Put $ to Matching 401(k) Contributions or Real Estate?

[Christian Gehman]

I've heard from guests on several BP podcasts that 401(k) contributions are very modest investment vehicles and that I should take that money and invest in real estate instead. Jeff Brown on BP podcast #17 claimed that even employer matching 401(k) programs are not worth investing in vs solid real estate investing if you "run the numbers."

I see how just a straight 401(k) with no employer matching might offer very modest long-term returns, which solid real estate investments could easily beat. But is real estate better even than 401(k) with employer match?

I've been at an employer for 3.5 yrs contributing to a 401(k) employer match up to 5%. I find it hard to believe that I'm better off investing in real estate and passing up an employer match. What would it look like to run the numbers on something like this?

I'd love an example or any actual analysis anyone has done on this kind of scenario they would be willing to share? Are you currently passing up a 401(k) employer match? If so, please share why!

[Spencer Hilligoss]

@Christian Gehman - a company matched 401k is essentially 'free money.' Strongly encourage you to contribute to receive the maximum match. 

For reference: I contributed to a 401k for over 10 years, even beyond company match. Once I discovered the power of real estate, I reduced my 401k contributions and will now only contribute to it if I receive a company match

[Edward Liu]

Absolutely put in 401k and max out company match. If you really need cash for real estate, you can borrow from 401k account. You can also convert 401k into self directed IRA for real estate investments. Get the 'free' match first in 401k, then figure out how to get that money into real estate.

[Eric Schultz]

Christian Gehman

Take the 401k match and diversify in index fund options with low turnover and expense ratios, if offered.

You would have to be a fairly experienced ‘active’ real estate investor to achieve a 100% return on your invested capital in a 12-month time period, which is what your employer 401k match is offering. The big difference is that contributing for the 401k employer match is completely passive in regards to your time, while being an active investor is not.

Yes, the tax benefits are much different between the two investments, but there are too many variables to quantify for a one-size-fits-all comparison.

You can definitely do better investing in real estate either actively or passively versus investing the difference of the employer match and the 2019 max allowable 401k contribution of $19k.

[George Blower]

@Christian Gehman

@Edward Liu

Keep in mind that contributions to your current employer 401k plan can generally only be withdrawn once you leave your job (separate from service) or reach retirement age.

[Taylor L.]

I'm passing up a match so I can allocate those funds to multifamily general partnership. I also have rollover IRAs that I use to invest as a limited partner in self storage and multifamily properties.

At the end of the day this is a personal decision. You have to consider your options and make a call.

[Dan H.]

I personally find it fairly easy to achieve better than 100% short-term ROI via real estate (via BRRRR). You would think this means that I am advocated foregoing the 401K company match but I am agreeing with @Taylor L. that it is a personal decision.

While I have consistently been able to get better than 100% short-term return on my investment, it is no where near as passive as a 100% matched 401K contribution.  The 100% matched 401K match is maybe as close to free money as you will ever find as it requires virtually 0 effort.

BRRRR requires searching for and finding an appropriate RE (I love the hunt, it is like finding the garage sale deal on steroids), purchasing it including obtaining financing (not much fun), adding the value add which typically implies dealing with multiple contractors (I like adding the value and deciding what we are going to do to add the value), finding and managing tenants, and the refinancing. Most of those tasks I like/love or do not mind, but they all take time and the process has risk (our biggest risk has been low appraisals). Be assured of greater than 100% return takes skill that may not be achieved by the newbie RE investor.

Compare that to just going to the 401K website and indicate you want to contribute 5%.  The biggest decision is pre-tax (regular 401K) or post tax (Roth 401K).  If you are young I recommend the Roth.

I would choose the company match while continuing to further my RE knowledge.  In a couple years, with a couple/few raises, you may be able to contribute the 5% and save for the RE purchase and be knowledgeable enough to complete a value add that returns in excess of 100% of the investment.

Good luck

[Christian Gehman]

@Dan Heuschele

Thank you so much for your thoughtful reply. Now I understand better why some real estate investors out there make this claim about possibly foregoing a 401(k) matching program for better returns. Great advice for the future, too—I will take it!

[Christian Gehman]

@Taylor L.

Thanks for sharing your alternative strategies, very helpful.