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!