Why Invest in Multifamily Over a 401(k) or an IRA (2024)

FAQs

Why should you invest in multifamily? ›

There are many advantages to owning multi-family real estate. These include access to easier and better financing opportunities, the ability to quickly grow one's rental property portfolio, and the luxury of hiring a property manager.

401(k)s offer higher contribution limits.

The employer-sponsored plan allows you to add much more to your retirement savings than an IRA – $22,500 compared to $6,500 in 2023. Plus, if you're over age 50 you get a larger catch-up contribution maximum with the 401(k) – $7,500 compared to $1,000 in the IRA.

IRA and 401(k) accounts let you save for retirement with tax benefits. Employers may match your contributions but limit your investment choices. IRAs offer more control, flexibility, and potentially lower fees.

If you roll your 401(k) money into an IRA, you'll avoid immediate taxes and your retirement savings will continue to grow tax-deferred. An IRA can also offer you more investment choices than most company 401(k) plans. You'll have more control over your money, with the ability to buy and sell any time you want.

The main benefit of multifamily housing is that it's usually more affordable than single-family housing. With the current real estate market as it is, it's more difficult for people to buy a home and this is especially true for first-time buyers.

We've alluded to this already, but the primary benefit to owning multifamily real estate is that it offers multiple sources of cash flow. The more units, the more sources of cash flow. The more diversified the cash flow, the less risky the investment.

Traditional IRAs offer the key advantage of tax-deferred growth, meaning you won't pay taxes on your untaxed earning or contributions until you're required to start taking minimum distributions at age 73. With traditional IRAs, you're investing more upfront than you would with a typical brokerage account.

Brokerage accounts are taxable, but provide much greater liquidity and investment flexibility. 401(k) accounts offer significant tax advantages at the cost of tying up funds until retirement. Both types of accounts can be useful for helping you reach your ultimate financial goals, retirement or otherwise.

What are three benefits of investing in a 401 K )? ›

401(k)s are employer sponsored and often come with matching contributions to help employees invest even more. IRAs, on the other hand, aren't employer sponsored and have lower contribution limits than 401(k)s—but they also offer more flexibility and investment options.

An IRA not only gives you the ability to save even more, it might also give you more investment choices than you have in your employer-sponsored plan. And if you have a Roth IRA, there's also the potential for tax-free income down the road.

The pros of rolling over 401(k) to a new employer's 401(k) include ease of management, employer's match, tax savings, and early retirement options. The cons include higher fees, limited control, limited investment options, and potential tax implications.

The primary disadvantage of multifamily investing is that it requires more capital upfront than other types of investments, apart from other, large commercial assets. Multifamily investments often require a larger down payment than other types of investments, as well as larger monthly mortgage payments.

The 50% rule in real estate says that investors should expect a property's operating expenses to be roughly 50% of its gross income. This is useful for estimating potential cash flow from a rental property, but it's not always foolproof.

Investing expert Barbara Friedberg says a real estate allocation of 5% to 10% is a good rule of thumb since real estate is an alternative asset class. At the same time, private equity and real estate investor and serial entrepreneur Ian Ippolito recommends putting as much as 13 to 26% or more into real estate.

Many financial advisors recommend a 60/40 asset allocation between stocks and fixed income to take advantage of growth while keeping up your defenses. Here's how 60/40 is supposed to work: In a good year on Wall Street, the 60% of your portfolio in stocks provides strong growth.

What is the safest asset class? ›

Common safe assets include cash, Treasuries, money market funds, and gold. The safest assets are known as risk-free assets, such as sovereign debt instruments issued by governments of developed countries.

Some of the disadvantages of rolling over a 401(k) into an IRA include no loan options, a decrease in creditor protection, possibly higher fees, and the loss of a possible earlier withdrawal without penalty.

Key Takeaways. Low-risk investments commonly found in IRAs include CDs, Treasury bills, U.S. savings bonds, and money market funds. Higher-risk investments include mutual funds, exchange-traded funds (ETFs), stocks, and bonds.

The two primary ways an IRA can grow is through annual contributions and investment appreciation. However, there are limits to the annual contribution amounts allowed, and not all investments are successful in the long-term.

For traditional IRAs, the distributions you take will be taxed at your income tax rate at the time the withdrawal is made. If the distributions are taken prior to age 59 ½, a 10% federal tax penalty applies.

The main difference between 401(k)s and IRAs is that employers offer 401(k)s, but individuals open IRAs on their own, through a broker or bank. IRAs typically offer more investment options, but 401(k)s allow higher annual contributions. The contribution limit for 401(k)s is $22,500 in 2023 ($30,000 if age 50 or older).

Keep in mind: You'll likely get the biggest return over time — and take the greatest amount of risk — with stocks (also known as equities), while bonds and other fixed-income investments help balance out that risk because they're relatively safe compared with stocks.

Key Takeaways

You're never too old to fund a Roth IRA. Opening a later-in-life Roth IRA means you don't have to worry about the early withdrawal penalty on earnings if you're 59½. No matter when you open a Roth IRA, you have to wait five years to withdraw the earnings tax-free.

Open the back door to a Roth IRA

Because the money in a Roth IRA can grow and be withdrawn tax-free, it can be an indispensable savings tool. After maxing out on the retirement plan, many wealth builders contribute every dollar allowed to a Roth IRA.

What is a better investment than a 401k? ›

Good alternatives to a 401(k) are traditional and Roth IRAs and health savings accounts (HSAs). A non-retirement investment account can offer higher earnings, but your risk may be higher, too.

