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

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

Jim Herbst
Investor · Powell, OH · Member since 2013 · 33 posts · 7 votes

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.

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Jon Holdman
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
12y

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.

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  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    12y

    @Jim Herbst

    If you company matches dollar for dollar, I would contribute to the max that they much. This is 100% return on your money, it would be very foolish to give that up. Up to what percentage does the company matches?

    If you wish to contribute more into a retirement account, I would not put those additional funds into company 401k, since you will be very limited on the investment options. You may want to consider self directed IRA or 401k and grow your investments tax-deferred (or tax free in a case of a Roth). You can invest in real estate using your retirement account, but many other investment opportunities are available to you as well such as investing in notes, flipping properties, etc.

    1Reply
  • Jim Herbst
    OP
    Investor · Powell, OH · Member since 2013 · 33 posts · 7 votes
    12y

    I agree. If a company match is available, you should at a minimum invest what is necessary to reap the benefit of the match. Can't beat that return!

    1Reply
  • Jon Holdman
    Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
    12y

    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.

    2Reply
  • Jim Herbst
    OP
    Investor · Powell, OH · Member since 2013 · 33 posts · 7 votes
    12y

    I could not agree with @Jon Holdman more. Real estate, regardless of your level of knowledge or competency, should should be a piece of your retirement puzzle (some here may argue a large piece). I personally know many people with 'successful' careers who completely overlook real estate and label it as 'too labor intensive' or 'to prone to market fluctuation' or 'more complicated than a target fund'. That is primarily why I became interested in BP, because I too was unfamiliar with real estate as a mechanism for wealth generation or protection. I appreciate diversification and while I agree that to get a 20% COC return it will be highly leveraged, thus greatly increasing risk and that appreciation should be treated like a cherry on top rather than as a guarantee, real estate is versatile. It allows you to take those calculated risks and while you can never truly eliminate external factors, real estate ownership does provide a bit of control that is lacking from investing in a 401k.

    Basically, I enjoy the intellectual discussion and insight from those significantly more experienced than I.

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  • Liam Goble
    Rental Property Investor · State College, PA · Member since 2013 · 287 posts · 99 votes
    12y

    Personally, I agree with the whole discussion here. I invest in my SIMPLE IRA to meet my company match, which is then a 100% return on my money and any increase in stock value is over and above the 100%.

    I then invest $100/month into a stock fund for my daughter (div. paying stock). I'm considering that if/when I increase that amount, to switch her investments into real estate.

    Lastly, I invest another ~$150/month into the stock market via a DRIP account. This amount basically keeps me honest and out of Starbucks, otherwise I'd spend the $150 there every month (I know, I'm an addict).

    Most of my monthly free cash flow budget ~$700/month is invested into my RE activities. I have an aggressive financial independence goal, so I'm maximizing my REI right now.

    1Reply
  • Dan N.
    Investor · Austin, TX · Member since 2013 · 113 posts · 30 votes
    12y

    The cash-on-cash returns that Lifestyles quotes are definitely based on positive cash flow on leveraged properties, not on appreciation. Of course, realistic cash flow levels vary by market. Of course, real estate has tax advantages that 401ks do not.

    0Reply
  • Nicholas Jasmine
    Real Estate Investor · Alexandria, LA · Member since 2014 · 70 posts · 18 votes
    12y

    I work in the oil industry and there are many millionaires out here because of 401k. The idea that you should only goes as high as the company match is crazy. Real estate is a great source of income, but for most people maxing out your 401k, 17,500$, should be the first thing you accomplish. This is easy to do. My example I started contributing 10% company matched 5% and every raise we have gotten I gave half of it to the 401k plan. Now in less than seven years of working I max out every year. There are many investment vehicles to pick from in a 401k so don't let that discourage you.

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  • Michael Seeker
    Investor · Louisville, KY · Member since 2011 · 1k+ posts · 1k+ votes
    12y
    Originally posted by @Nicholas Jasmine:
    I work in the oil industry and there are many millionaires out here because of 401k. The idea that you should only goes as high as the company match is crazy. Real estate is a great source of income, but for most people maxing out your 401k, 17,500$, should be the first thing you accomplish. This is easy to do. My example I started contributing 10% company matched 5% and every raise we have gotten I gave half of it to the 401k plan. Now in less than seven years of working I max out every year. There are many investment vehicles to pick from in a 401k so don't let that discourage you.

    This is very dependent on where you are in life and what your prospects at your 9-5 look like. I personally couldn't care less about a 401k except for the fact that my company matches it. That is because of my personal situation - I'm 28 and plan to have plenty of passive income to live out the rest of my life LONG before I get anywhere near 57-65. I don't want my money "stuck" without the ability to utilize it for anything until Uncle Sam gives me the green light. Your strategy also assumes the rules won't change before you get to retirement. What happens when congress realizes that in order for SS, Medicare and other tax based systems to continue to work the retirement age needs to move from 65 to 70? Maybe you'll already be on the other side of retirement and won't care, but I don't want to have to drudge along for another 5 years in the corporate world waiting to retire because I maxed out my 401k instead of investing that money in something I could access anytime I need it.

