401K vs Basic Real Estate Investing

Mainstream Media "Max out your 401K!"

Growing up we were always taught by our parents, "Max out your employer 401K. You will be a millionaire when you get older!". I decided to challenge this thought and compared two hypothetical scenarios. So basically you have two corporate guys age 25 making the same salary of 50,000 a year. They each contribute 12,000 a year to 401k and real estate respectively. How you ask? Lets just say they lived in their mom's basement all 30 years for this hypothetical situation :) This will be a 30 year analysis.

Assumptions to keep this simple:

1. Salary stays at 50K for all 30 years
2. I will not take into account inflation
3. Contributions of $12,000 a year will remain stable for 30 years

401K

401K is pretty straightforward. I just plugged it in a 401K generator online. Salary is 50K, The dude is contributing 24% of his salary (12,000 a year)! Annual rate of return is around 8%. The employer will match 100% up to a maximum of 6% of the employee's contributions.

Here are the results:
Total 401k fund balance when the guy is 55 is $1,772,017 (source: bankrate.com). Let's say the guys lives off of his annual returns of 6% a year, ($1,772,017*8%), he will make $141,761.36 a year. Assuming he withdraws the whole amount of his 8% returns year after year.

Summary:
Total contributions with employer ($1,772,017 million)
Total Yearly income from returns: $141,761.36/yr

Real Estate Analysis
The real estate guy can only buy his 1st real estate house at the end of year 1, after he has saved up a total of $12,000.
Facts and Assumptions:

1. The guy will buy his houses mostly in secondary markets where he can afford to buy 80K single family homes and putting down payments of $12,000 per property.
2. To keep it simple all of his deals will be 80K houses and down payment of $12,000 per house for all 30 years.
3. His cash flow for each rental property, taking into account tax benefits, property taxes, depreciation, mortgage, insurance, repairs, vacancy, etc....is a conservative $100 per month which is by the way a 10% return cash on cash from his 12K investment.
   ($100/mo. X12 = $1,200 /yr which is a 10% return from the 12K downpayment).

So the first few years he will only be able to buy 1 house per year until he can build up a large enough real estate empire from his cash flows to buy multiple houses per year. So basically the guys never touches his cash flows or spends it. He leaves it in his real estate back account until he has enough in there to buy an extra property with a 12K down payment. At the end of 30 years, he stops buying real estate and just lives of his cash flows.
See excel spreadsheet for detailed analysis.

Contribution: Represents how much money is able to contribute to buy a house. He is only able to contribute 12K a year for the first few years until he builds up enough cash flow from his rental property to contribute more in multiples of 12K.

Cash Flow: Represents how much money or passive income he is generating from his real estate properties.

Bank: Represents his real estate bank account. The amount in the bank should continue to get larger and larger from his cash flows and will only diminish when he decides to buy an extra property (multiples of 12K).

Results:
Total contributions (including the cash flows year after year from all of this real estate properties): $1,800,000
Total cash flow per year at yr 30: $178,000
Total number of properties owned: 150 properties ($1.8 mil/12k)
Total Value of his real estate empire: $12 million (150*80000)

So at quick glance at cash flows and income per yr, it looks like the real estate guy barely won....but he actually dominated this race because he has over $12 million dollars in property investments. At age 85 and assuming he stops investing at 55, he would have paid off all of his real estate mortgages and he will own 100% of $12 million while the 401K guy is stuck sub $2 million.

Real estate cons: The work of finding the deal and closing it at the right price. 401k is so much easier because all you do is click simple buttons on the screen. You don't even have to sweat.
The rental market might be so bad one year that the real estate guy actually suffers negative cash flows!

401k cons: you can only withdraw your money at age 65 or you will be charge a penalty! So actually at age 55, the real estate guy is retired on the beach and enjoying his yearly returns while the 401k guy has to wait another 15 years to get his freedom/money.
They make you take out loans to touch your money, but you have to pay it back.

Overall, despite the difficulty in initiating a true a real estate investment (i.e. finding the deal, closing the deal, finding the right property management, etc.), real estate investing is clearly better than the typical mainstream idea of investing in a 401K.

Personally, I have been working in Corporate America for 1 year now. I invested in 401k for the first few months, and after doing some reading on true financial freedom, I decided to completely halt my 401K deposits and focus on other investments.