Real Estate, the New 401k

Every financial planner I’ve known or met has presented the most perfect scenario when projecting the long-term estimates for gains and future payouts for a 401k or self-directed IRA. With the ups and downs and mismanagement and poor guidance of funds it has become an untrusted field of expertise. Many rely on the new college graduate or high-powered salesperson who thinks of his commission first.

Few financial planners utilize all the available means and instruments for your money to work for you. Their focus is to sell products or stick with the old business models for saving your way to wealth. You invest a portion of your paycheck each month with the hopes of a large fund to support you in the so-called ‘Golden Years’. You can never touch, see, or enjoy those funds until you retire. Worse yet is most will never accumulate enough to be able to retire.

The business model is broken. In fact, the U.S. savings rate is at historic lows. So many people are behind with saving enough that the government had to pass laws to allow some to play ‘catch up’; allowing them to deposit larger contributions in their later years. And in some parts of the country (California, Illinois, and Oregon) they’ve created laws which will mandate creating IRA’s for you and automatically deducting 3% from your paycheck.

Why is the savings rate so low? You could complain that the paycheck is too low but that’s just a lame excuse. People have the same excuses at 20k, 100k and 150k salaries. People don’t save because they don’t have the discipline to save something they can’t touch for decades! How can we change that and help improve home ownership rates?

Invest in Real Estate! It’s a tangible investment for your money to grow wealth. You can touch it, see it, and it pays you every month. How much does your 401k pay you every month? Real Estate historically doubles in value every 20 years, is the best hedge against inflation, and offers tax advantages that no other investment instrument could offer.

I purchased my first single-family residence in 1995 and my first multi-family project in 2010. Let me share with you some simple math which will illustrate the concept of leverage. In today’s market you could purchase a $140,000 house which would require you to invest about $31,000. The rental rate for such a house would yield about $1,400. Your total house payment and management fee would run about $1,057.  The total revenue per year would be $4,116; cash in your hand and available to reinvest or spend as you wish; no government mandate on how long to hold or what to spend it on. That’s a cash-on-cash return of 13.28% on your initial investment.

The overall return on the investment is nearly 25-30% when you factor the appreciation of the house. The tax code allows you to depreciate income properties over 27.5 years so after the additional interest, tax, and insurance write-offs you’re paying no taxes on any of the income. No 401k, IRA, or investment can match or come close to this type of investment. None of the competing strategies pay you a tax-free dividend each month.

$31,000 sitting in your 401k with a return of 4% is worth $32,262 at yearend. $31,000 invested in a house with an appreciation at the same rate is now worth $156,000 (return of 6k) and paid you $4,116 in dividends (rents). Your $31k investment gave you a total return of $10,116, far greater than the $1,200 your 401k would have produced. Let’s just hope the 401k doesn’t take a big hit. Housing could take a hit but people always need a place to live and if the value of the house never went up the monthly income alone is enough of a reason to invest in Real Estate rather than a 401k. The power of leverage and the monthly income is exponentially better than any other investment.

Opportunities exist to invest in a house with a lot less money than the above example. Many of my properties have zero investment and provide infinite amounts of interest. The above example is just for one house. Multiply it by 5, 10, 15, 35, etc. and you quickly see how you can retire young. Why wait until your 65 to retire when the means to live rich now and accumulate wealth at a faster pace is available? Real Estate is the new 401k.


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