Contributing to 401k or 403b or ROTH vs. Saving for Down Payment on Investment Property

[Jim Herbst]

I have been inspired by the podcasts and insight on BP and appreciate how a LONG-TERM buy and hold approach (my niche and strategy) can lead to quite significant 'passive' income streams over time. I also understand the importance of diversification and respect the long-term annualized rates of return in the stock market over the last 50+ years.

I suggest reading Lifestyles Unlimited's article on 'How 22 rental properties can retire you faster than a 401k' and their previous article on 'How 15 rental properties can retire you faster than a million dollar 401k'.

As fellow real estate investors, I was wondering how others approach this situation. Obviously the less you contribute to your 401k, the longer it takes to produce a down payment on your next investment property. Also, it's difficult to rationalize allocating funds to a retirement account which may yield 7-9% annualized when you could get 20% cash on cash in a rental property which also has the potential to appreciate.

Personally, I contribute 8% pre-tax to a 401k and I also get a company match. What are your strategies? Do you contribute the minimum to receive the company match (if offered)? Do you contribute nothing? Certainly, I understand that many may not have a company 401k to invest in at all (what are your retirement planning strategies). I am quite interested in people's strategies.

[Jon Holdman]

I'm 100% with @Dmitriy Fomichenko on the company match. Contribute at least enough to get whatever money your company is willing to give you.

Real estate is part of a portfolio. Some argue that if you know how to invest in one specific area really well then you should focus there. There's something to be said for that. But even with real estate there are external factors that are out of your control.

Keep in mind the company you mention is in the business of selling real estate education. Of course they are going to make real estate investing sound very attractive. That makes it easier to sign up for their various programs. Same could be said of many companies in that business.

20% cash on cash returns along with a possibility of any significant appreciation is, IMHO, a pipe dream. Historically, real estate prices have just matched inflation. There have been exceptions, but that trend is born out by the Case-Shiller data that goes back to the late 1800's. The exceptions are when there was a major economic or lending policy change. Real estate has a much larger risk of losing more than you've invested than stocks or bonds. If you buy with margin, that's possible with stocks and bonds. But for a straight purchase its not. With a leveraged rental it is a very real possiblity. With a highly leveraged rentals (LTV > 80%) even a small decline in value can result in very large losses. And the only way you generate those high returns is with a lot of leverage.