A 401(k) is Risky. Here's a Safer Investment Strategy. Real estate investment is arguably safer than traditional investment methods.
By Jake Stenziano •
Opinions expressed by Entrepreneur contributors are their own.
If you are reading this, you are likely wondering if there is an alternative to 401(k) to grow your wealth rapidly. Traditionally, investment vehicles such as the 401(k), where you invest throughout your career and do not see your funds until after retirement, have been considered the safest way to grow your money.
But is it really safe? In 401(k), you rely on compound interest to grow your money over a period — say 40 or 50 years. You have no access to this money during this time. In the case of most retirement accounts, you cannot take distributions until you reach the age of 59-60.
And when the time does come to withdraw money, typically after retirement, there is very little left because taxes work against investors. Gains are treated as ordinary income, taxed as high as 35%, and if you wish to take out your money early, you are penalized for it with an additional 10% penalty tax. Even if an investor needs the money and wants to take it out, they will still be penalized. In terms of returns, investors get a raw deal because they have no control over their investments.
There are many restrictions on investments with a company 401(k) plan. For instance, investments are limited to traditional investment options, such as exchange-traded funds (ETFs) and mutual funds. When adjusted for taxes and fees, returns from 401(k) investments tend to be lower, which can stop you from achieving your financial freedom goals.
Related: 13 Reasons Why Your 401(k) Is Your Riskiest Investment
Fortunately, there is an alternative way to grow your money steadily and have access to it before your retirement years. Investing in multi-family properties is an excellent option for those facing retirement or even for the young. Real estate has always been known for its high returns, especially multi-family properties.
Investing in apartment complexes pays the investor an assured sum of money every month. Ideally, an investor should look to make a minimum of $100 per unit every month from their property. This additional income will cover expenses such as education fees, medical expenses, a wedding or a vacation.
Investors must understand that you cannot build wealth by saving money. Inflation and other factors diminish the purchasing power of money over time. Consider the US dollar, which has lost 42% of its value since 2000. A $100 in 2000 is equivalent in purchasing power to about $172.05 today.
Beating inflation through 401(k) investments is not likely, considering the taxes and other high fees associated with such investments. Real estate is known to be the best inflation hedge. Properties will grow in value with inflation. If you buy a good property, manage it well and let it out to tenants, you can recover your initial investment in approximately a decade and continue to make a profit over your investment for the rest of your life.
This is what my partner Gino Barbaro did. He used the cash flows from the first 25-unit complex he bought to put his two children through college. Had Gino saved money through a 529 plan, the savings would have been used to pay for college fees, and he would have been left with little else.
Real estate investment proved smarter because Gino still owns the asset that funded his children's college fees. He is still making money from it. Multifamily properties, in particular, deliver strong cash flows every month.
Related: 5 Amazing Tips on Turning Real Estate Into a Real Fortune
Above all, real estate is an asset that will appreciate over time. If the investor manages the property well and takes care of the tenants, rents can be increased regularly so that the investor makes more money. This will also lead to an appreciation in property value.
In real estate, location decides the value of a property, so if the investor has bought a property in the right location, the chances of value appreciating are high. If an investor ever decides to sell the property, the value appreciation will allow the investor to make profits above their rental income. Also, unlike 401(k), investors have better control over their properties. Returns on investment are not subject to a fund manager's decisions or the vagaries of the stock market.
Owning a property gives you control over the management of the property. Investors can hire a good property manager to manage and maintain the building, so they don't have to worry about their investment. In a 401(k) investment, you hand over your money to a fund manager and hope the money grows without any access to your money during the investment period.
Real estate makes sense, even from a tax perspective. There are many tax drawbacks to investing in 401(k) because the investments are taxed at earned income rates, which are twice the capital gains rate. Real estate investment allows investors to write off depreciation as an expense against revenue. Property rental income is exempt from self-employment tax.
Additionally, tax credits are available to investors who offer low-income housing or restore a historical building. And, if you ever wish to sell your property to reinvest in a different property, capital gains tax will be deferred. The bottom line is investment will always trump savings, especially if that investment is in a high ROI asset such as multifamily real estate.
Real estate puts money in your pocket every month, offering you the financial and time freedom that other financial instruments do not deliver. It is time to stop putting your life on hold because you want to save for a financially secure future. You can have the life you want right now if you invest smartly.
Related: How NFTs Could Change Real Estate
