from the company matching.
I'm wondering if I should stop my 401 contributions and set aside that $300 per paycheck in a business checking account so I can build up my own cash reserves and not have to rely on other people's money so much. Of course, I lose out on the compound interest and company matching if I do that.
And/or, do I take the hit and pull out my current retirement savings? Dave Ramsey fans would say no, but if having the cash allows me to make other investments could it be worth it?
I'm 33 years old, and hope to build wealth through REI such that I can leave my full-time w-2 within the next 5 years (hopefully sooner).
Thanks, friends!
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
9y
The answer isn't simply, "stay diversified". What if your "diversified" choices stink? Staying in a bad investment, just because it makes you diversified, doesn't make that a good investment any more than investing in your own area just because you know it, makes that area the best place to invest. A bad investment is a bad investment.
Everyone has their own choices to make, but from what I've seen (and calculated), most retirement plans are only good for the retirement of the person that sold it to you. All you have to do to understand this is "follow the money"...and go watch the movie Trading Places. Specifically watch the scene, and the dialogue, between Eddie Murphy and and the Duke brothers when the Dukes are explaining " how it works" to Eddie Murphy. Murphy's comment and reaction says it all.
I'm not saying these funds don't have their place. Everything has its place, but it also has its time...and the time for these investments are at the end. You are not going to make it rich waiting for these investments to grow. That's what REI does for you. The "funds" are investments where your REI profits gain interest...and it's that interest (cash flow) that you can live off of...but, you have to get your "base deposits" into these funds large enough to generate high enough interest income (not interest rate) to live off of them first. That's where REI comes in.
1 - REI grows your seed money
2 - Seed money compounds itself through reinvestment back into RE
3 - Profits from REI is deposited into interest bearing investments
4 - Continued re-use of seed money (you never spend it...just use it an infinite # of times) generates new profits
5 - New Profits from REI are deposited into #3 above
6 - ...repeat until tired, or bored.
...and to your original specific 6% question, my best answer is with a question of my own:
If, you needed $100k a year to live off of in retirement, and your source of "base" generated that 6% in interest per year, which means your "base" would have to equal almost $1.75M, can you rely on that same 6%/year to get there?
Really good investors know the theory of diversification. Without getting too academic about it - basically, to reduce risk you don't put all your eggs in one basket.
I just reviewed my significant other's funds this week. There are several funds doing 14%-15% YTD. 12-%-13% over the past year.
What you need to do is move your shares within the 401K into funds with better growth. Takes about 5 minutes and review to do so.
If your company is matching your contributions, stopping your contributions is throwing away that matching.
Investor · Vacaville, CA · Member since 2016 · 433 posts · 249 votes
9y
I echo what @Christopher Phillips says. In particular his last line: "Be patient. Stay diversified." That is key. Life is long, life is uncertain, and life can be hard. Don't be all your eggs in one basket and be very patient. Think LONG TERM.
Real Estate Investor · Williamson County, TX · Member since 2011 · 1k+ posts · 961 votes
9y
Alway, always take the company match. Don't chase returns but if you can spread your new contributions to include some higher risk-higher return investments you might do so...minimizing the risk with dollar cost averaging over time.
The best way to prove your willingness to make it in RE is to get more money by cutting back (retrench as Jane Austen says) and get a second job to get working capital. If you cannot, then active RE investing may be a bit further in your future...because you need both time and money. Sincere best wishes.
Woodland Hills, CA · Member since 2016 · 98 posts · 40 votes
9y
Thanks for the sanity check, everyone! I do have a second job, so I'll re-strategize to put that income aside instead. It'll take a little tightening of the belt, but you've gotta sacrifice to accomplish great things sometimes.
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
9y
The answer isn't simply, "stay diversified". What if your "diversified" choices stink? Staying in a bad investment, just because it makes you diversified, doesn't make that a good investment any more than investing in your own area just because you know it, makes that area the best place to invest. A bad investment is a bad investment.
