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On the one hand, it seems like 401k with employee matching is one of the best investments you could possibly make. On the other hand, paying rent to a landlord is an ongoing loss compared to living in your own piece of real estate.

So what is the best strategy for someone who doesn't own a piece of real estate yet? Should they invest into 401k or should they save up cash as fast as possible to be able to get a housing loan from the bank?

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    How much 401k match is the employer offering? – Hart CO May 7 at 16:01
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    Actually, 'living in your own piece of real estate' is also (usually) an ongoing loss, given vagaries of appreciation, upkeep, and taxes. Hopefully less of one than renting. – BobT May 7 at 16:33
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    @BobT Sure, but a penny saved is a penny earned. – Hart CO May 7 at 16:49
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    There are calculators online to show whether renting or buying would be more advantageous. These exist because that calculation is not straightforward. In general, unless you know you won't be moving for around a decade, renting is preferable; buying a house is expensive. – user3757614 May 7 at 22:52
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    @user3757614 those calculators presume you would sell the house when you move out, rather than keeping it as an asset you rent out – JonathanReez Supports Monica May 7 at 22:54
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First, as a direct answer your question, you should always take full advantage of your employer's matching program. This is 100% free money that you are declining to receive if you don't set your 401k contributions high enough.

Retirement Considerations and Facts

  • 401ks and Traditional IRAs are tax advantaged accounts, so the money you contribute grows without having been taxed first. This is a huge advantage for your retirement. That means the amount you get to put in to your 401k account is a lot higher than the amount than your paycheck decreases.
  • The stock market over a very long term tends to beat out real estate returns, and your investments can be far more diverse. You can even invest in real estate without owning a home, there are plenty of funds that let you invest in all kinds of things.
  • You can withdraw $10,000 from a traditional IRA before your retirement age without penalty to put toward your first house. Whether this is an ideal thing to do financially I still haven't figured out.

Home Ownership Costs

Home ownership consists of the following costs put together:

  • Principal, this is the money you put into your mortgage bill that you keep 100%
  • Interest, which can amount to tens to hundreds of thousands over the course of 30 years
  • Property Taxes, which you must pay forever
  • Closing costs, around 6% of your home's value to make the purchase transaction
  • Maintenance, including long-term maintenance like furnaces, roofs, air conditioning, water heaters, garden/lawn care, handyman work, etc.
  • Insurance
  • Mortgage Insurance if you don't have 20% down payment

Rentals consist of all of the above costs except for principal and closing costs. A rental also has the additional cost of a usually very slim profit margin for the landlord, depending on many factors.

A lot of rentals are cheaper per month than an equivalent home with all the above costs added into the mortgage. But that's not universal, and that varies by market.

What that means is that, while renting seems like "throwing your money away," what it actually means is that owning a home incurs many of the same costs as a rental that you will never get back, and only one piece of the pie you put in (principal) stays with you, and you also get to keep the gains from real estate appreciation.

Home Ownership Pros

  • You have your own property, and can enjoy full control over it
  • Homes generally appreciate in value over time, and you get to keep these gains
  • You are forced to save your money in a relatively stable asset that can also house you
  • Homes are an advantaged "savings account" in that they often can't be seized as easily as liquid capital due to bankruptcy in many states.
  • Homes have a number of tax advantages that renters don't enjoy like the deduction of property taxes. With rentals, you're paying for the property tax indirectly to the landlord.
  • A paid off house in retirement can mean very "low rent" living with a very nice space compared to downsizing to whatever apartment you can afford in old age
  • Owned homes are typically "nicer." Landlords don't meticulously keep up their properties or add the nicest appliances.

