Investing in Real Estate vs 401K-Very Different Outcomes

It wasn’t that long ago that most everyone planned their retirement in the same way. They went to a good college, studied hard, got the best job they could find with the best benefits and a solid pension plan. That’s not how most retirement plans work anymore.

Today, there are no safety nets. We’re entirely responsible for exploring our own investment options and for putting together our own retirement portfolio.

Employer-paid pensions really don’t exist anymore. It’s simply not typical that someone stays at a company for a prolonged period of time of say 25 to 30 years and then retires.

Today in lieu of pensions you have traditional retirement accounts such as IRA accounts that were put in place to contribute to your retirement in your golden years. However, this investment strategy alone may fall short of providing you the financial independence and financial freedom you desire unless you’re more creative about how you plan.

Investing in Real Estate with Retirement Funds

Once you can see the value of your traditional IRA and its less than stellar performance, with no tax benefits, you may become more interested in finding an investment vehicle that will better help you accelerate your earnings.

You may not be aware of this, but you can absolutely use your retirement funds to invest in real estate. That can be a key benefit to diversifying your investment portfolio by utilizing real estate investing as well.

There are definitely rules that need to be applied before doing so, so make sure you speak with your financial advisor about how you can invest in real estate assets with your qualified retirement plans.

Hypothetical Situation 1: Keep My Money Where It Is

First, let’s just say that you have $100,000 in your retirement account. And let’s pretend that over the course of the next few decades or so your account will earn 7% annually.

You add $10,000 per year to the account with compounding growth. In 30 years, when you are retirement age, what do you think you’ll have? $1.8 million

You’re probably thinking, not bad, right?

Well, let’s add inflation into the mix. Inflation is about 3.22% per year. Note: today the inflation rate is significantly higher at the time of this writing at 7.87%, which would make this hypothetical situation even worse. But even by these conservative estimates of inflation at 3.22% a year, this means that approximately every 22 years the cost of living will double.

The 1.8 million that may have sounded pretty good a minute ago probably doesn’t sound so great when you realize that with inflation it only has the buying power of $900,000 by today’s standards, factoring in for inflation. Living out retirement on only $900,000 would be really very difficult, if not impossible.

Enter: The Self-Directed IRA

With a self-directed IRA, you are more in control over the type of investment you want to invest in with your own retirement money. You aren’t limited to only investing in stocks, bonds, or mutual funds.

As an added bonus, You CAN even invest in commercial real estate syndications and potentially receive great tax advantages. Investing in these commercial properties by way of syndications creates a passive investment opportunity where you can direct the IRA custodians of your self-directed IRA account to invest your personal funds in an investment property on your behalf.

Any annual return – interest/profit earned – from the real estate syndication goes right back into your retirement account and can help you to build your retirement accounts. This can also be a great way to potentially give you tax advantages as well.

You can also participate in real estate investments as a retirement plan if you are self-employed by opening a solo 401k as long as you don’t have any employees. You can, however, have your spouse as an employee in this plan and still qualify.

However, there are investments that you cannot do with a self-directed IRA, that are designated as a prohibited transaction. And there are also what they call “a disqualified person” as well that you should be aware of. It’s always a good idea for you to consult with your financial advisor before making any investment.

Hypothetical Situation 2: Invest In Real Estate Syndications

Now, let’s pretend that the same $100,000 was in a self-directed IRA account, all of the $100,000 invested in real estate syndications. Let’s say the terms of just such investments were a 5-year hold term and an equity multiple of 2x. This means that your investment would double over the course of 5 years.

To be clear, that means in 5 years, your $100,000 could be $ 200,000 and 30 years from now, your self-directed IRA could value about $6.4 million. Then, don’t forget about the $10,000 in contributions each year, like in hypothetical scenario 1. Add those in and you’d have over $9.5 million at retirement.

*Side note: Being able to contribute $10,000 per year assumes that your employer’s 401K allows in-service rollovers. If that is not allowed, you may be limited to contributing $5,500 per year which makes the total in your account in 30 years around $7.4 million. Still not a bad deal at all.

In Summary

Comparing $9.4 million (or $7.4 million if your contributions were limited) to $1.8 million is a no-brainer.

The impact on your future and your children’s futures will be astounding. Add to that the fact that your investments into affordable, much-needed housing options will have an impact on scores of families whose communities improve with every investment you have made.

I would choose to invest in real estate every time. But the best way to approach this investment strategy is to always conduct your due diligence and consult with your financial advisor.

What’s important to remember is that you can’t make this choice later. This is a choice you have to make now. Even if you procrastinate another 5 years, you’re missing out on hundreds of thousands of dollars.

As Robert Kiyosaki wisely said: “the poor and the middle-class work for money, the rich have money work for them.”

Do it for your future self, for your family, for your children. Do what it takes today so you can live life on your own terms when it matters most.

Until next time Earn Passively & Live Abundantly!

Note: we are not financial advisors and are not offering financial advice of any kind. Please consult with your advisors before making any investment or financial decisions. 

Ready to Learn More? 

The best way for you to learn more about commercial real estate syndications is to join the PCRP Passive Investor Club.

Through the PCRP Passive Investor Club, you’ll get a priority review of all the deals we offer. We’ll work with you to determine your investing goals and then present you with the best deals to meet those goals. We’ll then guide you every step of the way as you invest in those deals.

So if you’re ready to start investing passively in institutional-grade, commercial real estate in fast-growing, climate-resilient markets in the U.S., join the PCRP Passive Investor Club  – IT’S FREE! – and get started on your path to EARN PASSIVELY and LIVE ABUNDANTLY!

If you would like to know more about what we do and how it may be of value to you, please reach out to us anytime.  We’re always happy to help!