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Scrap the 401k?
I recently was a guest on Fox Business News where I was asked if I was recommending people scrap the 401k. I have been asked that same question by many people since the show and I want to be clear on my answer -- YES! I would absolutely scrap the 401k, not because the 401K is somehow flawed, but because of the opportunity that exists with multi-family real estate. Over the next 7-10 years income producing properties (apartments) will produce incredible returns while protecting retirement dollars due to the following factors:
1) Limited supply of apartment buildings will keep vacancy low and pressure on rental rates going higher.
2) Rental rates have not yet expanded the way other cost of living most notably fuel and food cost have.
3) Due to sub-prime lending market credit availability for first time and sub-prime buyers becoming limited the rental market will expand and home ownership continue to shrink.
4) Increase cost of building materials particularly steel and concrete make the building of new projects increasingly unworkable.
5) Possibility of future higher capital gains tax rates will make real estate 1031 tax advantages even more desirable.
Two million plus foreclosures are forced to remain renters for the next seven years minimum by Reality Trac.
There is over 45 trillion dollars in retirement accounts in the US retirement accounts. Apartments are safe vehicles for those retiring who desire control of their retirement dollars and want to willing and actively be responsible for those retirement dollars.
A Marcus and Millichap survey of real estate investors found that 52% of all real estate investors surveyed said they would extend their holdings in income producing properties. While the availability and cost of credit has changed, healthy occupancies, rent growth, lack of overbuilding and increasing rental pool of people due to foreclosures makes this investment even more attractive for retirement money.
Apartments, bought at the right price, in the right location will provide positive cash flow, appreciation, and peace of mind. While it will require work on your part at least you will know
that your monies won't go poof in the night by incompetent executives,out of control salaries, non-performance and out-ethics -- (Enron, Countrywide, Indy Mac, Bear Stearns, etc.)
I personally refuse to have someone else handle my most important, retirement, dollars. I want control over those dollars and refuse to turn over that responsibility. I also want to get leverage with my retirement dollars and immediately multiply my retirement dollars 3X. You don't get any leverage with traditional 401k Investing and you don't have control.
Let's say an individual's retirement account is worth 250,000 and after cashing out there is now available 175,000 after taxes. These dollars would be used as cash down to buy a property worth three times the down payment or 525k. In the current lending environment it is going to take about 1/3 down to do a deal. This is more than traditional real estate investors are used to putting down and provides an opportunity for someone with retirement dollars at this time.
Today, it is easier to get a loan on multi-family than it is a house because the multi-family (rental units) gets valued by its historical ability to produce income. You are basically buying an ongoing business and that business is valued based on its rental income exceeding expenses. DO NOT CONFUSE RENTAL PROPERTIES WITH HOUSING THEY ARE NOT THE SAME.
Apartments have so many things going for it right now that will increase values in the future. USA home ownership continues to decrease. Immigrants rent before buying with some renting their entire lives. Service communities are not owners but renters. AARP said in 2001 that those over 60 will find it more and more difficult to own a home as they are living on fixed incomes.. Even during economic contractions, populations continue to expand making the demand for rental properties more desirable and ownership less attainable.
Tips of buying apartments as investments:
1) focus on markets with service based economies,
2) markets where home ownership exceeds rental payments
3) markets with positive job growth,
4) markets with barriers to entry, (difficult to build in)
5) know the market
6) be able to get to the property easily
7) buy for the long term
8) be willing to pay up for great location
Your new retirement vehicle, the 550,000 rental property (you only paid 175,000) will be worth how much in 2023-2033? I don't know, but I do know it can not be stolen from you, it will produce income and could be worth 5 to 10 times the price you paid. Your debt will be paid off by renters and the rental income will probably be double or triple what it is today. Lastly, you will sleep better at night because no one on Wall Street will mismanaged or blow your most important dollars.
Grant Cardone
aboutgrantcardone.com
www.twincapitalholdings.com
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Suggesting people consider investing in real estate is laudable, but the whole "Everyone should do this and no one will loose money" tone of this is really not something that should be posted on a trusted news and opinion source (as I had started to take HuffPo to be) without a big ADVERTISEMENT lable across the top.
