401k contributions or Real Estate Investing

[David Fals]

It's the end of the year and I am considering investing in a rental property as a first-time owner, who already owns a primary home. However, I am also thinking about whether I should max out my 401k like I did this year. The pros and cons of both options are driving me crazy!

[Jeremy H.]

It's mind boggling to me when I come across people (mostly realtors or people heavily in the RE industry) that have zero retirement other than rent houses. I do get it's a strategy, and it may work, I just don't love it honestly

A 401k is hard to beat - I'm saving 32% right off the top (already hard to beat that return in RE), my employer is matching 5% (free money), the money that's not taxed now is now growing in my 401k. And over the long term you can expect an 8% return (I invest in fidelity's s&P 500 tracker) again a solid return over the long-term 

I personally do a Roth IRA on top of that. Tax free gains. Another thing that's hard to beat.

Then I do an HSA - again saves me 24-32% depending on the bracket at this point. Tax free growth again. Can convert 35k into a roth IRA in later years as well, if I remember right

Then I do a 529 for education. 

Then I do a regular contribution to a taxable brokerage (S&P 500 tracker) 

"Savings" stays in an HSA and I keep the minimum in my bank accounts 

I invest in RE after all this. I don't get to save on the taxes now (can't be REP due to W2 and can't deduct due to income limitations) so I have to pass the tax savings forward...until I retire essentially or make less than 150k and have passive income/gains I can deduct from. RE for me is diversification, increasing net worth through equity by buying at a discount, and a small monthly cash flow. Over the long term (think 20+ years) you'll have some equity paydown and appreciation as well. This is where RE shines, in the very long term. Retiring on LTR cashflow is, in my opinion and for my lifestyle, not realistic unless you are running a really big operation (which most mom and pops are not)