    Aside from that, most people don't get the kinds of raises every year to where $17,500/year is achievable in 7 years. Perhaps you're in a high paying field or have gotten way better than the 2-4% that is the norm in corporate America, but that approach just won't work for many folks.

    2Reply
  • Eddie T.
    Rental Property Investor · NY · Member since 2013 · 844 posts · 350 votes
    12y

    Invest in the 401k up to what your company matches like what @Dmitriy Fomichenko said. Then after that save up and buy yourself an investment property!

    0Reply
  • Mark S.Pro Member
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
    12y
    I max out my 401(k) at $17,500. I also put $5,500 into my Roth IRA, although I'm getting to the point where I may no longer be able to contribute directly to a Roth and may have to go the back door route instead and convert. My company matches dollar-for-dollar on 6%. They also provide a cash balance pension plan where they contribute 6% of my annual earnings. I've always been obsessed with maxing out my retirement accounts, HSA, etc. Due to this, I'm quite a bit shorter than I want to be in after-tax available cash for REI. I'd prefer NOT to touch my retirement savings for REI, and to instead do so traditionally with after-tax cash. Even though REI returns can be substantially more than, say, stock market (by the way, I am young and nearly 100% equities in my retirement accounts), I would rather have the tax benefits, use leverage, etc., with real estate without having to touch these funds. That way, if things go wrong, I didn't sabotage my retirement accounts at the same time. I'm also starting to invest in taxable accounts and hope to use THAT (non-retirement money) for REI once I build it up a bit more.
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  • Account Closed
    Homeowner · Pittsburgh, PA · Member since 2014 · 854 posts · 511 votes
    12y

    My approach has been much more aggressive than most when it comes to my retirement accounts.  I started off contributing up to the company match.  I recall reading a suggestion to increase your contribution every time you got a raise.  Whatever my salary increase was, I tried to increase my contribution by 1/2 of that.  Unlike @Nicholas Jasmine I do not work in a high salary field, so maxing out my 401k annually is not realistic let alone easy.

    I currently contribute 25% to my 401k and have been able to max out my Roth IRA the past few years. When I recently decided to make early retirement a goal, I immediately realized the shortcoming of not investing outside of my retirement accounts. My accounts have done well for me, but I can not benefit (without substantial penalty) from them until I am 59 1/2. Contributing to a 401k is a great vehicle for retirement but not for early retirement.

    That is what brought me here to BP.  I would like to invest in Real Estate to generate positive monthly cash flow that will bridge the gap between my desired early retirement and access to my retirement accounts.

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  • Walt Payne
    Real Estate Investor · Sebastian, FL · Member since 2014 · 812 posts · 432 votes
    12y
    Originally posted by @Dmitriy Fomichenko:

    @Jim Herbst

    If you company matches dollar for dollar, I would contribute to the max that they much. This is 100% return on your money ...

    Sure, for that year. But consider that it is then much less after that. I'm not saying it doesn't pay off overall, but it sounds better how you said it than it really is.

    0Reply
  • Walt Payne
    Real Estate Investor · Sebastian, FL · Member since 2014 · 812 posts · 432 votes
    12y

    @Jim Herbst Keep your money diversified. Keep it spread across several asset classes. 

    0Reply
  • Walt Payne
    Real Estate Investor · Sebastian, FL · Member since 2014 · 812 posts · 432 votes
    12y
    Originally posted by @Jon Holdman:

    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.

    I have come to respect your opinion a lot, but I disagree with one aspect of your statement here. If you are investing as a buy and hold investor, you are not likely to lose large amounts of money when done right. If you have a reasonable cash flow, with reasonable leverage, then you can just ride out the downturns.  But I do agree that 20% plus appreciation is not likely.

    And I know a lot of people who lost 30-40% of their supposedly conservative portfolio in the stock market also.

    1Reply
  • Adam Moehn
    Investor · Cedar Rapids, IA · Member since 2009 · 143 posts · 29 votes
    12y

    I have to agree with the people that said to invest in the 401k up to the amount they'll match, it's what I do. The match is a zero risk return on your money. I doubt you can find any other zero risk 100% returns on an investment.

    Will real estate have a better return? Maybe, but not certainly. The question is, at a cost of $100 to you, would you rather have $100 invested in real estate or $200 invested in a 401k?

    0Reply
  • Mark S.Pro Member
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
    12y
    $100 in real estate AND $200 in a 401(k).
    0Reply
  • Joe Demonte
    Contractor · Chicago, IL · Member since 2013 · 105 posts · 28 votes
    12y
    Originally posted by @Michael Seeker:
    Originally posted by @Nicholas Jasmine:
    ----------------------------------------------------------------------------------------------

    You basically wrote exactly what i was thinking while I read some of the other posts. Personally I get a 100% match on my 401k (up to $5,500) and have utilized that the first 5 years of working there. At my age (28), I would like to slow down that investment & put the money I would normally put in my 401K, into an account for REI. I just dont want to continue to put a majority of my investing money into a 401K account that I wont be able to touch until I turn 65 years old (without getting enormous penalties for early retirement withdrawal).

