Save for Retirement OR Invest in Real Estate?

What’s the best way to build long-term wealth? If you want to know whether you should save for retirement or invest in real estate, keep reading! In this article, we’ll share the pros and cons of each strategy, a common retirement “trap” and how to avoid it, and how to earn the most income in retirement!

Summary:

• Real estate investors benefit from monthly cash flow, appreciation, depreciation and other tax deductions, loan paydown, and outsourced management.

• Retirement accounts are easy to manage and allow investors to defer taxes, earn matching contributions, and keep a diversified portfolio.

• The “middle-class trap” is a scenario in which you are unable to retire early because most (if not all) of your investments are in retirement accounts.

• The combination of real estate and retirement accounts creates a diversified portfolio, and investors can even use retirement accounts to invest in real estate.

Pros and Cons of Retirement Accounts vs. Real Estate 

Retirement accounts and real estate are two of the main vehicles investors use to build long-term wealth. Which option is the best fit for you, your lifestyle, and your retirement goals? Let’s look at the pros and cons of each investing strategy so you can choose the right path!

Real Estate

There are several ways to invest in real estate—from real estate investment trusts (REITs) to house flipping to private money lending—but most investors make their money with buy-and-hold rental properties!

Pros

Investing in real estate for retirement provides the following advantages:

Passive income: You can earn monthly cash flow by renting out your property to tenants. If you have a property manager, this income is passive or at least semi-passive!

Appreciation: Home prices tend to increase over time. This means that if you buy a rental property today and hold it for the long haul, you’ll receive the capital gains when you decide to sell.

Tax benefits: If you own a rental property, you can use depreciation and other tax deductions to lower your taxable income.

Loan paydown: As you make monthly mortgage payments, you’re paying down your loan and building equity in your property. If you have tenants, they’re doing this for you!

Easy to outsource: Don’t want to be a landlord? Hire a reputable property manager to deal with tenants, collect rent, and handle maintenance, or buy turnkey rentals with vetted property management already in place!

Retire faster with managed turnkey rentals!

Cons

While the pros outweigh the cons, there are a couple of drawbacks to investing in real estate:

Must have reserves: When buying an investment property, you’ll need more than just a down payment and closing costs. Many lenders want to see at least three to six months in cash reserves to account for the unexpected.

Not as liquid as stocks: You can sell stocks much faster than you can sell a rental property. You’ve got to get your property ready, get an agent, list it for sale, and find a willing buyer. The average home spends 66 days on market!

Retirement Accounts

From 401(k) plans to IRAs to Roth options, there is a variety of retirement accounts to choose from, depending on your financial situation, investing goals, and what’s available to you!

Pros

Retirement accounts offer the following benefits:

Easy to manage: You can view your investments, adjust your contributions, and rebalance your portfolio with very little effort—all from your custodian’s online portal.

Tax-deferred: Many contributions are made with pre-taxed money, so it could be decades before you start paying Uncle Sam his share!

Employer-matches: Employers agree to match contributions you make up to a certain amount. This means you get free money for investing in your own retirement!

Diversification: It’s easy to spread out your investments across different types of retirement accounts and funds, which reduces your overall portfolio risk.

Cons 

There are also a few downsides to investing in retirement accounts: 

“Trapped” until 59 ½: You can’t withdraw funds from many retirement accounts until the age of 59 ½ (without incurring penalties), meaning you’ll have to wait until traditional retirement age to use this income.

Delaying your tax bill: While you’ll get to forgo paying taxes on pre-tax contributions, you’ll owe taxes the moment you start withdrawing funds.

Limited investment choice: Many employer-sponsored plans are limited in terms of the index funds or stocks you can choose from.

Little-to-no cash flow: Both stocks and real estate allow you to earn capital gains, but in terms of regular income, even dividend stocks pale in comparison to real estate cash flow.

The Retirement “Trap” to Avoid

Doubling down on retirement accounts could delay an early retirement since you can’t access 401(k), IRA, and other retirement account funds until age 59 ½ without incurring early withdrawal penalties. This is commonly referred to as the “middle-class trap.” In these circumstances, you could be a multi-millionaire on paper yet unable to retire!

One of the best ways to avoid this problem is to invest in real estate—an asset class that will start making you money today. You’ll have a consistent income stream to live on when you retire, and if you must cash out on your property, you won’t have to wait until traditional retirement age!

Retire (early) on your terms with turnkey real estate! 

Real Estate IS a Retirement Plan

Many think of real estate as an investment you use to build wealth and reach retirement sooner, which it is! But it’s also an asset that can support you financially in retirement. What’s more, it offers several perks that traditional retirement accounts don’t give you, like the following:

Tax-Advantaged Passive Income

A rental property can give you consistent monthly cash flow, and thanks to depreciation and other tax deductions, you get to keep even more of your rental income. Compare this to traditional retirement accounts, many of which you’ll need to pay taxes on once you start taking distributions.

Wealth-Building Appreciation

Like stocks and index funds, properly purchased real estate appreciates over time, making you richer when you decide to sell. You can also opt not to sell and instead pass down your properties to your children, creating generational wealth.

Passivity for True Financial Freedom

Don’t like the thought of dealing with tenants or maintaining your property? Buy turnkey and have a property manager take care of things while you collect the rent check! This way, whether you’re climbing mountains, cruising, kayaking, or just spending time with family in retirement, real estate doesn’t become another job.

Real Estate Gives You MORE Retirement Income 

As mentioned earlier, real estate is tax advantaged. In our “How Many Rental Properties Do You Need to Retire” article, we discussed how you may be able to bring in $75,000 per year in passive income with turnkey rentals. If you bought 15 rentals for $250,000 each (as in the example), you could pay close to no taxes on your rental income. 

How?

Let’s say the depreciable value of each rental is $200,000 (the property’s value minus the land value).

$200,000 x 15 = $3,000,000 (total depreciable value).

Depreciation rules let you depreciate your properties over 27.5 years, so divide your depreciable value by this number:

$3,000,000 / 27.5 = $109,090 of depreciation “expense,” meaning you have more paper “expenses” than income.

This would essentially bring your rentals’ federal taxable income down to zero, which means more money for you to keep during retirement!

Invest in Real Estate USING Retirement Accounts!

Do you have a significant sum sitting in retirement accounts? You could roll these funds into a self-directed individual retirement account (SDIRA) and use it to invest in real estate! Keep in mind that the SDIRA will be the “owner” of the property, so all rental income, expenses, and sales proceeds will need to be paid to and from your account.

So, Should YOU Save for Retirement OR Invest in Real Estate?

Both retirement accounts and real estate are effective wealth-building vehicles, and you don’t have to choose one or the other. Investing in both will give you a more diversified portfolio and mitigate your risk!

Do you have retirement savings but not real estate? Create your next stream of “passive” income with newly built or renovated turnkey properties. These rentals are professionally managed for you, making them one of the best retirement investments!

Save for Retirement or Invest in Real Estate FAQs

Is It Better to Buy a House or Invest in Retirement?

Whether you should buy a house or invest for retirement depends on your age and retirement goals. Buying real estate can be a savvy move if you turn it into a rental or have a long runway until retirement. But if you’re already behind on investing or approaching retirement age, you may want to prioritize retirement savings.

Is It Better to Save or Invest in Real Estate?

Stockpiling cash does not hedge against inflation and has few benefits, especially when compared to real estate. A rental property can give you consistent cash flow, grow in value, and provide several tax benefits!

Can You Retire with Rental Properties?

Yes, you can retire with rental properties if your portfolio generates enough monthly rental income. Find out how many rental properties you need to retire using our FREE retirement calculator!