Owning real estate CAN be profitable, my dad and several other relatives got rich from it. But it is NOT without serious downsides, especially in an economy going from seriously overpriced buildings to renters who cannot afford higher rents. If you aren't prepared for a downturn and unexpected expenses, you can loose big in a big way.
your parents did well because they understood what I wrote about- which was to be long term player in rental property where the renters pay down the debt and they are left with property that is paid off and still cash flowing.....this article was not meant to not use 401K but to convert it upon retirement into income property....
Being on Fox news is one strike against this idea to begin. I love the 401K. If the company mgt has a good selection of offerings, it provides one with great flexabilities. My company had use Fidelity as its umbrella famility with a few other family funds thrown in. I was able to monitor my funds and did very well. I did a rollowver to Fidelity and have been happy with the selections offered. The problem of investing in real estate or other single assets, is that it does not provide diversity. I was able to use sector funds to greatly improve my positions. Yes, I had to cash in on some sectors or reduce my exposure to oil/drillers/latin america/southest asia/etc. But in some cases where I reduced exposure, I am so far ahead by taking profits that the market in many of these areas would have to drop greatly before I either pulled out completely or would take losses. For example I completely got out out of gold when I was 25% ahead and that was before take partial greater profitability. I think it is dead wrong to drop the 401K for real estate assets. It is like social security, an insurance policy for the future.
and for every dollar you bought in gold you put up a dollar. this is a completely different investment that does not hinge on the price of a commodity but one that whether it goes up or not the debt will be paid down over time. talk to me in ten years and you will wish you did what was stated here!
In general I don't disagree with this post. I have 3 specific issue though:
1) If you put ALL your money into real estate you lose the advantage of diversification. This increases your long term risk. I'm currently short/cash, but during bull markets I recommend a mix of ETFs in various types of stock (caps, industries, regions, etc), commodities, currencies, etc.
2) Buying property is like "catching a falling knife" at the moment. There will be MANY condos converted back to apartments in the near future ...and RE prices are plummeting. What if your $525k apartment ends up being worth $400k and you lose most of your equity? Why not wait a couple years and buy it at $400k??
3) There are ways to purchase rental property using your 401(k). It is insane to cash it out and pay all the penalties when you don't have to. Check www.GuidantFinancial.com if you don't believe me ...you can run a small business using a 401(k) account also.
1) diversification is greatly overstated
2) we aren't talking about a falling knife here with income property. you are talking about residential property. this is income property and regardless of the future pricing the debt will be paid down by renters and to that degree it will be a win. Assuming prices never go up over the next 15-20 years which is historical impossible, it would still mean the investment went up three fold.
3) there are also ways to set up the 401k to purchase property but this article suggesting those cashing out of their 401k and still wanted to work their money could use this to three fold the value of their investment dollar and get the debt paid off by others....you can not do that with stocks or bonds!
Cashing out your 401k for to put into anything other tahn anonther qualified plan is foolish. To start with you will pay substantial tax penalties for the cash-out. Second your compounding will not be tax free. Finally if your contributions into a 401k carry a company match you are missing out on a fantastic instantaneous return.
I won't say that multifamily real estate is a bad investment, but you portray it with your 'you will sleep at night' rhetoric as if it is somehow a low-worry, low-risk investment. That is far from the truth. One nightmare tennant can cost you many thousands of dollars. Landing in court over the return of deposits and whatnot is commonplace. Events in the neighborhood (incresed crime rate, the downturn or closing in a key component of the local economy) can sink years of gains. Anything that can go wrong in a house (fire, broken pipes, valdalism, termites, etc.) can happen just as much if not moreso in a multifamily building.
you didnt read the article- i wasn't suggesting cashing out early but even if you did a ten percent penalty for the right investment would still make sense. You didn't set up the 401k to save ten percent you set it up to grow retirment dollars~
I'm with you Grant. I will be closing on a four family soon. In this day and age you can't rely on pensions, Wall Street or even SS. It has been my experience in 30 years of real estate that 95% of people don't want to be landlords, which leaves more deals for me. If they want an alarm going off every morning, sitting in traffic, doing an boring job with an a**hole boss while I lay by the pool.....let them.
You try to help people but they are afraid they might have to turn off their TV s and miss American Idol.
