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I'm a great saver, and I have no trouble saving at least 40k a year. I'm 25. I'm still not too sold on the 401k idea though... because I feel like it would chip away at my savings/income, money that I could be using to buy an investment property to rent out. Over 30 years, wouldn't I accumulate a lot more value if I bought 1 house a year?

My logic behind this is that there are loads of rich real estate people, but no one makes bank on their 401k really. If I have superior saving habits and am set on my 1-house-a-year strategy (lets say I manage to rent it out with cash flow equivalent to 10% of my down payments), wouldn't I outperform a 401k?

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    As I'm sure mhoran_psprep was pointing out, you should, at minimum, take full advantage of the matching contribution, as that is essentially free money. – Phil Sandler Nov 21 '14 at 16:53
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    So guaranteed ROI of 50% on 7% of your salary is a setback? In what reality? – littleadv Nov 21 '14 at 17:49
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    I don't understand. You can easily save $40k/year, but giving up 7% of your salary is a setback. What is your income then? It must be over $1mil if 7% of it is that much more than $40k. – EkoostikMartin Nov 21 '14 at 19:36
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    FYI: The "Loads of rich real estate people" often are those who do it as a full time job or were rich before they were real estate people. – JohnFx Nov 21 '14 at 22:16
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    "My logic behind this is that there are loads of rich real estate people" Hmm. How experienced are you at real estate? You do know that there are loads of people who lost a lot of money on real estate too, right? – Joe Strazzere Nov 22 '14 at 18:57
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Apples and oranges.

The stock market requires a tiny bit of your time. Perhaps a lot if you are interested in individual stocks, and pouring through company annual reports, but close to none if you have a mix of super low cost ETFs or index fund.

The real estate investing you propose is, at some point, a serious time commitment. Unless you use a management company to handle incoming calls and to dispatch repair people. But that's a cost that will eat into your potential profits.

If you plan to do this 'for real,' I suggest using the 401(k), but then having the option to take loans from it. The ability to write a check for $50K is pretty valuable when buying real estate. When you run the numbers, this will benefit you long term.

Edit - on re-reading your question Rental Property: What is considered decent cash flow? (with example), I withdraw my answer above. You overestimated the return you will get, the actual return will likely be negative. It doesn't take too many years of your one per year strategy to wipe you out.

Per your comment below, if bought right, rentals can be a great long term investment. Glad you didn't buy the loser.

  • So for 401k, do I decide which stocks to invest in? Also, I didn't end up buying that house. It was just an example of one that I was looking at. – Edmund Nov 21 '14 at 17:33
  • 401(k) choices are another conversation, but - it's typical to have fund choices, 6 or more, and many companies offer a brokerage side, allowing individual stocks/etfs/other funds. Not all offer this. – JoeTaxpayer Nov 21 '14 at 17:35
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    Go for the lowest cost broad market fund, typically something that tracks the S&P. – David Rice Nov 21 '14 at 19:52
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    @DavidRice - my 401(k) uses VIIIX an institutional Vanguard S&P index. .02% annual expense. Less than 2% over a lifetime. – JoeTaxpayer Nov 21 '14 at 20:03
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With an appropriate selection within a 401K and if operating expenses are low, you get tax deferred savings and possibly a lower tax bracket for now. The returns vary of course with market fluctuations but for almost 3 years it has been double digit growth on average. Some health care sector funds were up over 40% last year. YMMV. With stocks and mutual funds that hold them, you also are in a sense betting that people want their corporations to grow and succeed. Others do most of the work.

Real estate should be part of your savings strategy but understand that they are not kidding when they talk about location. It can lose value. Tenants tend to have some problem part of the year such that some owners find it necessary to have a paid property manager to buffer from their complaints. Other owners get hauled into court and sued as slum lords for allegedly not doing basics. Tenants can ruin your property as well. There is maintenance, repair, replacement, insurance against injury not just property damage, and property taxes. While some of it might be deductible, not all is.

You may want to consider that there are considerable ongoing costs and significant risks in time and money with real estate as an investment at a level that you do not incur with a 401K. If you buy mainly to flip, then be aware that if there are unforeseen issues with the house or the market sours as it can, you could be stuck with an immovable drain on your income. If you lose your job could you make payments? Many, many people sadly lost their homes or investment properties that way in 2008-2010.

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    Dealing with real estate directly is a business, not an investment, with the time and effort that implies. It can be a profitable business. But if you can't make that ongoing investment to do all the research, negotiation, marketing, support, and so on, the business will fail. Not may. Will. If you just want to invest in real estate, consider buying shares of trustworthy real-estate management firms, or of a REIT... which will also leave you the freedom to diversify between that and other kinds of investments. – keshlam Nov 22 '14 at 15:22
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    Thanks for sharing that observation. However, REIT's would not result in either the costs or some deductions. It can be money loser and many do not realize that when they start out unless they have relatives who have experience the stress and loss of it. Ones own home should be viewed more as shelter than an investment. A rude awakening from such thinking occurred for millions of Baby Boomers when the housing bubble burst. – Intrepid01 Nov 24 '14 at 9:12

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