    So my investing has come down to...

    40% 401K
    10% P2P Brokerage
    10% ETF & Spider stock funds
    40% REI

    I am no Financial Advisor, but I like to personally invest and learn from my mistakes on the way. Hopefully learning enough to skew the allocations more towards the REI world within the coming 5 years.

    0Reply
  • Jose M.
    Chicago, IL · Member since 2014 · 9 posts · 5 votes
    12y

    I agree with those that said to fund retirements accounts first. I just turned 22 and for the past two years I have maxed my roth ira and contributed up to the match with employer 401k.

    When I start my first "real" job next may here is how I plan to use my investment money:

    1. Up to match 401k

    2. Max roth ira

    3. Max 401k

    4. Anything left over can go to RE

    Here are the advantages I see from investing in 401k and IRA:

    - Completely hands off. If you set an asset allocation that meets your risk level you never even need to open your quarterly statements (you should anyways).

    - Equities have historically had an inverse correlation with REITs. Though personally investing in RE is not the same as REITs it is still risk diversification.

    - Starting next may I will keep tabs on the amount of money I invest in both RE and equities. I will then do a yearly return on investment. Over 40+ years the data should be interesting. I am expecting a 25%-50% premium on return over the long term from RE to compensate for the amount of human capital that it requires compared to equities.

    2Reply
  • Account Closed
    Homeowner · Pittsburgh, PA · Member since 2014 · 854 posts · 511 votes
    12y

    @Walt Payne 

    If you know people that lost 30 to 40% in the stock market, they certainly weren't invested in a conservative portfolio.  The historical returns of the stock market just don't support that statement.

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  • Jose M.
    Chicago, IL · Member since 2014 · 9 posts · 5 votes
    12y
    Originally posted by @Account Closed:

    @Walt Payne 

    If you know people that lost 30 to 40% in the stock market, they certainly weren't invested in a conservative portfolio.  The historical returns of the stock market just don't support that statement.

    This^

    David makes a very good point. Even if it were true it is only a small data sample used to make a point. What about the group of investors who went bankrupt in real estate? What about the group that made 30% last year in the stock market? What about the group that lost 50% in the stock market in 2008-2009? 

    That is why I think it is important to diversify your investment across different venues. 401k and IRA are tax sheltered growth free accounts. They should at least be considered by RE investors.

    1Reply
  • Walt Payne
    Real Estate Investor · Sebastian, FL · Member since 2014 · 812 posts · 432 votes
    12y
    Originally posted by @Account Closed:

    @Walt Payne 

    If you know people that lost 30 to 40% in the stock market, they certainly weren't invested in a conservative portfolio.  The historical returns of the stock market just don't support that statement.

    Over time, no. But if you were near retirement a few years ago it is very likely, not just possible, that you lost a significant chunk of your investment.  Sure, if you didn't mind waiting around you made it back, but that doesn't give you back those years of retirement.  

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  • Account Closed
    Homeowner · Pittsburgh, PA · Member since 2014 · 854 posts · 511 votes
    12y

    @Walt Payne 

    The yearly returns don't support that statement either.  In 2008, the S&P return was -36.55% and the Dow return was -33.84%.  Individuals 100% invested in the stock market had losses within the range you stated.  However, that is FAR from a conservative portfolio. 

    An individual close to retirement in 2008 should have only had 35 to 40% in the stock market. 

    0Reply
  • Walt Payne
    Real Estate Investor · Sebastian, FL · Member since 2014 · 812 posts · 432 votes
    12y
    Originally posted by @Account Closed:

    @Walt Payne 

    The yearly returns don't support that statement either.  In 2008, the S&P return was -36.55% and the Dow return was -33.84%.  Individuals 100% invested in the stock market had losses within the range you stated.  However, that is FAR from a conservative portfolio. 

    An individual close to retirement in 2008 should have only had 35 to 40% in the stock market. 

    Sorry if I wasn't clear, but I meant that as a percentage of their stock portfolio, but that was still enough to hurt them seriously. And things that were considered conservative at the time took a VERY serious hit. Especially banks, which anyone would have called conservative investments. That caused some with a conservative mix to still lose a lot.

    0Reply
  • Mark S.Pro Member
    Rental Property Investor · KY · Member since 2013 · 1k+ posts · 537 votes
    12y

    @Joe Demonte, I like your breakdown.  I don't mean to hi-jack the thread, but I'm interested in hearing more about your experience with P2P.  Can you elaborate on this?

    0Reply
  • Jacob Casarez
    Specialist · Columbus, GA · Member since 2015 · 81 posts · 16 votes
    11y

    @Michael Seeker It makes sense to me what you are saying. I would like to hear some examples of what you could invest in, that would give you access to your money at any time and that would pay back the kind of interest these 401 k types of plans produce -- most investments require thousands of dollars up front, the kind of money most of us will only earn with time. Ideally one would invest in both, and if you cant afford to do both then the "other investments" are simply not attainable?

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