401k vs. Investment Properties...am I crazy?

[Theo Hicks]

So I want to preface this post with that fact that I am very nerdy (Chemical Engineering degree). So here we go.

After stumbling my way thru my first deal, I have finally completed renovations, have one unit rented (starting June 1) and will be posting my second unit for rent tomorrow. The final numbers are the following:

Purchase Price: $170,000

Total Investment (Down Payment + Renovations) = $25,950

Annual NOI = $14,129.40 ($2800 per month in income - $1622.55 per month in expenses which includes mortgage, taxes, insurance, 10% vacancy, and 5% repair)

Annual NOI after 30 years = $23,124

Cap Rate = 13.6% Cash on Cash return = 54.4%

So before reading Rich Dad, Poor Dad, I was under the impression that 401k's were the way to go. When you start working, you allocate a percentage of your yearly salary into this magical 401k and when I am 65 years old, I will have millions of dollars to retire on. When I finally shed that delusion and invested in real estate, I wanted to educate my friends and convert them as well! Instead of just telling them, I wanted empirical proof that real estate would net a much higher return that the typical 401k investment plan, so I created sheet comparing 401k investing vs. 2 very conservative real estate plans. Below are the assumptions of the study:

-Initial investment in all 3 scenarios is the same ($25,950 which is my total investment for my first property

-Market investment return is 8% annually (I got this number from a financial planner)

-Property appreciation was ignored, income and expenses remain the same, and all income from rental property is saved w/ no interest (so VERY conservative)

-End date is 2056 (so 43 years) 

Scenario #1: Market Investment - Initial investment in 2014, no additional contributions are made

Scenario #2 -One Investment Property - I just buy one property, save all rental income in a savings account with 0% interest

Scenario #3 - 10 Investment Properties - First property cash flows $14,129.40 per year, every 2 years cash flow from property 1 is used to purchase another identical property (same purchase price, cashflow, etc.), this is repeated every 2 years until 10 properties are aqcuired

Results:

Scenario #1 ending value - $710,164

Scenario #2 ending value - $920,444.04 (savings + equity)

Scenario #3 ending value - $6,427,168 (savings + equity)

These values were quite shocking to me and the people I have shown it too!

Would love to get feedback on these calculations and any advice on how to improve this!

[Josh Mitchell]

@Theo Hicks

personally I think REI is the way to go, but keep in mind that the 401k plans often times have company matches to go along with them (Free Money!!!) I would just invest the minimum in order to get the maximum match from your employer and invest the rest into REI.

Quit convincing your friends to get involved, less properties for the rest of us!!! ;)