Everyone has their own choices to make, but from what I've seen (and calculated), most retirement plans are only good for the retirement of the person that sold it to you. All you have to do to understand this is "follow the money"...and go watch the movie Trading Places. Specifically watch the scene, and the dialogue, between Eddie Murphy and and the Duke brothers when the Dukes are explaining " how it works" to Eddie Murphy. Murphy's comment and reaction says it all.
I'm not saying these funds don't have their place. Everything has its place, but it also has its time...and the time for these investments are at the end. You are not going to make it rich waiting for these investments to grow. That's what REI does for you. The "funds" are investments where your REI profits gain interest...and it's that interest (cash flow) that you can live off of...but, you have to get your "base deposits" into these funds large enough to generate high enough interest income (not interest rate) to live off of them first. That's where REI comes in.
1 - REI grows your seed money
2 - Seed money compounds itself through reinvestment back into RE
3 - Profits from REI is deposited into interest bearing investments
4 - Continued re-use of seed money (you never spend it...just use it an infinite # of times) generates new profits
5 - New Profits from REI are deposited into #3 above
6 - ...repeat until tired, or bored.
...and to your original specific 6% question, my best answer is with a question of my own:
If, you needed $100k a year to live off of in retirement, and your source of "base" generated that 6% in interest per year, which means your "base" would have to equal almost $1.75M, can you rely on that same 6%/year to get there?
Woodland Hills, CA · Member since 2016 · 98 posts · 40 votes
9y
Update: I did some deeper digging on my accounts, and it's more like 12-14% annually, not 6%. I was--stupidly--forgetting to look annually instead of quarterly and overall I'm doing better than I had thought. So, I think I'll stay the course with the retirement account, possibly move some of the money to some funds that might be a little higher risk, but not reduce my contributions.
I'll also work on changing up my budget so that I can put as much as possible of my second job income into my REI fund.
Smithfield, NC · Member since 2016 · 30 posts · 22 votes
9y
Don't forget about the tax advantages of the 401K and IRA's on top of the free money from matching, those add to your returns that often get overlooked on the investment sites dashboard. If you have time try to get into a partnership providing sweat equity to build up cash to put into your own investment down the line. There's people looking for partnerships all over this site.
I agree with most have said so far. 401k match money from your company is free money. Why not take it? I'm glad you look into your account gains again, which is consistent with my 401k accounts with 11-12% returns YTD.
Update: I did some deeper digging on my accounts, and it's more like 12-14% annually, not 6%. I was--stupidly--forgetting to look annually instead of quarterly and overall I'm doing better than I had thought. So, I think I'll stay the course with the retirement account, possibly move some of the money to some funds that might be a little higher risk, but not reduce my contributions.
I'll also work on changing up my budget so that I can put as much as possible of my second job income into my REI fund.
A few thoughts: Higher risk doesn't always mean higher reward though it almost always means higher cost. Consider options with lower costs and broad market exposure. If your plan has a predetermined portfolio option, consider choosing it. If you have an advisor, ask them to help you select the right mix of funds. Remember to rebalance regularly. Understand the vesting and matching requirements of the plan. Try to capture the max needed for both.
Investor · Aurora, CO · Member since 2016 · 114 posts · 112 votes
9y
@Ashley Benning, I have a blended view of the information you have been provided thus far, as I also struggled with where I was going to get money for RE investing. I have a very healthy 401K with my employer (who matches 50% of my input up to 3% of my salary) and my investments are diversified in the fund across 12 holding areas. I checked my statement and earned over 13.5% last year, and 11.8% the year previous to that. Frankly, I have earned well into the double digits in interest on the 401K since 2009, as that was the beginning of the bull run in the Stock Market that we are still on now.
