Best Tax Strategy: Max out 401K or Save for Real Estate?

[Karen Chenaille]

Hi!

I am looking at real estate investing to reduce my tax liability and generate passive income.  I have a 401K plan which I have been maxing out annually. My company matches 4% of the first 6% contributed. I have used the loan feature on my 401K to purchase my first investment property.  Due to the 401K plan rules, I only have access to about 26K more.  For my next move, I will need about $35K between repairs, closing costs and down payment.  

I also have about $20K left on a vehicle loan.

Should I keep maxing out my 401K to get the max tax savings against my day job income or should I cut back to 6% and use the extra cash to pay off the vehicle loan and bridge the funding gap on second property?

Thanks for reading this! 

[Cory Binsfield]

If I were in your shoes, I would contribute just enough to max out the employer match.

401k loans are fine. Just be aware that you would have to pay it back or suffer a large tax hit if you were to lose your job with the company.

Ideally, a home equity line of credit is a better option if you are having trouble raising the large down payments.

Next, I wouldn't worry about the car loan if the interest rate is low. As long as you are earning 10% or more on your real estate, you come out ahead. Ex., car loan 5% cash on cash return 10%. Just like a bank, you borrow cheap and reinvest at a higher return.

Just be careful with expensive cars until you are set financially. I once sold an expensive car to help raise the cash for a closing. I simply bought a cheaper used one to replace the nice car.

Bottom line, I like having my rentals pay off my vehicles and other lifestyle items.

Lastly, not a fan of a self directed Ira for cash flowing real estate. Too complicated to get into it here. All I can say is you lose all the tax benefits of real estate and tie up your money till age 59 1/2 when you purchase cash flowing rentals to in your Ira.

Better to buy notes, private equity or land in the IRA. Plus, it might be a mute point if all your money is in a 401k.

Beware of financial advisors positioning life insurance as an investment. Just my opinion, mind you. You only need life insurance if someone will be harmed financially if you were gone.

Cheap term insurance fits the bill for 99% of people. For the 1%, you can use expensive whole life or variable/universal life to cover estate taxes. Works well if you have 10 million or more net worth.

Q? How many people became millionaire's investing in life insurance?

I'm sure I will ruffle some feathers with the latter two comments.

If your goal is passive income today/early retirement, keep doing what your are doing and shoot for 1 property a year over ten years. Coupled with a 401k, you would be set for life-assuming you don't screw it up!