Sometimes a contrarian play works out well

[TexasHusker]

In 2010, I left my employer of 24 hears and had about $400K in my 401K. A pretty impressive sum, but as I looked into it, it really hadn't grown much over that time. Most of it was what I had put in there, plus my company's match. I know that the average returns for mutual funds are appreciably higher than I personally experienced. I became disillusioned looking at the whole thing and thought "what the heck let's try something different."

So I took the entire $400K and cashed it out. Paid penalties and taxes, and was left with something around $270K. My accountant said he cried.

But I turned around and put $260K into 2 small vacation rental cabins in the Smoky Mountains. That was mid 2010. I have had 9 full calendar years of rents now, and the gross rents over that time are over $500,000. Of course I have expenses out of that - insurance, taxes, utilities, etc., but I have still netted over $400,000 in rents, and the cabins are now worth in the neighborhood of $400,000. In 2019 they yielded $62,000 and change.

I am not advocating this as an alternative to 401Ks. On the other hand, conventional wisdom doesn't also fit every foot. For me, I didn't want to wait 13 years before I could start withdrawing my money penalty-free. I wanted it now, to invest and provide me current income.

As Robert Frost wrote,

"Two roads diverged in a wood, and I -

I took the one less traveled by,

And that has made all the difference."

[bjl584]

Risk equals reward.

This strategy isn't for everyone as you've said, but it can pay off handsomely for those with enough guts and knowledge to do it.
I've seen this similar scenario play out on various real estate podcasts that I listen to.
Most advocate going against conventional investing wisdom and using money and leverage in creative ways.

[disneysteve]

You've shared your story before. Good to hear an update and that it's still working out well for you. Certainly, real estate is a time-tested means of making money. Stocks and bonds certainly aren't the only option even though that's what gets talked about the most.

[corn18]

In 2010, I left my employer of 24 hears and had about $400K in my 401K. A pretty impressive sum, but as I looked into it, it really hadn't grown much over that time. Most of it was what I had put in there, plus my company's match. I know that the average returns for mutual funds are appreciably higher than I personally experienced. I became disillusioned looking at the whole thing and thought "what the heck let's try something different."

So I took the entire $400K and cashed it out. Paid penalties and taxes, and was left with something around $270K. My accountant said he cried.

But I turned around and put $260K into 2 small vacation rental cabins in the Smoky Mountains. That was mid 2010. I have had 9 full calendar years of rents now, and the gross rents over that time are over $500,000. Of course I have expenses out of that - insurance, taxes, utilities, etc., but I have still netted over $400,000 in rents, and the cabins are now worth in the neighborhood of $400,000. In 2019 they yielded $62,000 and change.

I am not advocating this as an alternative to 401Ks. On the other hand, conventional wisdom doesn't also fit every foot. For me, I didn't want to wait 13 years before I could start withdrawing my money penalty-free. I wanted it now, to invest and provide me current income.

As Robert Frost wrote,

"Two roads diverged in a wood, and I -

I took the one less traveled by,

And that has made all the difference."

$260k + leverage = $62k annual income

I would need a portfolio of $1.5M (62x25) to match that income stream.

You can argue about real estate being a second job all you want, but that ROI is very appealing. If I could take $262k out of my portfolio and generate $62k of annual income, I would quit my job and do that. If we go into a recession and home prices drop significantly, I may do just that. But right now, I am too dumb and the housing market is too high for me to take on that risk.

Although I did make just shy of $12k today and didn't lift a finger, so there's that (we know that will continue, right?)

[TexasHusker]

$260k + leverage = $62k annual income

I would need a portfolio of $1.5M (62x25) to match that income stream.

You can argue about real estate being a second job all you want, but that ROI is very appealing. If I could take $262k out of my portfolio and generate $62k of annual income, I would quit my job and do that. If we go into a recession and home prices drop significantly, I may do just that. But right now, I am too dumb and the housing market is too high for me to take on that risk.

Although I did make just shy of $12k today and didn't lift a finger, so there's that (we know that will continue, right?)

In truth, the annual net yield is more like $48K after expenses. Still quite good however.

Many roads lead to Rome.

[corn18]

In truth, the annual net yield is more like $48K after expenses. Still quite good however.

Many roads lead to Rome.

Yes, better than quite good. And it is generally well protected from inflation. Your rents can go up with inflation and that is a huge plus. Now that I am planning a 30+ year retirement, inflation is an evil monster. It erodes everything.

[TexasHusker]

Yes, better than quite good. And it is generally well protected from inflation. Your rents can go up with inflation and that is a huge plus. Now that I am planning a 30+ year retirement, inflation is an evil monster. It erodes everything.

I keep hearing that there is no inflation .

[disneysteve]

I keep hearing that there is no inflation .

From who? Anybody who goes into a grocery store every week knows there is inflation.

[LivingAlmostLarge]

Texas do you think you've made more than Singuy with his stock picking? Isn't that a contrarion play? That picking one stock TSLA to make it is probably even riskier in some ways than real estate? I think the contrarion play can happen in many forms. I don't think that real estate is necessarily a contrarion play.

[TexasHusker]

Texas do you think you've made more than Singuy with his stock picking? Isn't that a contrarion play? That picking one stock TSLA to make it is probably even riskier in some ways than real estate? I think the contrarion play can happen in many forms. I don't think that real estate is necessarily a contrarion play.

By contrarian, I meant cashing out my 401K. There are people making infinitely more than me on their investments, and they likely have a few million more noodle cells than me.

[Captain Save]

cashing out your 401k ... not for spending but for investing in something that is more lucrative than what it was doing .... nothing wrong with that... even with the tax hit... this is even better if you know your numbers.

If someone doesn't want to take that risk .. they can do the same with something less costly.

[Fishindude77]

Question ?
Now that you have the rental housing gig up and running smoothly are you setting some of that money aside into a 401k, or other such "conventional investments"? Something other than real estate or business ventures?

[moneybags]

cashing out your 401k ... not for spending but for investing in something that is more lucrative than what it was doing .... nothing wrong with that... even with the tax hit... this is even better if you know your numbers.

If someone doesn't want to take that risk .. they can do the same with something less costly.

There is also the option of investing in real estate within your retirement account. Not many people do this, but it can be done. Similar to holding stocks in your account, you can hold rental property. I knew someone that started their own business & held the company in their retirement account. It's not as easy as the typical stocks, etc., but it is an option.

[TexasHusker]

Question ?
Now that you have the rental housing gig up and running smoothly are you setting some of that money aside into a 401k, or other such "conventional investments"? Something other than real estate or business ventures?

No, I kind of gave up on everything equities. I just never did any good.

I know you can technically invest in other things through IRAs and 401Ks, but it is perilous and honestly just not worth screwing with for me personally. And I am not a fan of all the do’s and don’ts in that sort of thing.

I have diversified, but only meaning I own 6 different vacation rentals now instead of 1 or 2. But if I could find something that offered an equal or better return and I could get still manage a good sleep every night, I would look at it.

I spawned a property management co. from the vacation homes which does well and i suppose means I am diversifying.

I also one four hair salon franchise locations. The ROI is quite good, but you don’t own hard assets like you do with property, so there’s that trade off.

We also recently inherited a cotton farm. Given what the land is worth, the return isn’t all that great as it relates to the land value, but it has sentimental value to my wife and she ain’t selling.

It’s complicated.!!

[Jluke]

Vanguard Wellesley or Vanguard Wellington might be good choices to ease back into investing.