Home Ownership Cons

  • You must arrange and pay for maintenance on your own
  • You have made an investment in your neighborhood and city, and you may be more exposed to macro-economic forces (e.g. migration out of Detroit) or changes in the fabric of your neighborhood.
  • You may give up opportunities to make more money by being less flexible toward moving
  • Inflexible toward changes in family size like additional kids, you have to plan ahead for that
  • You may be less able to shorten your commute if you change jobs within your city

The Takeaways

  • Use tools to know if you are in a rent or buy market, like this New York Times calculator.
  • Evaluate whether you actually want to own a home instead of overthinking the financials of it.
  • Leverage experienced people to help make this choice. Don't go into a home without an excellent home inspector and realtor on your side.
  • Learn the ins and outs of mortgage structures and the math behind amortized loans before rushing into a mortgage agreement.
  • Evaluate your career goals and risks and how they line up with your living situation.
  • Never buy if you intend to move in the next 5 to 7-ish years.
  • Evaluate all the costs put together for each option, not just mortgage check vs. rental check.
  • An employer's matching program is absolutely not "100% free money", and you should not always take full advantage it. It has the cost of rendering your contribution unavailable for many years, and you should not max out your matched contribution if doing so would bring your present consumption to unacceptably low levels. – tparker May 9 at 0:28
  • @tparker I fully disagree with that unless your company has a completely crazy long vesting period. Even if they do, the worst that can happen is that you leave your company before the vesting period, and in that case you “accidentally” save too much tax advantaged income for retirement. Oh no! It absolutely is free money that you can rollover to your own IRA after you leave your company. I don’t know what you mean by “present consumption” - consumption of what? – alexk May 9 at 6:31
  • In addition to that, most matching percentages are really low. It isn’t hard to hit the 5% safe harbor match amount, and that barely affects your take home pay. – alexk May 9 at 6:38
  • I'm not talking about vesting - my comment applies even to employer matches that are immediately fully vested. I'm just talking about the fact that 401(k) contributions are not accessible (without high penalties) until you retire, so you shouldn't contribute to them if doing so would leave you unable to meet your immediate necessities. I agree that in practice, matching percentages are usually low enough that this isn't an issue, but for people with very low income it could be. – tparker May 9 at 14:37
  • If the employer match were indeed "100% free money", then it would always make sense to max it out in any possible circumstance. But this is not the case. – tparker May 9 at 14:37
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When you pay rent, that money is spent. In an idealized world, when you make mortgage payments, you are paying yourself. Every payment builds capital. But in the real world there are unfortunately a few pitfalls you need to keep in mind:

  • The bank adds a few percent interest to the money you need to pay off. That's money you pay to your bank, not to yourself.
  • Even if you fully own a home, it will still generates a couple of fix costs which would otherwise be paid by the landlord (like property tax). So you can never live completely rent-free. That means home ownership should never be the only part of your retirement plan.
  • Speaking of things you need to pay for: As a home owner, you have a lot more worries to deal with. "What's that dripping sound? Please be a faucet and not a pipe!", "What will that hurricane do to my roof?", "I hope that splotch on the wall is just grime and not mold", "Is the heater supposed to make that sound?", "Children? Playing ball near my windows?!? AAAAH!". As a tenant, all that is somebody else's problem. If the building collapses, you just find a new home to rent. It just costs you the rental fee for a moving van. As a homeowner, you have to get used to a couple swords of Damocles constantly dangling above your head. Pay extra for good insurance and keep a large emergency fund.
  • If you buy a cheaply constructed house, it might lose value while you pay it off. When you paid off your loan, it might be ready for demolition and you need to start from the beginning. Ideally you want to own a house which is built to last. That way you, your children and your children's children can profit from your investment in the long term.

But despite all that, home ownership might still be a good financial decision. Whether it is a good investment or not depends a lot on the housing market in your particular region and what interest rate banks are willing to give you. You will have to do the math yourself if it is worth it for you or not.

