Three Reasons to Invest in Real Estate Instead of a 401K
If you ask the average American what tool they use for investing, it is very likely their response will include their company's 401k plan (or equivalent). Retirement accounts such as 401ks and IRAs do offer unique tax benefits and many times employers will even match their employees contributions to the 401k program. However, these accounts do have their limitations which is primarily that you cannot use them until you reach a certain age and the custodians of these plans usually limit the types of investments you can make to a select group of stock market investments. Today's article will therefore discuss three reasons why you should consider investing additional funds you may have into real estate and next week's article will go one step further to talk about a couple options you may have for investing into real estate using a retirement account.
Diversification is a word that is often tossed around in the world of investing and many people believe diversification is a good thing regardless of what it is they are diversifying into. When diversification takes the form of either risky investments or investments that simply do not move the investor towards their financial goals, we believe that it then actually becomes a bad idea. However, when one considers the strong fundamentals of real estate investing it makes a lot of sense to not have all your eggs in the basket of the stock market which is volatile and can fluctuate rather drastically. While real estate does have its own cycles, solid real estate projects can be historically shown to be a much better risk adjusted return due to the ongoing cash flow they provide and the fact that your investment is backed by a hard asset.
If you perform a study of millionaires in America today you will find that a high percentage of them became millionaires through real estate investing. Once again, this stems back to the fundamentals of real estate investing which we have discussed extensively in other articles, but the fact is that these fundaments typically lead to much stronger returns than can be found in other areas of investing. These stronger returns combined with less volatility described above is what has led to this statistic being true.
In the majority of investments, including the stock market, any gains realized are heavily taxed by the IRS. This of course weakens the actual returns of those investments. Even when stock market investments are secured under the blanket of a retirement plan (such as a 401k) the money invested is taxed normally before going into the account or taxed at a future (and most likely higher) rate when the money is dispersed after retirement. Only in real estate due we see the concept of depreciation where we can use paper losses to offset gains from our investment in order to retain the maximum amount of earnings possible. As discussed in our article a few weeks ago, many savvy real estate investors will invest based on the tax write offs as much or more as the actual projected returns themselves.
There are many important considerations when evaluating a multifamily deal and we make it our mission to careful vet each of these items. If you would like to learn more about passively investing in multifamily, please set up a meeting with us through our Calendly link and subscribe to our weekly blog here.