Before we begin talking about real estate investing or 401K investing, I have a disclaimer: I am not an accountant, or SEC-licensed. However, I am a licensed real estate broker in Utah. Over the last 13 or 14 years, I have bought and sold a lot of properties, and managed a lot of income properties for investors. So, my experience in that field has influenced my thoughts on the pros and cons of these different investment options.
Main Investment Difference: Barrier to Entry
The real difference in investing in residential income properties versus a 401K is the barrier to entry. It’s easy to invest in a 401k. You can start with a small amount of money and add to it incrementally over a period of time. You can contribute $25 or $500 a month; whatever you want. Then, you can slowly grow that. It’s like turning a seed into a tree. There will be ups and downs as your money grows, but those are fairly easy to weather.
Why Choose Real Estate Investing
I personally believe we have two basic needs in life – food and shelter. That’s why I prefer investing in real estate. It’s a tangible investment. The challenge, however, is that there are higher barriers to entry. You have to qualify for a loan, and you have to put money down. You need regular rental income, which means you need to find a good tenant. Then, you need to manage and care for that property.
You’re still turning a seed into a tree, but in my experience, that tree can grow faster. Perhaps that’s because housing is a basic necessity. I believe investing in real estate takes a lot more work to get started. But, the rewards are greater. You’ve got someone else paying your loan and you’ve got a property that’s appreciating.
The depreciation is also important. You can depreciate this asset every year, which goes against your taxable income. That’s not money in your bank account every month, but you’re saving in the taxes you’re obligated to pay. Consult with your accountant for more details.
This is a topic I could talk about a lot more. So, contact us at Utah Property Solutions if you’d like more information about the difference in a qualified plan or real estate when it comes to investing.