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    @JonathanReez Great many people don't live in major metropolitan areas though. Also, within a major metropolitan area you can have neighborhoods that perform terribly. Detroit is a good example, parts of Detroit are fully recovered, parts are blighted and may not recover for decades. – Hart CO May 7 at 17:01
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    Re "The bank adds a few percent...": The landlord presumably purchased the property on a mortgage, so that few percent is part of his costs. Likewise the landlord will factor in expected repairs & maintenance to his costs - and property taxes, and add his profit on top of that. And WRT getting repairs done, you might wait for months before a landlord addresses a dripping faucet. As a homeowner, I can spend a few bucks at Home Depot, and fix it quickly. – jamesqf May 7 at 17:02
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    the bank adds a few percent which equates to about 80% of the first year of mortgage payments; every payment doesn't build capital, every payment reduces your debt against your asset which probably equates to some amount of additional equity. And no mention of property tax. And no comparison to retirement savings. – quid May 7 at 17:02
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    @JonathanReez: yeah, so now you can pay a management company to maintain the place for you, which isn't free, and and expose yourself to the financial risk of maintenance on 2 places instead of one, and where one has tenants which have a tendency to do not care about your building. And that's assuming you can get a lender to loan you enough to finance two long term homes simultaneously with such a stretched debt profile. – whatsisname May 7 at 20:11
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    @Philipp That's a good point. I got caught up in the "but the net cost is the same" and totally missed the salient points, that as a renter you get to amortize those costs over a longer time window, you don't have the burden of managing repair work, and you can extricate yourself financially much faster and with less potential cost. Thanks for taking the time to reply and point it out to me (despite you already providing the selfsame reply to someone else). – iheanyi May 7 at 21:18
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There is a limit to how much an employer will match, if they match at all. Contribute enough to capture this entire match (free money!). If your goal is to buy your own place as soon as possible, contribute just enough to maximize the match, and save the rest for the purchase.

It will take a little longer this way to buy and pay off a property than if you contributed nothing, but it's likely worth it. Assuming you are aggressive about saving up for the purchase and paying down the loan, consider the following scenarios (not accurate/realistic numbers - you will need to do some math on your own to figure out what the actual numbers are):

  • Paid off property when you are 40 years old, $0 in 401(k)
  • Paid off property when you are 50 years old, $500,000 in 401(k)

Either way you eventually pay off the loan (assuming you actually pay it off) and own the property debt-free. One approach gets you there faster, while the other takes longer but leaves you on a much better financial footing for the rest of your life.

Those numbers are purely hypothetical, and you'll have to do your own math (salary, employer match, estimated returns, target price for real estate, how long you'll actually take to pay it off, etc.). Just remember that the employer match is free money that will grow for the next couple decades if you take it now, or will be hypothetical money you could've had if you leave it on the table.

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    +1 "contribute just enough to maximize the match." Even when not saving for a home this is generally sound advice. Once you've gotten your full match, its often better to max out an IRA before continuing to contribute to the 401(k), if you are prioritizing retirement savings that is. – Helpful Friend May 7 at 18:46
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    Also note that 401K contributions have a yearly limit. In the future, if you have extra money (a more lucrative job, a small but useful inheritance etc) you can use that to speed up paying off a mortgage, but your 401K may never "catch up" from not investing at least something into it now.. – Dragonel May 7 at 20:17
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    @HelpfulFriend "Once you've gotten your full match, its often better to max out an IRA before continuing to contribute to the 401(k), if you are prioritizing retirement savings that is" in what way? They look basically the same to me, though I'm not an expert in retirement planning, so I could easily be missing an important difference. – asgallant May 7 at 22:35
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    @asgallant You get to choose who your IRA broker is, but generally your employer chooses your 401k plan so that's who you're stuck with. You can usually find an IRA broker that has lower fees and more investment choices than your 401k plan. – Justin Lardinois May 7 at 22:55
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    @tparker reducto ad absurdum. Nobody is arguing that it would be reasonable for anyone (absent some exceptional circumstances) to put all of their income in a 401(k). In the context of the question (invest in house or 401(k)) arguments about the marginal value of income are unlikely to be significantly relevant to the discussion of maximizing one's employer match. – asgallant May 8 at 4:30
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Not a complete answer, but some thoughts that wouldn't fit in a comment:

Interestingly, you need "PITI reserves" to get a mortgage in the first place, and, typically (good news) 50% of your 401K amount count "as PITI reserves" so double win up to that.

