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Which is Better for Retirement: 401(k) or Multifamily Investing?

A 401(k) is meant to help you invest for retirement, but how much do you keep? Consider the advantages of apartment investing instead

"We weren't social visionaries."

Those are the words of Herbert Whitehouse, a former human resources executive at Johnson & Johnson who was one of the first to usher in the 401(k).

"It was oversold."

Those are the words of Gerald Facciani, the former head of the American Society of Pension Actuaries. He helped defeat an effort by the Reagan administration to kill the 401(k) in 1986.

The misgivings of the early proponents of the 401(k) were chronicled in a bombshell article from the "Wall Street Journal" in 2017, "The Champions of the 401(k) Lament the Revolution They Started."

According to the article:

Many early backers of the 401(k) now say they have regrets about how their creation turned out despite its emergence as the dominant way most Americans save. Some say it wasn't designed to be a primary retirement tool and acknowledge they used forecasts that were too optimistic to sell the plan in its early days.

Others say the proliferation of 401(k) plans has exposed workers to big drops in the stock market and high fees from Wall Street money managers while making it easier for companies to shed guaranteed retiree payouts.

As they say, hindsight is 20/20. Some of the biggest, earliest proponents of the 401(k) now wish they’d never championed it. But, unfortunately, no one is listening. This is because many people have bought the slick marketing that a 401(k) is an asset that gives you free money...that is your employer match.

There’s no such thing as free money

Years ago I had a conversation with a young man about 401(k)s and the employer match.

“I have a question for you,” he said. “I’ve read that you say 401(k)s are the worst investments, but I don’t understand why you say that.”

“What is it that you don’t understand?” I asked.

“Well,” said the young man. “Most employers match your contribution. For instance, my employer matches up to four percent of my salary. Isn’t that a hundred percent return? Why is that a bad investment?”

“It’s a bad investment,” I said, “because it’s your money to begin with.”

He looked puzzled and perplexed.

“Listen,” I said, “if it weren’t for 401(k)s, your employer would have to pay you that money as part of your salary. As it is, they still pay it, but only if you give up four percent of your existing salary into a retirement account where you have no control. And if you don’t, well the employer comes out ahead. It’s your money, but they’re in control.”

Thinking like an employee vs an employer

The young man still didn’t look convinced, but I could tell he was thinking hard about it. The reason this young man and many others don’t understand my reasoning is that they only think like employees. As an employer, I know that if it weren’t for 401(k)s, I’d have to pay that money to employees in their salary in order to be competitive.

For me, as an employer, a 401(k) is an advantage because I don’t have to pay the money unless an employee opts in, and if they leave my company too early, I don’t have to pay because they aren’t vested.

A recent study confirms what I’m saying and should help those of you who still find this logic confusing or not convincing.

A 401(k) steals your money

Research confirms what I’m saying and should help those of you who still find this logic confusing or not convincing.

According to “Time Magazine” writer Steven Gandel in an article called “ How 401(k)s Make Many Americans Poorer,” a study issued by the Center for Retirement Research in 2012 indicated that, “All else being equal…workers at companies that contributed to their employees’ 401(k) accounts tended to have lower salaries than those at companies that gave no retirement contribution…In fact, for many employees, the salary dip was roughly equal to the size of their employer’s potential contribution.”

Translation, companies that don’t offer 401(k)s must pay a higher salary to compete with companies that do. Those company’s employees simply get their money as part of their salary rather than having to match it and save it in a tax-deferred retirement plan where they have no control and have high fees.

Speaking of high fees, a typical 401(k) plan takes 80 percent of the profits. The investor may receive 20 percent of the profits, if they are lucky. Don’t believe us? Ask John Bogle. Yes. John Bogle, Founder of Vanguard Investments.

The investor puts up 100 percent of the money and takes 100 percent of the risk. The 401(k) plan puts up zero percent of the money and takes zero percent of the risk. The fund makes money through fees, even if you lose money.

Generally speaking in a bull market, a 401(k) does put money in your pocket – but only 20%. So if you had $10,000 in your 401(k) and it made 5%, then your 401(k) made a profit of $500 - you only get $100 (before taxes).

Now we have to understand that taxes work against you with a 401(k). Long-term capital gains are taxed at a lower rate of around 15%. Great! The only problem is the 401(k) treats any gains as ordinary income. Ordinary income is taxed at the highest rate, sometimes as high as 35%. And if you want to take the money out early, you’ll have to pay an additional 10% penalty tax.

In real investment assets, tax law is written to your advantage, not taxing you at every turn.