This is the reason Multi Family Real Estate is such a good investment for the person that has money soon coming available from his 401k. People have so many misunderstandings about real estate. The misnomers of it automatically meaning slumlord, plumbing problems and legal problems is just people that don't have experience with managing their own investments by owning their own business. If a person doesn't want to work their money, doesn't want to take phone calls, and just wants to stay home, hope and pray that their retirement money is going to be all right this wouldn't be for them. But for those that don't want to leave it to the CEO they will never meet and to the whims of Wall Street multi family can be a great thing and will prove to be over the next 7-10 years.
Yeah, folks, get back in real-estate trading and slum-lording business so the financial insiders can *again* jack up the price, then take all the cash and let it all crash while you lose everything. Welcome back my friends to the show that never ends....
"Joo know wuh Capitalism iss? Gettin f***ed!" - Tony Montana
You have no clue what you are talking about. There are no insiders in real estate that control the game.....this is one of the last investments available that can not be manipulated!
Yeah, but I know a snake oil salesman when I see one.
If you manage it yourself you will soon wish you were dead. If you don't manage it yourself you wont make any money. Tenants who are both willing and able to pay their rent are much harder to come by than you think. This kind of business only looks good on paper. I have done property management for small time landlords and I have brokered "income" properties. You may find you have bought yourself a nasty, risky low paying job. There are passive investments in real estate but that is not what this article is talking about. Do your homework. Be careful.
If people start living beyond their planned retirement age, they will be out of money soon before they pass. this investment creates an alternative income flow and protects their assets. The richest people in this country are loaded with income producing real estate in their portfolios.
My parents inherited rental property from my (maternal) grandma. They said the 2 happiest days of their marraige were the day they married and the day they sold the property.
As the author of The Smartest 401(k) Book You'll Ever Read, I agree that the 401(k) system is flawed. However, the advice in this column strikes me as totally irresponsible.
Most financial advisors agree that employees should contribute the minimum amount to their 401(k) plans that will get them the maximum employer matching contribution. Employees should also consider a Roth IRA (if they qualify), whether or not they invest in their 401(k) plans.
Advice that proposes investing in any one asset class flies in the face of Nobel Prize winning research and hundreds of academic articles that demonstrate that asset allocation is the most critical factor that affects the returns of investors.
And because asset allocation is critical is one of the reasons this asset is important for people to get knowledge on... The article doesn't suggest that all monies should be in multi family but that it is a vehicle to retire with....
Great a whole new generation of slum lords is born.
Buying and managing real estate is a business like every other, so that defies the meaning of retirement. As every business it requires a certain degree of expertise (what is a good location, what about the house's substance and need for repairs etc.) and you have to be willing to deal with the hassle (tenants).
I'd read the intention of the blog to show to us that now might be good time to buy real estate because it may be already cheaper than its very probable long-term value. Although that might be the case, the timing is (still) bad - an error of many investments. The recession is going to stay awhile (my guess would be at least 5 years) and property values will not rise soon. Also credit costs are high and rising because of the danger of inflation which the Fed will address sooner rather than later. The best time to buy real estate is at the end of a recession - and we are far away from that.
Don't confuse retirement account with retiring. Most people are going to live long after their financial plans. Retiring doesn't mean you lay on the sofa everyday and do nothing. Those that remain active through retirement and stay busy will not only prove to be happier but will live longer.
Oh, I get it now. You are not talking about actual "retirement". In that case I agree. Everybody of any age should cash in their 401K if it is exposed to the stock market and invest in something substantial.
Toilets and Tenants; no thanks!
I would rather toilets and tenants than CEO out of control salaries, non performance and out right thievery.
From what I hear, you better be prepared to work for what you earn in apartment ownership. Tenants are a headache. Contractors for repairs are a headache. Lawyers for advice and protection are a headache. Vacancies are a headache. Etc., etc.
I started with one house and then bought 38 units and ended up many more since then. I made more money on this investment than a lifetime of salaries.....it was worth the work.
I think he's joking a bit there folks. Don't be so serious!
After all, real estate never goes down! ? Who needs diversification when an expert has told you what the future will be?
Look into the year 2019 and tell me where real estate will be?
Where will rents be in 2019. Where will your debt be after being reduced by tenants by ten years.
I am not joking!
Grant may have something here... if no one is buying rental properties right now, it MUST be the right thing to do.
Conversely if no one is buying rentals right now, there must be a sound reason why, and I'll bet Grant has a few 'select' properties he'd love to unload.
Over 50% of all commercial property owners will add real estate this year to their portfolio.
We will buy over 5000 units before year end.
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