put cash into Rental Property or Roth IRA?

Question

For the last few years, I have been maxing out both my wife's and my annual roth IRA contributions with savings from work. I am in my late twenties and think of our IRA as more of a bonus later in life then what I am relying on for our retirement. My goals is to have enough rentals to provide me with cash flow so that an IRA is not really even needed. Should I stop contributing to my IRA and direct that cash into properties? It seems that the main party line in the personal finance world is to max IRA first, then invest in other things with whats left over. I know its a case by case opinion based question but I'm curious what others would think/say about that.

John Morgan · Answer

@Jesse Hodges

I used to put as much $ into our Roth IRAs as possible. I considered it our “emergency money”  or “play money” in case we needed a big chunk for something. Or thought I would pull out the principle to use it to invest in something later since there are no tax consequences for pulling out what you’ve put in.. not your gains over the years. I bought stocks and actually did well with some dumb luck. Anyhow, I finally decided to get into real estate 5 years ago. I pulled 62k out of our Roths and didn’t have to pay a cent in tax since that was just our contributions over the years. 5 years later and we now own 10 SFRs. I have no regrets dipping into our Roths to get me started into the real estate game. Our net worth is growing exponentially with these properties (that our tenants are paying off) compared to the stocks we owned in our Roths. Although I wish I hadn’t sold all my Apple stock five years ago. Lol. Good luck!

Dave Spooner · Answer

@Jonathan R McLaughlin The 25+ year horizon is key! If you're a short term investor, the risks are exceedingly high. I would recommend transitioning investments from stocks to bonds and lower interest vehicles as you approach your retirement, but that may be a discussion for a different forum...

Allan Smith · Answer

You will get a wide range of opinions on this one, but here's my take on it .my 401k and Ira best ever did maybe 8%. When I left my day job my 401k had lost money.

when I buy a rental, it's usually at least 12%. But then it will likely appreciate, and since the average is 4%, we'll go with that for now. Some of my properties have doubled in value in a few years but that was luck more than anything. Then you also have the loan getting paid down by the tenants. Lastly, there are tax advantages.

so when you zoom out and look big picture, A rental could increase your net worth on that cash dollar by 100% or more. What an IRA can do is compound, but I have found that rentals for me will still beat even The Compound Effect by quite a bit. My most recent BRRR gave me back home most all my cash, so my cash roi is above 35%, and then I still have all those other factors I mentioned above.

so, of course it is personal preference, and rentals generally take much more effort than an IRA, but those are some of the factors you can consider.

Dave Spooner · Answer

@Jesse Hodges Alan raised a lot of good points but I think the last one is really important. Investing a Roth IRA in safe vehicles like an S&P ETF is about as passive an investment you can possibly make. With a 25+ year horizon, it's virtually zero-risk as well.

Investing in property takes significantly more effort and has quite a bit more risk, but as a result, the returns can be a lot higher. 4% appreciation feels pretty high to me, but having someone else pay down your mortgage while also creating cash flow is incredibly powerful. I myself am moving more of my money into property investing whenever possible, but it depends on your situation!

Dave Spooner · Answer

@Jesse Hodges I have managed to find ways to still max my Roth alongside REI. I try to take advantage of all tax shelters whenever I can (401ks, IRAs, HSAs, etc.), but I do emphasize real estate above those. At some point, I recognize that I likely won't be able to do it all, and depending on the investment, I'll likely put my money into real estate.

SDIRAs are a great option. @James Hamling had some great suggestions on that front. I would strongly, strongly suggest that if you want to go that route, find a knowledgeable custodian you can really trust. Do NOT cut corners on it. I've heard of great experiences with an SDIRA and considered it myself, but if you get it wrong, it can be a disaster. Just make sure you're doing your due diligence!

Carl Fischer · Answer

@Jesse Hodges

I have been doing a Roth IRA since 1998 when they started. I was in real estate before that.  I put real estate in my Roth IRAs.

I am 65 now and had your same thoughts-I am very happy to have the  real estate in my SD Roth IRAs. A lot better than social security. Tax free income for life plus 10 years is very nice. Worry free from increased taxes gives me peace of mind.-I don’t know any individual or professional that isn’t glad they have a Roth. On top of that many people who don’t have Roth’s wish they did.  I see it in my clients all the time.

In addition, a little known fact, Roth IRAs provide asset protection and penalty free access to your money.

Do both is my suggestion.

Jonathan R McLaughlin · Answer

Agree completely with the time horizon you propose and I’m a big fan of diversification. I cringe when I hear risk free though, people actually start to believe it! I figured you meant something like that.

There have been long periods of relative decline in the market and people forget the risk is there because we have been in a liquidity induced bull period for so long

Jonathan R McLaughlin · Answer

@Dave Spooner virtually risk free? You weren’t around in 87, 01 and 08 then...

Joe Splitrock · Answer

@Jesse Hodges I would try to figure out a way to do both. Roth has the advantage of tax free withdrawal. For most investors, they can expect their tax bracket to be very high in the future. This is due to higher income and progressive politicians advancing a high tax structure. Maybe even more scary is things like wealth taxes, higher capital gains, bonus taxes on rental income, etc. Even though these things do not exist today, they likely will within our lifetime. Taxes are an investors highest expense over their investing career, so you should always be looking to find ways to reduce that expense.

Ron Todd · Answer

I think diversification is key. I still contribute to IRAs and my real estate ventures, the only thing that has changed over the last decade is that I've shifted real estate to be more of a priority. If you are unsure, maybe put half as much into the IRAs and move the rest towards real estate. Like someone said above, you can withdraw from your Roth tax free as long as you are taking out what you put in and not any of the interest you've accumulated. I've done that before when I found a property I wanted to buy in cash. You can play around with the monthly amounts that go towards your Roth and real estate and see what works best for you.

put cash into Rental Property or Roth IRA?

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