Roth IRA or all in on Real estate?

Question

I've heard time and time again that real estate will out preform retirement. Though it's hard to deny the fact that Roth Ira's are 100% tax free after 69.5. Getting into real estate I'm wondering if I should continue to max out my Roth IRA or stop and go all in on real estate instead and forget retirement. Or maybe there's a good middle ground to shoot for instead, or even a totally different option. I also have a 401k that my 9-5 does a 5% match on so I do 5% just to get that basically free money as well. Any and all suggestions would be excellent!

John Morgan · Answer

@Lane Mcdonald

I’m a fan of Roth IRAs and 401ks only putting in the minimum match to get the free company money. And I’ve used both my 401k and Roth to create infinite returns and generational wealth with real estate in the 9 years I’ve been investing. Here’s how I did it.

I initially took out 62k (tax free) from our Roth IRAs. You can pull out the principal you’ve put in them over the years tax free, just not the earnings. This got us in the game with very little of our $ to get started. Since then, I’ve paid myself back with the rental cash flow. And I’ve taken out five 401k loans up to 50k to buy properties. I pay myself back with the cash flow and repeat. My net cash flow from my rentals is now 17k/month after all my expenses. I’m losing out on the opportunity costs if I would have left my money in these retirement accounts is what the critics tell me for tapping into my retirement funds and borrowing from them. But I now own over 5 million in real estate with about 50% equity by using my retirement funds. I don’t think the 62k I borrowed from our Roths and 401k loans would be worth 2.5 million if I would have left it in there. Plus I have 17k/month in mailbox money coming in which allowed my wife to retire 15 years early. And it’s all tax free income on the side due to all the real estate write offs. I’m a fan of leveraging your way to wealth and my retirement accounts were a way for me to do it since I was broke when I started investing in RE 9 years ago and was only making 40k/year. People still tell me I should never touch my retirement account $ to buy RE, but I disagree. Good luck!

Brett Synicky · Answer

@Mark S.

Totally agree people should own real estate in and out of a retirement account for that exact reason. However, write offs and depreciation are NOT the point of a retirement account.   Tax deferred growth or tax free growth in a Roth are.   Unless you have UBIT in an IRA then you can take those deductions on that portion subject to UBIT.   People need to do their own evaluation of what asset class(s) is going to grow their retirement account as quickly as possible. It might be a combination of stocks, bonds, mutual funds and alternative assets.

Basit Siddiqi · Answer

Any 'investment' can act as a 'retirement'.Roth is great because it is tax freeI personally like real estate also becuase your cash flow is normally shielded by depreciation.I like real estate further because there is less complixities / restrictions when it comes to IRA such as the 5 year rule, year you have to take distributions, RMD, Unrelated Business Income Tax(UBIT).Your goal is to have the best return and the most money at the time of retirement, what is the best way to get there?

John Morgan · Answer

@Lane Mcdonald

Oh, and one more thing when you want to compare returns with the stock market vs RE returns. Your cash on cash returns with RE might only be 7-10% at first which isn’t exciting at all compared to the SM. However, the power of leverage will make you very wealthy in only 10 years or less when you factor in your monthly cash flow, principal pay down of your mortgage and 5% appreciation. For example, a “base hit” single family house I bought off the MLS 6 years ago cost me 100k. Rent at the time was $1000/month and I was making only about $250/month net after all my expenses at the time. I put 20% down (20k) and owed 80k on it. 6 years later I only owe 48k on it and rent is now $1800/month. I now net about $850/month and the house is still appreciating 5%/year. When you factor in my cash flow ($850/month), principal pay down on my mortgage (which is about $380/month now), 5% appreciation on the house ($875/month now) it equals 25k/year. And my initial down payment was only 20k! That’s a 125% return on my initial 20k every year. And this is just one example of an average deal I’ve found. I bought most of mine off the MLS and don’t hustle like many people on here do. I buy n hold single family homes in C+ hoods in the Dallas area where demand is high. My point is, don’t just look at your boring initial 7-10% cash on cash return when you buy RE. There’s more to it. And after 3-5 years I tap equity in many of my properties to scale up with no out of pocket cash by doing cash out refis. I’ve bought 14 houses by doing this. And again, this all started by taking out 62k from our Roth IRAs and doing five 401k loans over the last 9 years since I started investing in RE that have no tax penalties. So keep that in mind when comparing the SM returns to RE. And when we have the next recession, rent money keeps coming in because people need a place to live. There’s no guarantee the SM will have these huge returns every year we’ve been seeing lately. And I target working class hoods in C+ class areas where rentals are in biggest demand in good times and bad.

Mark S. · Answer

@Brett Synicky Not a good idea in most situations. IRAs and RE each have their own tax benefits. Putting RE in an IRA effectively gives away the benefits of RE. Do both, but separately.

Bruce Lynn · Answer

Do both.  Fully fund your Roth.  5% match is 100% return on your 5% no matter what happens.  Tough to beat that.  That might help you diversify into options you don't have otherwise.

Make separate investments into real estate.   You can do self directed IRAs and 401ks, but it complicates things a lot and you loose depreciation.   Might though is just keep them separate.

Brett Synicky · Answer

Something you might consider is moving some/all of your pre-tax or Roth funds into a self directed ira and investing in real estate.  Or a solo 401(k) since that won’t have ubit on leveraged real estate. learn more here:   Solo 401(k) SDIRA

Roth IRA or all in on Real estate?

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