I live in the San Francisco Bay Area, one of the country’s most expensive real estate markets.
Down the street from me, just last month, one of my neighbors listed a two-bedroom home for over $800,000.
And that’s not all. After a couple of weeks on the market, it ended up selling for over $950,000.
$950,000! For a two-bedroom home. Eesh.
So we got to thinking, in a real estate market that’s this overheated, does the traditional narrative of “get married, buy a house, have kids” still make the most sense financially when you’ve got to put down hundreds of thousands of dollars just to buy a starter home? Is a primary home still the best investment or should you take a walk down Wall Street first?
Or, could it make more sense to go against conventional wisdom, continue renting, and invest that money into a different type of investment instead?
Alternatively, what if you’ve been feeding your savings accounts for a while, were just awarded an inheritance, or received a signing bonus? You’re ready to invest $200,000 and need to weigh your risk tolerance and explore your options.
In this article, we will discuss two very different ways of looking at investing. First, the conventional investment strategies – the options a financial advisor would likely present and recommend.
Then, we’ll explore an unconventional yet stable investment strategy that most people don’t realize is an option. Plus, I’ll explain how by going the unconventional route, you have the potential to make out better than by following the stuffy, old-hat advice.
Conventional Investment Strategies
The way you choose to spread your money into different investment vehicles is called your personal investment allocation. The strategy in which you invest your cash will be different than anyone else’s because it is your personal diversified portfolio based on your investment goals, monthly income, age, job, and lifestyle you desire. Keep this in mind as you read through your options and consider your best route.
Investing In The Stock Market Through Retirement Accounts
The stock market is the most popular investment option simply because most people begin investing with their employer-offered retirement accounts such as 401ks or IRAs. Retirement accounts are made more enticing by an employer match, upfront tax advantages made possible by non-Roth options, and the potential for compound interest earnings on money invested.
Wall Street offers many options, including index funds, mutual funds, individual stocks, real estate investment trusts (REITs), and exchange-traded funds (ETFs). An investment portfolio containing various index funds and mutual funds is great for building retirement savings, but 401Ks and IRAs do not offer liquidity. That means you cannot withdraw at a moment’s notice unless you would like to be highly penalized for withdrawing before retirement age since they are tax-advantaged retirement plans.
Accessing Wall Street Through A Non-Retirement Brokerage Account
One way to harness the power of the stock market while maintaining liquidity is to open a non-retirement brokerage account. This would be outside of your retirement accounts and separate from any employer-offered plan. Open an account for free at any online brokerage firm with no minimum balance, and you can often begin picking index funds (if that’s your cup of tea) the very same day!
Pros and Cons of Investing in Stocks
Stock market investments are very popular because they’re easy to access online and require very little capital to get started. On average, the stock market has increased by about ten percent each year, which is considered reflective of a good investment.
However, the stock market gets a bad rap due to its volatility. Short-term investors can see steep growth, but they always face the possibility of losing money quickly if there is a crash in the market.
The other issue with a simple brokerage account is the lack of tax advantages. For example, if you invest your savings to generate income, you will have to pay the capital gains tax on any profits you withdraw. Capital gains taxes are the same as your regular income tax rates on investments held for a year or less. However, they are significantly reduced for long-term gains.
Most financial advisors will suggest investing 40-50% of your money in the stock market, in line with conventional advice.
But is that the best move for you? Keep reading to find out more.
Investing In The Real Estate Market
Investing in real estate is one of the more tangible and seemingly steadier investment strategies. You can purchase your own home, invest in other residential rental properties, buy commercial real estate, or pursue real estate investment trusts. All of these investment strategies can be great, but the one(s) you choose will depend on your investment goals, how much liquidity you are looking for, and how much work you are willing to put forth.
A typical certified financial planner will recommend investing ten to fifteen percent into real estate, so let’s look at the most conventional forms of investing in real estate.
Purchasing Your Own Home
Owning your own home is not only the American Dream but is also one of the most traditional investment strategies. Homeownership has historically been viewed as a great investment because while you provide your family a place to live, the property can appreciate, building your equity in a stable, tangible asset.
We will discuss this strategy in more detail later in this article. Stay tuned for the pros and cons of investment property and owning your own home.
Owning and managing rental properties is typically the first thing that comes to mind when someone mentions investing in real estate. This requires becoming master of all landlording duties, including finding tenants, performing repairs and maintenance, collecting rent, and dealing with vacancies and evictions.
Owning and managing rental property can be a great investment strategy since you earn income each month when tenants pay rent and you qualify for awesome tax benefits. If this sounds interesting to you and you’d like to explore living for free, I suggest looking into house hacking.