The word "diversification" has been thrown around here in the thread a few times, and that is my draw to wanting to move some of my investing into real estate for long term buy-and-hold. I know that I could continue investing in my 401K, work through to retirement and finish strong (barring any unforeseen economic catastrophe), but the sexiness of real estate brings more investment diversification, through:
1. cash flow
2. appreciation
3. depreciation
4. expense deduction
So, like another poster mentioned, I knew that I needed an additional source of income to fund my REI pursuits, as the returns that I am getting on my 401K now is pretty good (one of my parents retired 4 years ago with only her 401K mutual fund investments (drawing 4% of total) and one rental property (600/mo cash flow, condo paid off), and believe me, life is good for her, so there is no "doom and gloom" if you have only a 401K as a retirement vehicle).
Although many may disagree, I personally would advise against dropping your 401K investment to save money for REI. Why? Because we are still in a stock market bubble, and your gains will be pretty high there, compared to your entry level real estate investing. Many will disagree with this, but my risk tolerance is low, thus I am not as willing to "let it ride" on a RE investment unless the long term numbers pan out for my goal (I look for turnkey properties, fully rehabbed with $300 per door cash flow, 20% down, midwest markets).
There is a caveat here. I would adjust my answer depending on your age and your risk tolerance. If you are between 25-35 years old (I think you are 33), since you have a low 401K balance, you can almost STOP your 401K investment, as the tax benefit and interest appreciation you are getting may be low and could be replaced by your real estate cash flow, depreciation and expense deduction on a rental property (especially if the cash flow is invested in another retirement vehicle). Plus, you have a heck of a lot of years for buy-and-hold, allowing the tenant to buy your investment, before you may need substantial cash flow from the property, so time is on your side. I am over 50, with a young family, thus my risk tolerance and conservative nature for investing is much lower than many (plus, I got burned bad during the last RE downturn due to buying investments at market price peak conditions).
Many posters here have earned the ability to use their RE investments to retire early (and most likely they were not investing in a 401K during their accumulation period), but that has to be through a combination of frugal lifestyle (while accumulating assets) and learning to live within their means monthly, after the goal is reached.
You certainly have a lot to think about, but I tell you there is no wrong answer here, as long as you are saving for your future and investing in something that will bring a healthy return.
Woodland Hills, CA · Member since 2016 · 98 posts · 40 votes
9y
Thanks so much, @Michael Hastings. You have definitely helped me out things in perspective. I think the best way forward for me right now is probably finding ways to cut my living expenses and putting that savings toward REI awhile maintaining my current 401k contributions. That corporate matching is free money! I just wish it were more accessible.
Investor · Seattle, WA · Member since 2017 · 19 posts · 8 votes
9y
I was in a similar situation two years ago, my recommendation (ymmv): Keep contributing max match to 401k, savings could go to traditional ira if you can meet income requirements. You can pull ira money out for primary residence purchase and 401k loan options are good once you have enough of a balance, you can usually borrow up to 50% and repay over 5 yrs, 10 if primary, paying yourself 5% interest as you do. This combined with a brrrr strategy is what we did to get into our first rental, now looking for the next opportunity using the same down payment. If you haven't already done so, run the numbers on your current home and see what it would look like as a rental, sometimes starter homes make decent cash-neutral equity opportunities that you can then sell within 3 years of putting into service tax-free.
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
9y
Unfortunately, in society today, the complete lack of understanding on "how money works" compounds the differences between "spending and using", between "cost and expense", between "problem and opportunity", between "risk and control", and between thinking, and then acting like, a "homeowner" when they are investing. The great separator is their knowledge bases. Usually you can immediately tell the difference between the different groups. The first group describes the other as always "thinking outside the box". The 2nd group describes the first group as "having a smaller box".
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
9y
@Ashley Benning It sounds like, via your update, you're doing just fine as far as getting a return goes. BP is basically split into two groups. One faction (I'm a part of it) believes that diversification is important, I don't want to have all of my eggs in one basket, etc. I have money in real estate and money in the stock market. However, I don't have that stock market money in homebuilding stocks, REITs, etc. I'm not trying to use a 401K, Keogh, etc. to "double down" when it comes to real estate. The other group believes that every dollar you put away in retirement is a wasted dollar. Because it could be used/turned-over/compounded/etc. over some timeline (like 30 years) and would end up creating more value/wealth. Their version of "compound interest" is using the same $25K you have in savings in repeated transactions. I can't, uniformly, say that they're "wrong" in that regard.
