401K or Investment Real Estate?

I hope to add another way of looking at this age-old question. This article isn't for everyone.

401K, IRA - company sponsored plans are probably the best savings plan for the average employee who will continue being an employee until retirement. If my opening sentence depresses you, read on.

If you want to make a change, if you want solid retirement funds, first, make the decision to take responsibility for your future, second, get educated, and third, act.

If you're reading this, you have made or are in the process of making a decision.

Get Educated: Invest in yourself first.

The 401K takes zero know-how to contribute to, at least that's how it's presented. This perception that it's easy is a major selling point to most employees, who are either novice investors, totally oblivious, or are focused on their jobs - their specialty, and don't want to research the investment options offered by their provider. So often, employees choose preset packages starting from the conservative and leading to higher risk options presented by the provider. Another attractive fact is that that starting a 401K takes no down payment. Ultimately you have the choice to get involved or to let the provider choose for you, and the fact is, most people don't know where their money is going.

Takes zero investment knowledge to buy in. This is not necessarily good.

That willful ignorance is also the reason most are unaware that fees are being withdrawn from their 401K to maintain it, and if they are aware at all, they often don't know what the fees look like. Until July 2012, 401K providers were not required to disclose fees. But even now, it requires the employee to not only look at, but understand their quarterly statements, and make their own projections, and I don’t know anyone who does. Do the calculations.

Considering market changes over time and decades of fees, it's estimated that the true 401K performance is only 5%. And that’s after employer contributions and after gains. At the end, you pay taxes in whichever bracket you are in at the time of taking distributions. Hopefully you plan on retiring in a higher tax bracket, which means you'll pay tax at the higher rate than when you contributed.

If you plan to remain an employee until at least 59 and a half, get educated. With full understanding of what you're paying into for the next several decades and proper planning, you can come out ahead. But don't wait, the longer you do, the harder it will be to meet your goals.

If you’re committed to taking steps towards education, why stop at your 401K?

Gain the knowledge and make your own self-managed (maybe IRA), no (or very low) fees, long term investment choices. With a little research and education, you will find more options, many of which have the potential to outperform a 401K - even without employer matches. And when you decide to cash out or take distributions, unlike the 401K, you can do so without penalty and you will be taxed only at the capital gains rate. This is a risky proposition for most, which is why a 401K is a better choice for them.

While risk will never be eliminated - not with stocks, a 401K or IRA, or Real Estate, the more educated you are about the investments you’ve chosen, the more you will decrease and recover from risks. In my opinion, it doesn't get any riskier than handing money to Wall Street, to people you don't know and have never met, and hoping they care more about your retirement than you do. This is why real estate can be a much better alternative.

Now to what we are all here for, Real Estate:

Personally, I don't mess with either the 401K, IRA, or the stock market, or the Dow, NASDAQ, or Wall Street. Some people win at with those investments, most don't -, but I don’t invest that way because I do not want to wait 30 years, or until I'm 60, or 70, for a return. I believe in the American spirit and our bootstrap beginnings, I believe in business and helping people, but above all, and in connection to do those things, I believe in real estate. Specifically flipping (revitalization as I call it), brokering purchases and sales, and multi-family buy and hold and management.

Whether SFH rentals or multi-family properties, you need to buy right. This takes education; so you've got to get over laziness, complacency, and excuses, to start doing the work - daily. Same goes for wholesaling, flipping, as with buying and holding.

Let's use the buy and hold approach to stack up against the 401K over a 30 year period. Assume you've done the necessary work- you got smart, you bought smart, and your rents cover the PITI, vacancies and maintenance, capex, and leaves you with something for your pocket at the end of the month.

Here's what you get: monthly cash flow, a government subsidy over the next 27.5 years, passive loss deductions, equity paid by the renters, equity in the form of appreciation - let's average 3%-6%, possibility of forced appreciation, control over your investment choice - location and property type, control over management and positioning, leverage, a scalable business - borrow from or sell and go bigger at any time, and an asset that will produce for generations - long after your 401K burns out.

Between cash flow, appreciation, equity paid by residents, depreciation (tax), you will make your initial investment back before you know it and when the mortgage is paid off in 30 years, it will print money for life. Buy one every five years and you'll have 6 by the time you are 50, or 60. If you are older than 30 or 40, either investment option, 401k or RE, requires time, but you have more options to shorten that time using real estate. You can't do that as easily with a 401K.

Whether you're looking for a retirement fund or financial independence, and to me there's no difference, I would rather have money printing assets than a finite fund that I never have control of.

Why not do both? That depends. If you're here reading this, I'm guessing you want to build a business in real estate. It is a business so treat it like one. If you've made the decision to invest, though, why spread yourself out between the two? If you’re committed to real estate investing, dedicate the time and money necessary to build real success.

Instead of locking your money away with someone else for decades, use it today to buy investment property or any RE investment angle. You must decide, make a plan, and act. People will always need a place to live. With real estate, you can give them that place to live.

if you continually get smarter, gain experience, you build faster, and it's within your control - I don't care what the market or economy is like, there is always opportunity, you just need to find it.

Real estate isn't the only way, but since you're here...

The choice I made should be obvious, I chose life, I chose control, I chose real estate.

Take what I’ve said here into account, but I cannot stress enough how important it is get educated and make your own choices for your future before you’re out of time.