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Real Estate Investing Versus 401(k)

There is a reason more millionaires have been made through real estate than any other investment.

The most commonly accepted retirement plan in the United States today is the 401(k) plan. But have you considered real estate investment as a retirement vehicle?

Let’s take a look at the two options.

401(k) Plans

Interestingly, the 401(k) wasn’t even intended for use as a retirement vehicle when it was founded in 1978. But once companies discovered how much cheaper it was to require employees to fund their own retirements, the 401(k) took off like wildfire.

Investing in stocks through a 401(k) pays everyone else involved before paying the employee contributing to the plan: Fund managers are paid fees, the government collects taxes, and Wall Street gets perpetually richer through your regular contributions. We are told to keep investing for the long-term whether the market goes up, down, or sideways. Why are we taking all the risk by putting our money for years into these 401(k) plans when the financial advisers, companies, Uncle Sam, and Wall Street get paid no matter how well the market is doing?

Most people don’t question this because they receive a small match on their 401(k) contributions through their employer, or they are told they are saving on taxes each year they contribute. The truth is, they don’t know any other way of doing things. Plus, most people don’t want to think about money. They believe since the 401(k) is set up by their employer, or since their neighbor talks about their 401(k), they must be doing the right thing. But, as the saying goes, “You just don’t know, what you don’t know.”

The 401(k) plan hasn’t even been around 40 years! It’s still an experimental idea for how to save for retirement. The reason it’s been so commonly adopted is because companies started going bankrupt trying to pay employees for life through pensions and continue to rid themselves of pension options. It makes sense for companies to require employees to fund their own retirement plans.

Now consider how long real estate has been around. Well, since people have needed a place to live!

The main reason a 401(k) will never work for the vast majority of people is because it is essentially a savings plan. There is no way to “save” your way to retirement. Unless that sum of money stashed away in your 401(k) can be converted to consistent monthly cash flow, it is basically worthless. It is estimated that you will receive a measly 4% on your money to live on once you convert your growing 401(k) to fixed income securities.

For example, let’s assume you are in the top 1% of all 401(k) investors and you have accumulated $300,000. Good job! A 4% return generates $12,000 a year to live on! Let’s say you have a job paying you $80,000 annually. When you retire, it would be nice to at least earn that much. After all, the goal is to maintain the same lifestyle you have now—and maybe even travel more. With a 4% return, you would need at least $2 million saved to receive $80,000 per year in retirement. Further, 4% doesn’t beat inflation most years! The good news is you can achieve a substantial retirement through real estate—in a fraction of the time and with exponentially higher results.

At what age do you want to retire? How do you plan to achieve that?

The government decided that 59 ½ is the age when we should be finished working. The sad truth is the majority of people will work far past this age because their retirement will not even partially support them. Should we really let someone else decide when it is time for us to retire? Should it really be this complicated to access our “retirement” money that we have spent the majority of our working life saving for? You want to retire on your terms and timeline—and that requires taking control of your financial future!

The IDEAL Path to Financial Freedom

The path to financial freedom requires establishing regular cash flow. Besides monthly passive income through rent, here are some additional benefits you receive by choosing to invest in real estate. These are the reasons why real estate will continually beat the stock market and how it can skyrocket your wealth. Real estate investing is the IDEAL investment.

  • Income. You receive income from rent each month. What is left over after expenses is called cash flow, and it is the key to financial independence.
  • Depreciation. A huge tax advantage of owning rental properties is depreciation. Divide the home price by 27.5 years and that’s what you can deduct each year.
  • Equity buildup. Your tenant pays down the loan you used to acquire the property, increasing the amount of equity over time.
  • Appreciation. Regardless of short-term market corrections, home values will increase over time (estimated at 4% a year in stable markets).
  • Leverage. Leverage is what explodes your returns on investing. You put in only a small percentage of the capital to buy the home, but you receive 100% of the tax and income benefits.

Let’s use an example of investing $20,000.

If you purchase stocks with that $20,000, you will have $20,000 invested. If those stocks increase 5% that year, you will have $21,000 and realize a true 5% return.

Now, let’s say you invest that same $20,000 into a rental property. You borrow $80,000 to purchase a $100,000 home. Say that home went up 5% that year and is now worth $105,000. You have $25,000 in equity and an actual return of 25%. Consider also that the home produces $200 a month in cash flow ($2,400 a year). Just from that income you are receiving a 12% return ($2,400/year rent income/$20,000 down payment). This still doesn’t include the returns you receive from tax benefits through depreciation or equity buildup as the tenant pays the loan for you.

Do you see how all these factors can produce an enormous return? Even the income alone of 12% will easily beat stocks’ suggested 7% annual return over time. There is a reason more millionaires have been made through real estate than any other investment. It’s the math, not magic!

This is a real-world example, and we actually have many properties that consistently beat the conservative numbers used in the previous example.

We have our clients work backward to achieve their financial goals. For example, someone decides they want to achieve a passive income of $75,000 annually to replace their current job. Breaking that number down to a monthly income, we get $6,250 a month. Using an average rental that cash flows $450 a month, that person would need to buy 14 properties to reach this goal. If they bought two properties per year, they could achieve financial independence within seven years! Don’t forget: When these properties are paid off, the annual income more than doubles to easily achieve a passive income of more than $150,000 a year

One last item to address for all the naysayers who ask: “What happens if the real estate market crashes like in 2008?” Buy more at a discount. Fewer people will be able to buy homes, which drives up rental demand and rental prices. Your rentals will have fewer vacancies and more income.


Zach Lemaster is the founder and CEO of Rent To Retirement. Lemaster is a seasoned real estate investor who has accumulated a large portfolio of rental properties across multiple markets, including single-family, multifamily, commercial, and new construction. He is passionate about educating others on the numerous benefits of real estate investing and how to use real estate as a means to create the lifestyle each person desires.


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