It gets worse. It turns out that when it's calculated correctly, without government creativity, inflation increases faster than any 401(k). That means money is leaving your pocket!

No financial intelligence? Retire with a 401(k)

Control is an important aspect of investing. As I mentioned, with a 401(k), you have no control over your investments as you generally invest in funds and indexes controlled by brokers, who are controlled by bankers, who invest in companies that are controlled by boards — all of which you have no control over.

If you want to be rich, you must have a financial education and control over your money and your investments. This is why I like to invest in my own business, purchase real estate and create products. I have a lot of control over those investments. Generally a good matrix is the more control you have, the higher your potential return. The less control you have, the lower your potential return.

Of course, it takes high financial intelligence to invest in things where you have control because you have to make a lot of important decisions. This is why being forced into a 401(k) probably isn’t a bad thing for most people. This is because most people have little-to-no financial education and wouldn’t know what to do with the extra money other than save it or spend it.

Multifamily investing, the better retirement investment

A number of years ago (2011), I read an article in The Wall Street Journal by Tom Lauricella called “Want a Job? Become a Landlord”.

In summary, Lauricella wrote that for those facing retirement, a valid option is buying a small multi-family building, living in it, and managing it.

He cited low interest rates and depressed pricing as reasons that it was a good time to jump into apartment investing. He also pointed out that rents were on the upswing in most states and that the long-term trend in the US looks to be one of renting vs. ownership. All of this boded well for landlords.

Fast forward over ten years later, and much of Lauricella’s justifications still exist today. Interest rates are at all time lows. Rents are rising aggressively in many cities. And the 401(k), as we just established, is still stealing from most people’s retirement.

I was happy to see an article like Lauricella’s in the mainstream media because I’ve been preaching for years that cash-flowing real estate is one of the ultimate investments due to the ability to leverage, receive cash in your pocket each month, and the tax benefits.

“Why Real Estate?” As Rich Dad Advisor Ken McElory’s writes,

Using Other People’s Money – leveraging other people’s money to create a cashflow opportunity is always ideal. In the realm of real estate investing, this is very common. You might only pay down 10% on a property, have a private party or bank provide the rest of the funding, and be bringing in money! Just think about this; you can own a $500,000 property for just $50,000 and it brings in over $5,000 a month in cashflow!

Appreciation– this is the increase in value of the property over time. If you can manage your property well, take care of your tenants and strategize, you can increase your rent rates. When the rent increases, your expenses go down. This causes the property to increase in value.

Control –when you own the property, you have control over the income and expenses of your property. So, if you’re able to have your property cashflow, it is not subject to the ups and downs of the market.

Tax Advantages –there are some tax advantages to owning real estate properties. Depreciation is something that you can write off as an expense against your revenue. Not to mention the tax credits available if you offer low-income housing or if you restore a historical building. When you’re looking at a tax credit, it is directly deducted from the taxes you owe at the end of the year. And lastly, capital gains deferral. If you wanted to sell your property to reinvest in a different property, the capital gains will be deferred.

Basically everything you don’t have with a 401(k), you do with multifamily investing.

That being said, there are a few things I’d say differently than Lauricella did in the WSJ article.

Hire a property manager

If you’re buying an apartment building, why spend the time and energy renting, managing, and maintaining the building—especially if you don’t know what you’re doing? Who wants to spend their retirement years fixing toilets and changing locks?

One of the great things about multifamily investing is that you can factor in property management into your calculations when buying an investment property. Find a deal that can provide income while supporting professional property management.

Make investing your “job”, not management

To me, it’s short-sided to find only one building and make managing it your job. Instead, become an investor and find more great deals that you can purchase and have professionally managed. Spend your spare time educating yourself on the market, rounding up investors, finding better deals, and building the value of your portfolio so that you can leverage it into even more deals. That will give you a purpose in retirement and build your wealth.

Start now, no matter your age

While I think it would be smart for those nearing retirement to consider multi-family investing, it would be even smarter for the young people reading this post to begin investing.

As the old saying goes, “Youth is wasted on the young.” Don’t let your youth be wasted. Rather begin planning for your future by investing in your financial education and building a portfolio of assets that will provide for you and your family when you’re ready to retire.

My wife, Kim, began investing over two decades ago with one two-bedroom house in Portland, OR. Today, she owns thousands of units in multiple states that bring millions of dollars into her pocket each year. Anyone can do this. Start small when you’re young, and build big for when you’re old.

For more on multi-family investment and management, I encourage you to read the books by my real estate advisor, Ken McElroy, The ABC’s of Property Management and The Advanced Guide to Real Estate Investing .