That said, compared the two is really comparing apples and oranges. One has tax benefits year in and year one, one has tax deferrals. In one investment (stocks) you can only lose your original investment. With real estate you do run the risk of losing more than your original investment. People will say you can "walk away" but that assumes your credit rating has no economic value...which is...well...ummmmm...a "unique" perspective.
However, all of this is really "pie is the sky" thoughts that are hard to put into actionable advice. What I think I'd be trying to think through if I were in your shoes is if that $25K + $300/month number can get you where you want to go in 5 years. Can you turn that principal (with the HML capital from mom and pop) into a return over the next 5 years that will allow you to leave your full-time W2? If so, how do you get there? Do you need the $25K to get there? Is the $300/month integral to you achieving that goal?
Before you cash-out 401K or stop employer matching contributions I'd look at your spreadsheet models and figure out how adding and subtracting those variables changes the scenarios. Side note, if you don't have a spreadsheet model don't do anything. Build a spreadsheet model. If you don't know how to do it, learn. There's a 100% chance that model won't actually be what happens but you have to start with a plan.
Side note, my reason for rambling about all of this is you're talking about flips and BRRRs when you live in Woodland Hills. Doing flips in Los Angeles, San Fernando Valley, etc. I don't know that $300/month is really going to "move the needle" and I don't know if another $25K in principal capital will either. The median home price in Woodland Hills is $735K so your retirement dollars don't (to me) sound like they will make a material difference in getting you into a deal.
Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
9y
I don't have much to offer as far as an answer to your question, but I loved the "do I drop it like it's hot" so had to respond! Haha! (I actually did laugh) And Woodland Hills...very cool...I'm down in Venice.
Woodland Hills, CA · Member since 2016 · 98 posts · 40 votes
9y
Andrew Johnson I appreciate the insight into the two modes of thought. I feel drawn to diversification, at least for now. And you are right that the extra income I could get from stopping retirement contributions is negligible in my market.
I think I am just frustrated with my false starts in REI lately and grasping at straws. I need to refocus and maybe think bigger and also adjust my strategy. I have looked at several properties, offered on a few, and not gotten any. It's time to analyze why I'm not getting anywhere.
Appreciate the input!
Ali Boone, Hi! Glad you were picking up what I was putting down.
Investor · Kansas City, MO · Member since 2017 · 791 posts · 1k+ votes
9y
I went all in on real estate. Took 7 years to achieve financial freedom (for the lifestyle we want). My total left in investments at this point is ~$150k. This spits off roughly $8k per month.
If I wanted to follow the safe withdrawal rate figure of 4%, I would have needed to put in about $1.7mil into a retirement account over those same 7 years to achieve the same annual income I get from rentals (assuming equal investments from the start and using average return of 7% which I believe is the historic adjusting for inflation adjusts for inflation).
I'm working on two larger projects (that are above our financial freedom) that will take ~2 years to fully materialize and all value added). Refinancing those two will put an additional ~$350k in my pocket (tax free) and I'll be around $13,500 per month in cash flow after the refinances. I could leave the money in and cash flow ~$16k per month. At that point I'll be 34.
If I wanted $13.5-16k per month using retirement accounts @ 4% safe withdrawal rate, that would mean the balance would need to be $4-4.8mil... I'll let you figure the odds of that happening within that same timeline... If you're willing to hustle and go all in on REI, do it.
Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
9y
We're getting ready to close finish up a cash out refinance for an investor on a property here in Oakland.
Once he's recouped his initial investment from the cash out proceeds, he'll still be out of pocket $60k.
The property cashflows $4000/mo.
