top of page
  • Writer's pictureRick Martin

Investing in 401k vs Real Estate - Which is Better for You?

Weighing the pros and cons of investing in your 401k vs Real Estate.
Weighing the pros and cons of investing in your 401k vs Real Estate.

Depending on how long you've been around in life, there has been an evolution in the retirement plan. No matter what age you are, your parents probably first taught you about a savings account. When I next discovered the CD, I think they were paying about 5% at that time - not bad. Somewhere along the line, the ticket to retiring came with the all-holy IRA - the individual retirement account. Your financial advisor would tell you that you could defer a whole $3000 by saving and investing into the stock market and diversifying your risk by purchasing mutual funds. At some point, the traditional ira was old news, and the 401k became popular. Now you could defer even more, and your employer might even match what you contributed. For the longest time, I stuck with this plan, as that was all that I knew. I certainly wasn't aware of real estate investments as an investment vehicle. I probably believed that real estate investors who held numerous rental properties were perhaps offspring of the very wealthy.

I backed into my first rental property. I decided to buy my first single-family residence, and I scratched and clawed for that first down payment. I planned on living in that thing for a long time, but only a year later, life took a turn, and a career change would move me out of that city. It felt too soon to turn around and sell, so my home became my first investment property, as I put it up for rent. Now my very modest income was being supplemented by rental income, and the lightbulb went off. I was getting cash flow without working a job. I had discovered passive income, and it felt different than my stock investments. I knew then that real estate was going to become a part of my long-term investment strategy.

Benefits: 401k vs. Real Estate

All investors are not created alike, and one size does not fit all, so let's take a look at some of the advantages of each.

Benefits of a 401k

Tax Benefits - As I mentioned earlier, you can defer a significant portion of your income, reducing your taxable income, and therefore your income taxes.

Liquid - Since traditional 401ks most commonly invest in the stock market, they are highly liquid, as a stock transaction can happen instantaneously.

Employer Matching (through a company 401k) - This has to be the most significant benefit of investing in a 401k and gives it an advantage over real estate. An employer matches your 401k contribution up to a certain percentage by giving you a return before ever investing it. I'd say this is a great way to grow one's retirement savings. However, not all employers do match, and if this is the case, it significantly reduces the advantages.

Self Direction through a solo 401k - This one took a while for me to discover. In 2010 I was looking for more funds to invest in real estate. Ironically, I found out that the internal revenue service had no problem rolling over my retirement funds from my simple ira into a solo 401k. Not only did this open me up to more investment options, such as real estate and private businesses, but I could do so with checkbook control. I no longer had to rely upon ira custodians. While such custodians are great for making sure you are IRS compliant, they can slow down the logistics of moving money. When investment opportunities knock, we don't always have the three weeks a custodian can take to fund our investment. That inefficiency of liquidity can hurt.

While self-direction is listed as a benefit here, the solo 401k is available only to the self-employed. Thus, only a tiny percentage of 401k's truly have the freedom to invest in a wide range of assets. Traditional retirement accounts - company 401k's - are limited to conventional types of investments, such as stocks, bonds, etc, to add to their investment portfolio.

Benefits of Real Estate -

Income Producing Assets: Who doesn't need a little help with the mortgage, rent, gas, or groceries? Undoubtedly, the passive income-producing aspect of real estate sets it apart from other types of investments. Rents minus the expenses and the mortgage leaves the cash flow that goes directly into your pocket. Build enough of these income streams from your real estate portfolio, and you can start to think about replacing your salary, or at the very least supplementing it.

Tax Advantages - While the 401k benefits from tax deferments, the government gives a tax break to those making real estate purchases as they see real estate investment as a way of improving communities. Whether it is a single-family flip or a 200 unit value add apartment, investors will acquire a lightly or heavily distressed asset and perform renovations, restoring the asset. Investors not only can write off the cost of these renovations but their operating costs, including repairs and maintenance, utilities, insurance, mortgage interest, professional fees, and property taxes, helping their bottom line come tax time.

Depreciation - Depreciation is the process used to deduct the costs of buying and improving a rental property. Depreciation distributes the deduction across the useful life of the property. The typical time frame is 27.5 years, but there is something called "Bonus Depreciation," which accelerates the depreciation, which is helpful for assets being held for a shorter time frame. While it may take an entire article to explain how to calculated depreciation, know that you can claim a significant deduction each year you own the property.

It is a good idea to consult with a tax advisor regarding the tax implications of real estate investing.

Leverage - You know those late-night infomercials, "own real estate with low or no money down!" Well, it is true. Whether buying your single-family property or teaming with other investors to purchase a large apartment (know as a real estate syndication), you get a loan to cover 80% of the value and seek the rest from other private investors. The leverage amplifies your cash on cash return. The less money you have in the deal, the higher your COC%. For example, if you bought a house for $100,000 and were getting back $10,000/year in cash flow, your COC% is 10%. If you purchased that house for $100,000 but only put down 15,000 and got that same $10,000/year, your COC% increases to 66.6%! The power of leverage.

Equity Pay down - Every payment made towards a home loan increases the equity in a property, and the bonus of investment properties is that the tenants are paying your mortgage. If you wisely underwrite your expenses into the deal, then the rent is covering those as well. It is the type of investment that pays for itself.

Let's jot down the disadvantages of 401's vs. Real Estate.

Disadvantages of 401k's

If investing in the stock market:

It can be highly volatile.

Some stocks move sideways for years.

It can be very emotional, which can lead to bad/snap decisions.

One should be aware of some disadvantages if investing in Real Estate out of a solo 401k. You cannot spend the cash flow, and since you can't spend it, you cannot write off the cash flow with the K-1.

Disadvantages of Real Estate.

High entry barriers can require much work unless you are investing passively into syndications.

Minimum investments can be high, and a down payment can be anywhere from $20k and up. The minimum investment on syndications can be 50k.

An illiquid investment. You cannot push a button and have the transaction. Some see this as an advantage because it prevents making emotional, snap decisions.

A quick word on returns because no investment is guaranteed. According to Business Insider, the Dow has averaged a 9.2% return or the last 10 years, while the S&P averaged 13.6% over that same period. In a passive real estate investment, one can expect 7 to 8% COC% plus another 10 to 12% appreciation for an average annual return of 17 to 20%. If actively investing in your own rentals, you may even beat these returns, but be aware that it does take much time, effort, and education.


As with anything, we can see pros and cons to either your company 401k or investing in real estate. Maybe this article shed some light on the solo 401k, which bridges the gap but has different rules when investing with taxable income. Those who are not self-employed have no fear. The self-directed IRA allows you to invest in real estate, but be aware that it does carry UBIT (unrelated business income tax ). Still, it is more tax advantageous than the stock market.

It comes down to personal preference. Some thrive on the ups and downs of the stock market, while others enjoy real estate as if it were a game of Monopoly. And for those that don't necessarily like to play Monopoly but like the cash flow, appreciation, and tax advantages, real estate syndications are a great option. As we grow and evolve, it appears our investment options have as well, which gives us options. Hopefully, you have learned some of the advantages and disadvantages of 401k and real estate. The good news is, you don't have to do just one - you can do both.

If investing in real estate syndications sounds interesting to you, let's have a chat. You can also sign up on our investor list, at no cost.

To learn more download our QuickStart Guide to Investing in Syndications below:


bottom of page