The drawbacks to this investment strategy include illiquidity (you can’t just withdraw your cash in an emergency) and the extra time and energy you have to invest as the landlord. The extra effort it takes to maintain a cash-flowing property long-term is a big reason why earnings from rentals are considered active income. Now, if you want to earn passive income instead of becoming a landlord, consider investing in REITs or syndications.
Real Estate Investment Trusts (REITs)
A real estate investment trust is a group of real estate properties owned and managed by a corporation. When you invest in REIT, you invest in the company that owns and operates income-producing real estate, such as apartments, office buildings, warehouses, storage facilities, and hotels.
Real estate trusts allow for various diversification opportunities across property types and locations, making them more reliable than other stock-type options. There are some downfalls to REITs, since they do not offer the tax benefits of direct ownership of the property and , if they are a private REIT, they lack liquidity.
Exploring Alternative Investment Opportunities
Now that we’ve discussed several conventional ways to invest $200,000 and explained some basic savings advice, let’s look at alternative investments. Take a moment and think about all the successful people who have gone against traditional methods and have found success. Will you be one who goes against tradition and makes an investment opportunity of a lifetime?
The Best Way To Invest $200k In Real Estate (It’s Not What You Think)
Earlier in this article, we noted that the first real estate investment most people make is their own home. The intention is generally to live in that “investment” as the property value increases over time.
But what if we go against the conventional way of thinking and take the downpayment you would have put into the house and invest it into something like a multifamily real estate syndication (i.e., a group investment)?
Let’s walk through two examples of how to invest $200k in real estate, examine investors’ options, and see the investment outcomes over several years.
Buying A Single Family Home vs. Investing In Real Estate Syndications
As an example, here are two paths a young family might take.
Scenario 1: Saving up $200k to buy a single-family home
Scenario 2: Renting a home and investing that $200k in real estate syndications instead
Below, we’ll examine the math behind the two scenarios, find out which path puts them ahead, and look at the potential risks and liabilities of each opportunity.
Scenario 1 – Conventional Wisdom – Save $200k To Buy A Home
Let’s start with the conventional wisdom: to save the $200k for a down payment, then purchase a home.
Let’s say our fictional couple, Jack and Jill, have just gotten married, and they’ve been told that they should settle down, buy a house, maybe get a dog, then have some kids.
Jack and Jill knew this day was coming, so they saved up a good amount of money in their savings account and have been keeping an eye on their local real estate market and interest rates.
Buying A Home
After looking at a few homes, they find the perfect three-bedroom home in a decent neighborhood and put it under contract for $1 million. They plan to put in 20%, or invest $200,000, as a down payment. (For simplicity’s sake, we’ll keep closing costs out of this scenario.)
They get a loan for $800,000 at 5% interest with a 30-year amortization.
Everything goes smoothly, and Jack and Jill soon have the keys to their new $1 million home in hand. Ah, a true investment for their future, they think.
Paying The Mortgage
One month later, they get a mortgage bill in the mail for their first month’s payment: $4,295.
They both have pretty well-paid tech jobs, so this mortgage payment is well within reason for them.
In a few years’ time, Jack and Jill find out they’re expecting their first child. Then, a few years after that, their second child. The house is filled with laughter and general merriment, with the occasional screams of “Mom, she hit me!”
Homeownership Over The Years
About five years in, they realize their now 30-year-old roof needs to be replaced. A couple of years after that, their hot water heater goes out. And then they discover foundation issues, so they get hammered with a huge bill from that. Ah, the joys of owning real estate.
But, because Jack and Jill are well-paid professionals, they can cover the costs of the unexpected repairs.
Just more than a decade after they buy the home, Jack and Jill realize they’re out-growing what once seemed like such a spacious home. They’ve got two tweens and a labradoodle in the house now, and more space is in order. Stat.
Equity And Appreciation
Over the ten years they’ve owned the house in this hot market, the appreciation for real estate in their market averaged, let’s say, 4% annually.
That means that their house could now be worth about $1,480,000 in their local market, which means that Jack and Jill have gained about $480,000 in equity over those ten years.
But of course, that’s not all. Jack and Jill have diligently paid their mortgage every month, which has helped to pay down the principal on their $800,000 loan.
Over the ten years, they’ll have paid about $515,000 in monthly mortgage payments ($4,295 per month for 120 months). Of that, roughly $150,000 will have gone toward their principal, which means they still have about $650,000 remaining on their loan balance.
That also means that they’ve paid about $365,000 in interest to the bank over the years. Ouch! (This is why interest rates are so important to keep an eye on.)
