Why does real-estate investing crush your 401k mutual funds?

You know that you can’t just save your way to a fortune … right?!

So, what to do with that ‘extra’ cash that you manage to scrounge from time to time?

In a previous post , I pointed out that we are at a UNIQUE point in history.

For the FIRST TIME that I can recall BOTH money AND real-estate are cheap!!

If you save up a deposit (AFTER paying of any pesky credit card debt) and plonk it down on a rental property (or even your own house, if you ain’t got one yet) and LOCK IT IN for 30 years, how can you EVER go wrong?

If you do buy to live in it, eventually you will move on – just keep it as a rental FOR EVER.

I don’t know what will happen over the next year or so, but over 30 years it’s a no-brainer …

… your mortgage payments remain flat (you fixed them, remember?) …

… the value of the house doubles every 7 years or so (and, you will take advantage of this ‘spare’ equity, won’t you?) …

… and – here’s the kicker – your rents rise roughly in line with inflation … see how that compounds over 10, 20 or even 30 years to spin off income that will help you stop working!

And when you eventually do retire, the real-estate strategy STILL kicks your 401k’s butt …

This built-in inflation-protection makes real-estate a great adjunct or alternative to so-called safe retirement strategies such as the Grangaard Strategy and Worry-Free Investing (two of the best that I have come across).

Try doing any of that with your 401K or mutual fund!

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8 thoughts on “Why does real-estate investing crush your 401k mutual funds?

  1. Your forgetting something. House prices are declining and the cost of owning a house is increasing, taxes upkeep etc they dont’ remain flat.

    Also inspite of all the paying the landlords mortgage hype landlords tend not to raise the rent on good tenants.

  2. Thanks for your comment, Robin. I can’t recall the last time that BOTH real-estate AND money was cheap … what do you do when stuff is cheap? BUY lots of it.

    But, you’re right … there may be better opportunities than houses …

    … now, let’s SAY you DO buy a house or twelve NOW … you may MAKE or even LOSE some money over the short-term … but over the long-term those who buy – and lock in those loooong, cheap mortgages – will be sipping Pina Coladas on the beach in Majorca AND Cancun AND Bondi Beach in 20 years … because they CAN!

  3. You are correct that they are cheap and possibly a good dceal but the most important thing about real estate is location location location more than anything. Do your homework.

  4. Residential real estate, purely as an investment, only returns about 1 to 1.5% over inflation (depending on the study)

    Plus, it is a very high maintenance investment (1% or more of the value annually)

    Both prices AND rents are still dropping. Most don’t expect a stabilization until the end of 2009 (so why buy at today’s prices?)

  5. Thanks, Bill. I agree 🙂 IF you buy ordinary real-estate in an ordinary location, and are happy with ordinary results, then sure … short-term returns can be low. Even so, if you buy low and hold for the long-term (especially, if you can lock in cheap finance) then 30 years will do an awful lot to ‘cover up’ any small purchasing problems.

    Of course, a better outcome is to do you homework (should you buy apartments, houses, commercial? In what locations? can you reposition/rehab to immediately improve value?) BEFORE you jump in …

  6. in today’s market, even 20% down won’t put you into a positive cashflow rental on a sfr (as residential real estate has been bid up so high)

    sure, apartments have a better cap rate than a sfr, but the downpayment you need on even a small complex is pretty hefty

    did you make a significant chunk of your cash in real estate via pre-bubble buying?

    thanks for any info – i’m currently reading john t. reed’s books on real estate

    cheap money, of course, was one big reason we had/have such a bubble

  7. I made most of my money (and continue to) in various businesses, real-estate, and stocks (in that order) … and, I would suggest that how most people who’ve made serious money have made it, too.

    When you buy-and-hold real-estate, bubbles matter a little less … now we have a little ‘anti-bubble’ so more opportunities may come along … you just have to turn a lot of rocks!

  8. I really liked how you called out the idea of simply renting your home vs. simply selling it when you move. I got started in real estate investment early – purchased my first condo in PA when I was 25 moved to years later, purchased another condo in CA and had to move again because of work. The rental market is tremendous and I have never had a problem filling the units. Its simply smart business!

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