With the development of economy, more and more people start to look into ways of investing for retirement. Among all the options, real estate investment and 401k are two major choices. While 401k features tax benefits and easy access through employers, real estate investment provides investors more flexibility and control. This article will compare investing in real estate and 401k, and provide suggestions on how to leverage both options.
Real estate investment allows leverage while 401k does not
One of the biggest advantages of real estate is the ability to utilize leverage through mortgages and loans. By borrowing money to purchase properties, investors can achieve higher returns. In contrast, 401k accounts do not allow leverage. All capital invested has to come from your own pocket.
Real estate investors have more flexibility in managing assets
With direct ownership of properties, real estate investors can decide when to buy, sell, renovate or rent their assets based on market conditions and personal strategy. However, 401k investors have limited control over the assets. They cannot directly buy or sell stocks or funds in the account.
Real estate investment involves more work but provides higher potential returns
Succeeding with real estate investment requires knowledge, effort and time devoted to evaluating deals, managing properties, etc. The hard work comes with the potential of achieving much higher returns than 401k investment. Average annual return rate of real estate investment over the past decades has been around 10% to 12%, outpacing stock market.
401k features tax benefits while real estate does not
The tax-deferred nature of 401k helps investors greatly reduce tax burden. Capital gains and dividends are not taxed until withdrawal after 59.5 years old. However, income from rental properties and capital gains from selling real estate are taxed as ordinary income.
In conclusion, real estate investment provides more flexibility, control and potential of higher returns compared to 401k accounts. It does require more effort and involve higher risks. 401k features great tax benefits but limits investor’s options. The ideal approach is to leverage both vehicles to achieve diversification and maximize benefits.