Selling The Home
If they sell now, they will receive their original $200k down payment back, $480k in equity from appreciation, and $150k in principal that they’ve paid down over the years.
That means that they’ll end up with about $830k in their pockets at the end of the day.
$830,000. That’s a lot of money, especially when you remember they only had to invest $200,000 to begin with.
Surely that means that conventional wisdom is right and that this is indeed the best path…right?
Scenario 2 – Bucking Conventional Wisdom – Rent A Home And Invest That $200k In Real Estate Syndications Instead
Jill has always had a bit of a rebel streak inside her. Her parents wanted her to go to medical school, but she ended up majoring in art history instead.
Her friends told her to invest in index funds and mutual funds, but she wasn’t convinced that was the best way to grow her wealth.
Let’s rewind these ten years and see what would have happened if Jack and Jill had taken a different path, a path that few people ever dare even to consider.
Renting vs. Buying A Home
Jill has never liked the idea of being saddled with a mortgage. So, when it came time to “settle down,” she and Jack weren’t sure that they wanted to invest $200,000 they’d worked so hard to save up into a house. So, they decide to rent a home instead of buying one.
They find a terrific three-bedroom apartment near public transit for $3,000 per month.
Because they are renting a home, they don’t have to pay for any maintenance costs or HOA (homeowners association) fees, and they like that.
Real Estate Investing – Rental Properties vs. Syndications
Jack and Jill had always wanted to get into real estate investing, though they had thought that they had to invest in a rental property, which would mean they would have to be landlords.
With their busy lives, they aren’t sure they want all the hassles that come with investing in a rental property, so rather than jump and start buying up rental properties, they pause to consider their investment options.
Through their research, they are thrilled when they discover that they can invest in real estate passively, through real estate syndications (group investments), rather than individual rental properties. This means that they can pool their money with a group of other investors to buy a bigger commercial asset, like an apartment building, together.
Best of all, this means that Jack and Jill get to own real estate without having to deal with any of the headaches or time commitments of being landlords for individual rental properties. Instead, the general partners leading the syndications will do all the heavy lifting of managing the properties, meaning Jack and Jill can sit back and enjoy the ongoing passive cash flow.
Jack and Jill do their due diligence, make sure that real estate syndications are a good fit for their investing goals, and proceed to invest in their first real estate syndication.
Investing In Their First Syndication
After considering all their investment options and getting educated, Jack and Jill decide that the best way to invest for their goals is to invest in real estate not through a rental property, but through a real estate syndication.
So, they take the $200,000 that they’d saved up for the down payment on a home or rental property and invest that money into a multifamily real estate syndication instead.
The real estate syndication (i.e., group investment) invests in an apartment community in a fast-growing neighborhood of Dallas, Texas.
How Much Income Will $200k Generate?
The multifamily real estate syndication they invest in comes with a preferred return of 8% per year. That means that, for their $200k investment, they might generate around $16k in passive income per year, or about $1,333 per month.
On top of that, the syndication has a projected equity multiple of 2x over a projected 5-year hold period. In other words, when factoring in both the cash flow and the profits from the sale of the asset in year 5, they could double their money from $200k to $400k within 5 years.
Here’s how the math shakes out.
8% preferred return on $200k = $16k/year ($1333/month)
$16k per year for 5 years = $80k
Profits from the sale of the asset in year 5 are projected to be 40-60%. Assuming this lands at 60%, that would mean Jack and Jill would get $120k in profits from the sale.
$80k (passive income over 5 years) + $120k (profits from the sale) = $200k total returns
Jack and Jill could feasibly double their money in 5 years when counting both the passive income distributions and the profits at the sale of the asset.
This means that they could possibly turn their $200k into nearly $400k in just 5 years. Plus, they get to invest in real estate and enjoy all the benefits of direct ownership (cash flow, equity, appreciation, and tax benefits) without having to manage the asset actively. Win-win!
Exiting The First Investment
Three years later, when Jill is pregnant with their first child, they get an update from the general partners that the renovations on the apartment building in Dallas are complete and that the general partners would be selling the asset early.
By the end of year three, their first child is born, and they receive their original $200,000 investment back. Oh, and they’ve made $170,000 in profits from the real estate syndication they invested in.
Investing In The Next Deal
Because they love both their apartment and the experience of investing in multifamily real estate syndications, Jack and Jill decide to forego their other investment options and continue renting while investing the $370,000 into another real estate syndication with the same general partnership team.