Some alternatives include IRAs and qualified investment accounts. IRAs, like 401(k)s, offer tax advantages for retirement savers. If you qualify for the Roth option, consider your current and future tax situation to decide between a traditional IRA and a Roth.

Compound interest is likely the most significant benefit of investing early in retirement. Though there's no guaranteed set rate of return, when you start saving for retirement earlier, you'll end up with more money with a smaller capital investment than if you wait until later in your career.

Some of the advantages of this kind of investment include advanced portfolio management, dividend reinvestment, risk reduction, convenience, and fair pricing.

You'll owe income tax on your contributions and on your gains. So if you have a bigger income when you retire than when you made contributions, you'll be in a higher tax bracket and owe more than if you hadn't deferred your taxes.

A Roth individual retirement account (IRA), rather than a traditional IRA, may make the most sense for people in their 20s. Younger savers tend to be in lower tax brackets, which means that they benefit less from tax-deductible contributions to a traditional IRA than those in higher brackets.

The value of 401(k) plans is based on the concept of dollar-cost averaging, but that's not always a reliable theory. Many 401(k) plans are expensive because of high administrative and record-keeping costs. Nonetheless, 401(k) plans are ultimately worth it for most people, depending on your retirement goals.

Key takeaways. IRA and 401(k) accounts let you save for retirement with tax benefits. Employers may match your contributions but limit your investment choices. IRAs offer more control, flexibility, and potentially lower fees.

What is an advantage to both a 401k and an IRA? ›

The traditional individual retirement account (IRA) and 401(k) provide the benefit of tax-deferred savings for retirement. Depending on your tax situation, you may also be able to receive a tax deduction for the amount you contribute to a 401(k) and IRA each tax year.

Employees 50 and older can contribute an extra $7,500, up from $6,500 in 2022. In 2021, roughly 14% of investors maxed out employee deferrals, according to 2022 estimates from Vanguard, based on 1,700 plans and nearly 5 million participants.

The amount individuals can contribute to their 401(k) plans in 2023 will increase to $22,500 -- up from $20,500 for 2022. The income ranges for determining eligibility to make deductible contributions to traditional IRAs, contribute to Roth IRAs, and claim the Saver's Credit will also all increase for 2023.

If you think you might be in a lower income bracket when you retire, you should consider a traditional IRA because you may be able to make tax-deductible contributions. If you're expecting to have a higher income in retirement, consider a Roth IRA and its potential for tax-free growth.

If you're leaving your job, do away with your 401(k) When you leave your existing job, Ramsey suggests moving the money from your current employer's 401(k) plan into an IRA that you open at a brokerage firm. This process is called a 401(k) rollover.

In addition to preventing you from maximizing the strengths of multiple accounts and vendors, a consolidation may also cause you to forfeit grandfathered benefits – and in some cases, this change is irreversible.

2% Rule. The 2% rule is the same as the 1% rule – it just uses a different number. The 2% rule states that the monthly rent for an investment property should be equal to or no less than 2% of the purchase price. Here's an example of the 2% rule for a home with the purchase price of $150,000: $150,000 x 0.02 = $3,000.

Owning multiple rental properties can help investors reduce risk through portfolio diversification. The snowball effect describes how real estate investors use cash flow from one rental property to purchase multiple properties over time.

What are the benefits of investing in a multi asset fund? ›

Multi-asset funds can offer investors exposure to a broader range of assets, sectors, strategies and direct investment exposures (e.g. individual securities, bonds) with greater flexibility. They are diversified across both traditional and non-traditional asset classes, such as real estate and infrastructure.

Like many rules of real estate investing, the 50 percent rule isn't always accurate, but it can be a helpful way to estimate expenses for rental property. To use it, an investor takes the property's gross rent and multiplies it by 50 percent, providing the estimated monthly operating expenses. That sounds easy, right?

The 80% rule means that an insurer will only fully cover the cost of damage to a house if the owner has purchased insurance coverage equal to at least 80% of the house's total replacement value.

The 70% rule can help flippers when they're scouring real estate listings for potential investment opportunities. Basically, the rule says real estate investors should pay no more than 70% of a property's after-repair value (ARV) minus the cost of the repairs necessary to renovate the home.

What is a good ROI for multifamily? A good return on investment (ROI) for multifamily investment could be between 14% and 18%. Factors like the local real estate market and asset class will affect this. For example, if you invest in a growth market, your initial ROI will be on the lower end.

Don't get in over your head. Some real estate investors enjoy great success with one or two rental properties, while others own dozens. There's really no preset number of properties you should limit yourself to. Rather, you should think about your capacity to manage those properties.

If you haven't heard already, one of the most reliable, recession-resistant moves a real estate investor can make is invest in apartments. Multifamily outperforms other types of commercial real estate simply because it serves a basic human need - people need somewhere to live.

Investing in multi-asset allocation mutual funds is suitable for those investors who are not willing to assume higher levels of risk and are looking to earn stable and consistent returns on their investments.

Mutual funds are one of the most popular investment choices in the U.S. Advantages for investors include advanced portfolio management, dividend reinvestment, risk reduction, convenience, and fair pricing. Disadvantages include high fees, tax inefficiency, poor trade execution, and the potential for management abuses.

What are the disadvantages of multi-asset funds? ›

But there are drawbacks too. The allocations to different asset classes may not reflect your risk and return preference. “Using a multi-asset scheme to fund multiple goals with different horizons may mean that the investor may have to withdraw money at a time when a sharp fall in equity has eroded the returns.