Whether you’re looking for short-term gain or long-term profit, investing is a great way to do both. But, what exactly do you invest in? While there are many options, I personally prefer to invest in real estate vs. a 401k … partly because I’m an entrepreneur but also because I like to enjoy advantages NOW vs. waiting until LATER!
Today, I’ll walk you through a comparison between real estate investing and a 401k so YOU can decide which vehicle makes the most sense for your situation and financial goals.
Why My Wife and I Invest in Real Estate vs. a 401k
#1: Real estate provides cash flow to use TODAY.
One of the biggest differences between investing in real estate vs. a 401k is the potential for cash flow if that’s the real estate investing strategy you’re using. When you buy rental properties, for example, the monthly cash flow from them enables you to not only maintain them, but also purchase more income-producing properties. When you do this consistently, your passive income can increase exponentially and propel you along the road toward financial freedom. With a 401k, however, cash flows into the investment during your working years but you won’t enjoy cash flow out until retirement.
#2: You can leverage the bank’s money to buy real estate.
Have you ever tried to get a loan from the bank in order to have the funds to put into a 401k? Good luck with that … you won’t get approved! What you can do, however, is use the bank’s money to get a mortgage on an investment property. That’s called leverage – you create greater purchasing power and opportunities to grow your income by using the bank’s funds to invest in real estate.
#3: Become debt-free AND grow your assets with someone else’s money.
If you learn how to invest in real estate the right way, this goes right along with #2. First, you leverage the bank’s money to purchase a rental property. Then, the rent that tenants pay covers the cost of maintaining and improving that property. And, as long as you are able to keep that property occupied and you attract top-quality tenants, those rent payments month after month pay down your mortgage. Eventually, you’ll have used someone else’s money to become debt-free, you’ll continue to enjoy cash flow from the property, and you’ll have a significant amount of equity in the paid-off asset.
#4: Investing in a 401k has a large opportunity cost for entrepreneurs.
If you’re an employee, investing in a 401k absolutely makes sense. You may be able to take advantage of an employer match – that’s free money you can use to grow your investment account. In addition, most 401k plans are tax-deferred. That means that you contribute money from your current earnings before that income is taxed by the federal government. Later on, in retirement, you are taxed on the withdrawal of that money, typically at a lower tax rate.
If you are an entrepreneur, however, the picture looks a little different. Many entrepreneurs are doing what they love and want to do it forever, or at least as long as possible. The term ‘retirement’ has a slightly different meaning – rather than it being the cessation of work altogether, it often means continuing to do what they love but perhaps with a more relaxed schedule and passive income taking care of day-to-day expenses.
An entrepreneur might choose to invest in real estate vs. a 401k simply because putting money into a 401k could cause them to miss out on valuable opportunities to grow their income TODAY. For example, if you invested $10,000 in people, products, or systems to grow your business today, rather than investing that money in a 401k for future gain, you could potentially increase your income both now AND in the future. The same can be said for investing in real estate instead of contributing to a 401k.
#5: Enjoy tax benefits TODAY instead of LATER.
While we’re on the topic of present benefits vs. future gain, let’s look at the income tax component of investing. Before we do, here’s an important reminder – always talk to a tax professional to investigate the pros and cons of various investment strategies for your specific situation.
Now, let’s talk about taxes in general. When you invest in real estate vs. a 401k, you typically reap tax benefits now instead of later. Depending on your real estate portfolio size and the types of properties you own, your taxable income could be significantly reduced due to deductions from depreciation and cost segregation studies. This can be a HUGE benefit if you have multiple streams of income, several businesses, or high income in general.
With a 401k, you’ll receive some tax benefit when you make contributions since those contributions come out pre-tax. But, most of your tax benefit will be deferred until retirement when you make withdrawals from your 401k at a potentially lower tax rate.
#6: What if you don’t live until the retirement age of 65?
According to the Centers for Disease Control (CDC), the average life expectancy in the U.S. in 2020 was 78.8 years. Using that data alone, there’s a good chance that you’ll reach the golden retirement age of 65 … but there’s no guarantee.
While many people choose to wait until age 65 to enjoy the benefits of retirement, why not enjoy them NOW? When you invest in real estate vs. a 401k, you CAN! You can enjoy significant cash flow, increased income, and even financial freedom when you invest in real estate. You don’t have to wait until you reach age 65 … IF you live that long … AND you can even pass your real estate investments along to others you care about after you die if that’s important to you. With a 401k, you have to wait until age 65 to start making withdrawals of your money … something you’ll miss out on entirely if you don’t happen to live that long.
Achieve Financial Freedom Through Real Estate Investing
Are you interested in learning how to grow your income through real estate investment? How about achieving financial freedom so you can do what you want, where you want, and when you want? If that describes you, I invite you to subscribe to my YouTube channel. There, I’ll offer real estate investing tips and share how my wife and I went from owning $0 in real estate to owning $5 MILLION in real estate by age 30. If we can do it, you can too!