Comments on: The 401k revisited …

By: Is real-estate management time consuming? « How to Make 7 Million in 7 Years™

Mon, 18 Aug 2008 08:15:31 +0000

[...] real-estate management time consuming? Published August 18, 2008 Rich Rick asks: What about time commitment? What is a realistic estimate of hrs/year needed to manage a single [...]

By: AJC

AJC — Mon, 04 Aug 2008 15:07:17 +0000

@ Shaferfinancial – Thanks for the comments!

By: shaferfinancial

shaferfinancial — Mon, 04 Aug 2008 13:37:37 +0000

Oh and one more comment. I love when people who haven’t accumulated wealth argue their strategies against folks who have!

By: shaferfinancial

shaferfinancial — Mon, 04 Aug 2008 13:21:38 +0000

There are several inherent problems with the save/invest/401K strategy. But, first one should start with facts. What is the average rate of return from folks invested in mutual funds? Not, what is theoretically possible, but what do folks actually get? The premiere data analysis is done by Dalbar, Inc. These studies are consistent with the other studies, including Vanguard’s internal studies. Then compare that with the rate of return for leveraged investment property.

Perhaps more importantly, is the fact that few people are able to save monthly for 35 years. Truth is life intervenes, like layoffs, sickness, extraordinary expenses, etc. that keep people from making inputs into their 401K/IRA for periods of time.

And finally, are taxes. Real estate ownership has inherent tax advantages all the way through the ownerhship cycle. 401K/IRA create tax problems for folks down stream when they least can afford it or have the ability to offset taxes.

Truth is, 401K/IRA save and invest strategies have failed for the last generation of folks and will fail for the next generation of folks.

By: Mike Hunt

Mike Hunt — Thu, 31 Jul 2008 04:09:12 +0000

I like to use 6% – 10% for ROI on Real estate based on rental incomes, personally. 10% gives you a good margin for lack of occupancy, repairs, etc. Unfortunately these deals are very hard to find as prices are still too high generally. The bailout bill that just passed will only drag this on for more time. That said, I’m confident that there will be bargains in the next 3 years or so. Just keep an eye out and always look at the Price / Rent ratio of the property.

-Mike

By: AJC

AJC — Wed, 30 Jul 2008 21:55:32 +0000

@ Rick – Good question/suggestion for a post … stand by. In the meantime, read anything by T John Reed (older) or Dave Lindahl (newer).

By: Rick Francis

Rick Francis — Wed, 30 Jul 2008 19:03:33 +0000

AJC,

It does seem like a worthwhile alternative to research more- what about time commitment? What is a realistic estimate of hrs/year needed to manage a single rental proerty? Any suggestion on books that cover the basics well?

-Rick Francis

By: AJC

AJC — Wed, 30 Jul 2008 17:39:32 +0000

@ Rick – The point of the post wasn’t to tell you to invest in RE instead of 401k, merely to challenge the ‘automatic millionaire’ assumptions out there today. I encourage you to run the numbers with whatever investments and rate/s of return that you like.

But, to answer your questions: I used 8% for stocks and 6% for RE because I consider these to be equally conservative; we are talking about 5 properties acquired over 30 years (anybody buying 5 could actually buy more under this model). I allowed 25% of rents (a useful Rule of Thumb) to allow for vacanices and holding costs for the RE and I used an 8% mortgage rate, not 5.25%.

By: Rick Francis

Rick Francis — Wed, 30 Jul 2008 16:31:25 +0000

AJC,
I read the article and it was interesting- however I wonder if it is a really fair comparison. For the stock example assuming 8% annual for 30 year period is conservative estimate… Isn’t that the lowest return rate given the available historical data? I’m OK with that assumption as long as the real estate example is similarly conservative
I don’t know enough about real estate to know how the assumptions compare however…
A> How much work would it take to manage the property?
It seems like it would be a lot more work than rebalancing a few times a year.
B> Since the real estate case is a single property isn’t it much riskier? A flood or other natural disaster or difficulty getting renters could raise the costs estimates. If the cash flow was bad enough you could potentially lose the property. Shouldn’t the calculation put 6 months to 1 yr of mortgage payments in a CD as a buffer?
I didn’t see any mention of insurance or property tax premiums, is that assumed to be covered by rent? Didn’t it assume a mortgage rate of 5.25%? That seems too good of a rate to me… looking on bankrate.com a 30 year fixed rates is running 6.41%! Wouldn’t it would there be higher rate for a rental property?
If the comparisons are really equally conservative it demands some careful research on real estate.
-Rick Francis

By: AJC

AJC — Wed, 30 Jul 2008 01:25:19 +0000

@ Guys, thanks!

@ Rick – Is it possible that the combination of (relatively) low returns and high(er) fees in your company’s 401k will pretty quicky eat up that one-off ‘free money’ 50% match? Check this post out:

http://7million7years.com/2008/05/23/will-you-ever-put-a-penny-in-your-401k-again/

Let me know what you think …