Opinions expressed by londonbusinessblog.com contributors are their own.
If you’re reading this, you’re probably wondering if there’s an alternative to 401(k) to quickly grow your wealth. Traditionally, investment vehicles like the 401(k), where you invest throughout your career and don’t see your money back until you retire, 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 of time — say 40 or 50 years. During this time you will not have access to this money. Most retirement accounts will not allow you to withdraw benefits until you reach the age of 59-60.
And when it comes time to withdraw money, usually after retirement, very little is left because taxes work against investors. Profits are treated as ordinary income, taxed up to 35%, and if you choose to withdraw your money early, you will be penalized with an additional 10% penalty. Even if an investor needs the money and wants to take it out, he will still be punished. In terms of returns, investors are getting a rough deal because they have no control over their investments.
There are many restrictions on investing with a business 401(k) plan. For example, investments are limited to traditional investment options, such as exchange-traded funds (ETFs) and mutual funds. After adjusting for taxes and fees, 401(k) investment returns tend to be lower, preventing you from reaching your financial freedom goals.
Related: 13 Reasons Your 401(k) Is Your Riskiest Investment
Fortunately, there is an alternative way to steadily grow your money and have access to it for your retirement years. Investing in multi-family housing is an excellent option for people retiring or even for young people. Real estate has always been known for its high returns, especially multi-family homes.
Investing in apartment complexes provides the investor with an insured amount every month. Ideally, an investor should aim to earn at least $100 per unit of their property each month. This extra income covers costs such as study costs, medical costs, a wedding or a vacation.
Investors need to understand that you cannot build wealth by saving money. Inflation and other factors reduce 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 unlikely, given the taxes and other high fees associated with such investments. Real estate is known as the best inflation hedge. Real estate will increase in value with inflation. If you buy a good property, manage it well and rent it out to tenants, you can recoup your initial investment in about ten years and continue to make a profit on 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 help his two children study. If Gino had saved money through a 529 plan, the savings would have been used to pay for college, and he would have had little else.
Investing in real estate turned out to be smarter because Gino still owns the assets that financed his children’s college tuition. He still makes money from it. Multi-family homes in particular ensure strong cash flows every month.
Related: 5 Great Tips To Turn Real Estate Into A Real Fortune
Above all, real estate is an asset that will increase in value over time. If the investor manages the property and takes care of the tenants, rents can be increased regularly so that the investor earns more money. This will also lead to an increase in the value of the property.
In real estate, location determines a property’s value, so if the investor has bought a property in the right location, there is a high probability of an increase in value. If an investor ever decides to sell the property, the appreciation will allow the investor to make a profit in excess of their rental income. Also, unlike 401(k), investors have better control over their properties. Returns on investments are not subject to the decisions of a fund manager 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 transfer your money to a fund manager and hope that the money will grow during the investment period without access to your money.
Real estate makes sense, also from a tax point of view. There are many tax disadvantages to investing in 401(k), because the investment is taxed against the income from labor, which is twice as much as the capital gains. Real estate investments allow investors to write off depreciation as expenses against income. The rental income from real estate is exempt from self-employment tax.
In addition, tax credits are available for investors offering low-income housing or restoring a historic building. And if you ever want to sell your property to reinvest in another property, the capital gains tax will be deferred. The bottom line is that investment will always exceed savings, especially if that investment is in high ROI assets such as multi-family real estate.
Real estate puts money in your pocket every month and gives you the financial and time freedom that other financial instruments don’t offer. It’s time to stop putting your life on hold because you want to save for a financially secure future. You can now have the life you want if you invest smartly.
Related: How NFTs Can Change Real Estate