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Most people who work jobs have 401k’s that they are building up over time and some even work for companies that offer a 401k matching program. If you are employed, this is a “no brainer” to participate in as the company matches your contributions. It’s also a great way to reduce your taxable income by putting “pre-tax” dollars into a 401k tax-deferred program that you can use in retirement.

However, today very few people stay in the same jobs or with the same company long-term. Most people face downsizing, hiring freezes, layoffs, and burnout and end up moving on. In fact, there are a lot of people who decide to leave the security of their jobs and start their own businesses. The question becomes, what do you do with your 401k nest egg when you leave your current job? Do you continue to invest in stocks, bonds, and mutual funds or do you consider buying investment property?

Rental properties can be very profitable if bought and managed correctly, however most people avoid this route because of the perceived risks inherent with property management. Tenant “issues”, turnover, and maintenance problems keep a lot of people out of the rental game as they don’t want to become landlords. But those who stay and learn to manage (or successfully outsource the management) of these issues can win BIG TIME in the long run?

What should your goal be with buying investment property? How many properties should you acquire? How should you finance them? These are subjective questions that each individual investor has to answer for himself. However, let’s assume that you set a goal to buy 5 quality rental properties and own them “free-and-clear” some day. Further, let’s assume that these properties each rent for $1,000/month. This is VERY attainable for anyone looking to dabble in rental properties and, it could be argued, is actually not a very aggressive goal.

However, assuming 5 rental properties- paid for free-and-clear- would give you $5,000/month of passive income at $1,000/month each. The question is, when you retire, which would you rather have: a 401k “nest egg” that is taxed, or a portfolio of free-and-clear rental properties? The 401k’s value won’t change and it will be taxed at a future tax rate that is, almost certainly, higher than today’s rate. It will erode in value very fast! The portfolio of rental properties will throw off passive income that is taxed, but can be offset by the depreciation and business expenses from owning property.

Further, as time passes and interest rates go up, you could raise the rents on your rental properties to keep up with inflation. Your $1,000/month rental today may rent for $1,500/month 20 years from now! And you continue to benefit from the annual depreciation “expense” that owning properties affords to reduce your taxable income. So rental properties offer a hedge against inflation and taxes over time.

If you have an existing 401k that you are building up, it is certainly a good idea to keep doing it. But it would definitely be to your advantage to be buying investment property and working toward the long-term goal of owning a portfolio of free-and-clear properties.