$4000 * 12 / $60,000 = 80% CoC ROI.
80% a little better than what a 401k can do...
BUT if your 401k has an employer match, that needs to be included in your math too. So max it out first, by all means. Even if the CoC ROI is lower, it's also virtually risk and work free. My 80% guy above isn't typical of what a first time investor can expect, he's very experienced.
TLDR: @Ashley Benning, I'd max out your employer matched 401k contributions first and foremost.
Rental Property Investor · Denver · Member since 2017 · 121 posts · 121 votes
9y
You don't need to choose between saving in a 401k and advancing your RE goals.
I'm maxing my 401k currently - the intent is to use it to loan myself money for down payments on investment properties.
I'm using pre-tax money, which is matched by my employer, to get a loan where I pay myself the interest.
Depending on your circumstances it could be a good option. You need to know that A) you'll want to stay with that employer for the term of the loan, it is typically due within 30 days if employment is terminated and B) you'll be able to afford both your new RE expenses + loan repayment.
You can take up to 50% of your 401k or $50k as a loan, whichever is greater is the maximum.
Eventually when I'm doing REI full-time I'm going to roll this into a solo 401k and then I will not need to worry about the employment contingency.
"Diversification is protection against ignorance. It makes little sense if you know what you are doing."- Warren Buffet
Just some food for thought...Best to all!
Lol. When I feel that I am as investment savvy as Warren Buffet I will stop diversifying but until then I will diversify.
As you should. However, diversification just to be diversified is not the answer, anymore than eating your veggies just because they are there.
If I have a nice steak, and the veggies they bring look like they've been run over by a car...in order to attempt to kill the fungus on it, I'm not going eat the veggies...just to have a well rounded (diversified) meal.
Like I said above. You can't make a bad deal look good just because it makes you diversified.
If you red between the lines, Warren Buffet actually said it was more important to get that knowledge.
Rental Property Investor · Aptos, CA · Member since 2017 · 3 posts · 0 votes
9y
I agree with some of the above posts. If I were in your shoes I would do the following.
1) Set a goal. Replace W2 NET income
2) Establish a plan. I use turn-key SFR properties in the mid-west that produce ~300/month net.
3) Figure out how to fund it. Liquidate current assets/creative financing.
There are infinite ways to create wealth and the 401k is not always the best strategy, regardless of a company match. If you find a system that works, use it to achieve your goal. Everyone has different goals and different strategies to achieve them. You have to ask yourself what you really want. I recently liquidated some qualified plans and stopped contributing to my 401k until I achieve financial freedom through cash flowing real estate. Not everyone will agree with this strategy, but it's what I needed to do to achieve my goal.
Portfolio theory shows that as you increase the number of your investments you help to reduce your overall portfolio risk. You don't eliminate the risk, but you are looking to reduce it by not putting all your eggs in one basket (or dirty veggies all on one plate).
If you buy one railroad stock, you have risk from the company performance, industry performance, and the overall market and economy performance. If you move to more than one railroad stock, you spread your risk across several companies, but you don't eliminate the industry, market, and economy risk.
So, in theory, you would also buy a basket of stocks that have nothing to do with railroads or transportation or anything that the railroads might carry like coal. Because if the railroad industry has a system shock, like a derailment, anything that does business with the railroad would also be hurt.
So, you try to spread your risk across multiple industries.
In a really diversified portfolio, you also invest outside of the stock market like real estate.
If you buy real estate, to have a more diverse portfolio you would also hold stocks and hopefully stocks that are not industry related like building supplies.
But that doesn't eliminate the economy risk. So, you would invest in multiple economies like foreign stocks in the form of ADR's, foreign assets or park some cash in another country.
How diversified you need to be depends on how much risk vs. return you are willing to take on and your goals. That risk is different for every investor and will largely depend on age, portfolio size.
If you are in your 20's, you can afford to take on a lot of risk. If you are on a fixed income and elderly you would probably want less risk...