"At some places" you can even take a loan out against a portion of your 401K and use that as the mortgage down payment.

So you may be able to "do both" to some extent. At very worst you could actually make an "early withdrawal" from your 401K, pay the (various) penalties at tax time, and still come out on top thanks to your employer's matching contribution. Not the perfect option but available.

So all of these seem to favor investing into the 401K but it's still a personal decision, I mean if you can save up aggressively for 6 months and get a house it might be worth it if houses are appreciating rapidly in your area, still depends. Even then you'd still "leave some money on the table" but it's possible.

I would recommend owning a house over paying rent as the rents go up every year but mortgages don't. The only risk is if you need to soon move (esp. if house prices have dropped in the meantime), but in general my recommendation (if you have no immediate plans to move) would be pull the trigger and buy, it's almost always better than renting over the long term, though initially it might be slightly more expensive (monthly cost), at least the money is eventually going toward equity you'll be building up. If you're in the US you can get FHA loans for 3.5% down, or conventional for 5% down. These have "mortgage insurance" added but for the conventional once you've "paid off" (or appreciated) 20% LTV total then you can drop the mortgage insurance. Long term it is a nice win.

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    Minor nitpick: Rents don't universally go up every year. My own rent hasn't changed in the last three years. It's good as a general rule, though. – Brian May 7 at 17:56
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One should almost always take advantage of a 401(k) employer match to the maximum extent offered by the employer. In my personal case, for example, my employer matches on contributions made by me up to 6% of my salary, so I should definitely save no less than that in the 401(k).

Saving for a home is an independent decision. Home ownership has elements of investment and consumption, and the balance of those depends on your personal preferences and future plans. You may consider rent to be "wasted" (and from a macroeconomic point of view, it might very well be), but property ownership is not entirely cost-free, and there is no guarantee that property values will rise. The primary purpose of owning your primary residence is to provide you with shelter that gives you the freedom to modify the property to maximize your enjoyment of it (within limits set by local building codes and zoning ordinances). In exchange for that freedom, you will be responsible for maintenance costs (figure 1% of the property value per year), property taxes, structure insurance, mortgage interest, etc. The home's purpose as a savings/investment vehicle is generally secondary. Plus your "investment" will be relatively illiquid, and so will be a barrier to responding to job market changes that might require relocation (a thing that is more common when you are starting out).

Investment property is different, of course, since its primary purpose is to extract rents from other people.

Save for a home if you want to own your own home, but save for retirement, at least to the employer match limit, first.

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Figure out how much rent you would save (you can also include rising house prices, but you need to take into account that people tend to be overly optimistic on that front, and past results don't guarantee future). Subtract from that all the expenses of a house (interest on the mortgage, insurance, property tax, maintenance, depreciation, etc.) Keep in mind there almost certainly are expenses you aren't thinking of. Then divide that by how much you would need for a down payment. That's your ROI. Is it more than the employer match? There's also the fact that the 401(k) is tax advantaged, and will presumably be put into revenue generating positions such as stock purchases. The 401(k) is almost certainly a better deal.

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Another way to think about it is: 401k is a TIMED lockbox that can't be opened until retirement.

You might not even live long enough to get to the payout period.

So... should you save for something that you might never even need

or should you invest in something you will use every single day... (which is also a tax shield that typically appreciates in value over time.)

Finally there is another social/biological consideration: if you are a guy.. and you want to find a mate... you will need a roof over your head.

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    You can have a roof over your head without buying a residence. Additionally, regarding your last paragraph, when single, one can comfortably live in a smaller dwelling. Take the difference between owning a home and a small apartment and put that money in a non-retirement account, that's money you can use later for a home, or for other purposes, whenever you desire. – whatsisname May 7 at 20:13
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    @sofageneral - mind sharing what you know about withdrawals after separation from employer after age 55+ ? Or Sec 72(t) withdrawal provisions? – JTP - Apologise to Monica May 7 at 20:24
  • Comments are not for extended discussion; this conversation has been moved to chat. – GS - Apologise to Monica May 9 at 21:46

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