Should You Invest In The American Dream Or Your 401K?

By Troy Corman, www.t2realestate.com

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With affordable home prices and some of the lowest mortgage interest rates in history, The American Dream is on sale. Our economic uncertainty has bred tremendous fear, and in turn, tremendous opportunities.

So why are so few taking advantage? Because you and your brethren have been programmed to sock away money blindly into a 401K or IRA managed by some distant stranger who is making your investment decisions for you. I find that a frightening option, especially since stocks tend to have much bigger drops than housing in times of despair. I've heard of many stocks dropping to $1 from $100 or more a share, but I've yet to hear of any real estate that was worth $100,000 at one time dropping to $1,000. That's why I think if the doomsdayers are correct about another downturn, the stock and commodity markets will take a much bigger hit than real estate, and those 401Ks could end up in 201K territory again.

An alternative strategy is investing in home ownership in lieu of your 401K. We'll break down a plausible scenario below. Benefits include:

A. You get to LIVE a better life, in better living quarters - EVERY DAY - NOW;

B. Unlike the 401K, the profits you receive when selling your owner-occupied home are TAX-FREE (after living in the home for 2 years);

C. Home ownership reduces your taxes. On a $200K home purchase, financing $190K, at 5% interest, you'll deduct $9,436 in interest expenses, and $5,000 in property taxes (based on 2.5% rate at $200K tax assessment) annually. If you're in the 28.5% tax rate, that totals $4,114.26 in annual additional after-tax dollars you'll keep;

D. After 5 years of payments, instead of owing $190,000, you'll owe $174,181;

E. If you buy your $200K home at 10% less than market value, it's worth $220K at purchase, instead of the $200K you paid;

F. If your home averages 3% appreciation for 5 years, the home would be worth, in 5 years, $255,040 (based on a $220K starting valuation);

G. Let's suppose you put $500 a month into your monthly housing payments, instead of your 401K, or $30,000 over 5 years;

1. $30,000 invested monthly over 5 years in your 401K with an annual 5% return would total $34,788 before taxes at the end of 5 years, or $24,873 after taxes based on the 28.5% tax bracket.

2. $30,000 invested in the your home purchase over 5 years - plus the down payment of $10,000 and closing costs of $7,500 (estimated) equals an investment of $47,500, plus a roughly $1,200 monthly expenditure on housing.

3. Now let's say you sell the home after 5 years for the $255K price and owe $174K. Taking out Realtor commissions and closing costs, you're left with $63,295 tax-free.

Would you rather have $34,788 stuck in a 401K you'll have to pay taxes on, or $63,295 tax-free that you can use or invest with now? Seems like a no-brainer to me.
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