Would you put off retirement saving to buy real estate?

Question

Im finding myself faced with the decision to reduce 401k deposits in favor of putting aside money for a down payment on a primary residence so i can get a house faster. I currently live in an apartment.

What are your thoughts?

Account Closed · Answer

The wife and I are cashing out our IRAs to fun the first deal. We have less than 50K saved, haven't been saving long, but we're on step 6 in Dave Ramsey which means we're saving 15% each annually.

Our choices were decrease saving, or take a one time hit. We took the hit.

If this kicks off we won't need the 401K anyway muahahaha.

Omar Khan · Answer

@Alan E. I wouldn't recommend reducing your 401K deposits. That is a sub-optimal decision based on your age, income (my assumption based off your age), investment time horizon and needs (again, my assumption).

At this stage of your life, you need a combination of liquidity and appreciation. The 401K and similar plans offer you flexibility that real estate won't.

That doesn't mean you shouldn't buy real estate. All it means is that if you had a to pick one, you should pick 401K all day, every day.

P.S. You can look at it from another angle. How do you think has a higher chance of long-term success - amateur BP investors with a 1-2 houses or companies in the S&P 500?

Carl Fischer · Answer

@Alan E.

I am a fan of retirement accounts, especially the Roth IRA or Roth 401(K).  I would not recommend that someone cash out their entire 401(k).  I think its a good idea to meet your companies match policy to get the complete employer contrition.

Do you have an IRA? Did you know their is a special type of distribution for a first time home purchase?

You can also take a loan from the 401(k)

As @Sean Carroll mentioned if you were buying real estate for investment purposes only (not to live in personally) there are self directed retirement accounts that allow you to invest in real estate to grow your retirement wealth. Many investors like this for the added control over their IRA and for diversification.

Terrell Garren · Answer

Purchase the lowest cost house you can be happy with and avoid paying rent.  Invest the rest based on your goals e.g. 401K, real estate etc. My wife and I went from a 70K home to a 450K home to keep up with the Jonses and set back our investing by 15 years.  Learn from my mistakes.

Sean Carroll · Answer

@Alan E. that’s a yes or no question for me because the real estate is my retirement. You can do a lot of cool things with self directed retirement accounts. I personally am saving up and maxing my IRA and building that up until I can have enough to buy real estate with it. I am meeting my employers onctribution max in my 401k since that is basically a 100% ROI right from the start. I then take the remainder and buy real estate.

Peter M. · Answer

Depends on your goals and expected return. Some people classify a primary residence as a liability because there is no cash flow (I personally see it as an asset) and unless you are renting it out you are losing money but everyone has to live somewhere so you might as well be paying down debt on something you can potentially sell for profit later.

So yes IMHO, I would reduce the 401k down to whatever my employer matches and save the rest to buy a house or rental property. But that's me.

Dustin Beam · Answer

@Alan E. I just finished Scott Trench's book and if you haven't read it, you might want to. His book is aimed at people making 50k (ish) or more and basically gives solid advice throughout for someone starting out.

Some of it applied to me, some didn't, but depending on where you are in life it could give some insight.

Josane Cumandala · Answer

I guess I'm undecided because a primary residence is not going to generate passive income for you so I see no net positive with either option. Sure you can sell the home when you retire but will the proceeds of the sale after taxes and broker fees really net you a profit after a down payment and decades of property taxes, debt service, mortgage interest that you can no longer deduct from your federal taxes, repairs and homeowners insurance? I don't know about all that. Also, both a 401k and a primary residence both assume the economy will not be in a contraction when you go to retire - an assumption that has burned countless many people.

I would focus on creating passive income before worrying about a primary residence. Saving money for the future is far easier to do with two, three or more income streams rather than just one.

Robert M. · Answer

Do not be in a hurry to buy a primary home.  Unless you have a high income I would recommend the Roth instead of the 401K. Keep feeding the IRA, compounding interest is awesome.  Speed kills!

Best of luck in your journey.

Would you put off retirement saving to buy real estate?

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