Four years later, that second real estate syndication successfully completes its reposition and is able to sell the property and double Jack and Jill’s original $370,000. Now, Jack and Jill have $740,000.
At this point, they have a four-year-old and another baby on the way. They love investing in real estate syndications so much that they’ve told all their friends about it. They take their $740,000 and reinvest it.
Three years later (which is now ten years since they invested in that first real estate syndication), they end up with $1.4 million.
Of course, we can’t forget the rents that Jack and Jill have been paying monthly. The rents that their parents told them they were “throwing away every month” and that they’d never get back.
Over those ten years, assuming an annual rent increase of 3% per year, they will have made about $415,000 in monthly rent payments. And no, their landlord isn’t about to write them a check to return any of that.
Even still, when we factor in the profits from their syndication investments, are those rent payments they’re “throwing away” really as bad as society makes them out to be?
Comparing The Math
Jack and Jill started out with $200k to put into something in both cases. In scenario 1, they chose to use the $200k as a down payment for a house. In scenario 2, they instead chose to invest that money into a real estate syndication.
So, how do the two scenarios compare? Which option was the best way for them to invest their money for the long-term? Let’s take a look.
Scenario 1 – Buying A Single Family Home
Started with: $200,000
Equity after 10 years: $480,000
Principal paid down after 10 years: $150,000
Interest payments over 10 years: $365,000
Net gain over 10 years: $465,000
Scenario 2 – Investing In Real Estate Syndications
Started with: $200,000
Profits after the first syndication exited in year 3: $170,000
Profits after the second syndication exited in year 7: $340,000
Profits after the third syndication exited in year 10: $660,000
Rent payments over 10 years: $415,000
Net gain over 10 years: $985,000
The Verdict – The Best $200k Investment
This means that if Jack and Jill were to decide to go against conventional wisdom and learn about real estate syndications while continuing to rent over the course of ten years, they could end up with roughly $520,000 more than if they were to buy a home and make the mortgage payments.
Over $500k more. Let’s just let that sink in for a minute.
$500,000 over 10 years is an average of $50,000 a year. Try to get returns like that from your savings accounts, ha! This means that Jack and Jill essentially added a third income earner to their household via their investment. All without having to do any work.
All they had to do was buck conventional wisdom, consider their long-term goals, evaluate all their investment options, and determine the best way for them to invest their $200k such that they would be able to meet their investing goals.
Rather than having to work for their money, their investment put their money to work for them. That’s what you get through the power of passive income and investing in real estate.
Assumptions and Other Considerations
Of course, all this math is just on paper, and it’s based on a number of assumptions. Here are a few of the big assumptions to consider:
1. Assumption: Home Appreciation Rate
These scenarios are assuming an annual home appreciation of 4% over ten years. It’s possible that, in a hot area like the San Francisco Bay Area, the average appreciation could top that. But of course, that’s not a guarantee. Home prices could just as well dip down, and appreciation could slow, no matter what the historical real estate data says.
2. Assumption: Syndication Performance
These scenarios also assume that the real estate syndications are led by strong teams that can execute their business plans and meet or exceed their projections. We’re also assuming that the market holds fairly decent, allowing these real estate syndications to cycle through in a timely manner.
Both of these factors can be big question marks, especially when you’re first starting out investing in real estate syndications.
That’s why we work so hard to make sure the teams we’re investing with are strong operators with proven track records, conservative underwriting, and multiple exit strategies and why we always encourage our investors to do their own due diligence before they get into any investment.
3. Consideration: Huge Home Loan
Another big aspect to consider is the huge loan that Jack and Jill would be taking on in scenario 1 if they were to buy a home. That $4,295 monthly payment seems doable when Jack and Jill are happily employed and have no kids.
But if a recession were to hit and one of them were to lose their job, or Jack’s father were to get sick, and Jack needed to take some time off to take care of him, or any number of other unexpected situations were to come up, they might struggle to make that monthly payment, which could then lead them to default on their mortgage and possibly lose their home.
When you factor in that huge loan and the interest rate, you can start to see that buying a home is more of a liability than an asset and true investment that mainstream media keeps telling us.
4. Consideration: Liability
Consider, on the flip side, scenario 2, in which Jack and Jill invest their $200,000 into real estate syndications instead. They take on no loan and are not liable to lose more than that original $200,000. They needn’t make any additional payments on that investment. Instead, that investment is making money for them, meaning that investment is a true asset.
5. Consideration: Taxes
We didn’t even mention the huge tax benefits that come with investing in a real estate syndication, which really put it over the top. This is one of the core reasons to consider investing in real estate rather than the stock market or another alternative investment.
What Should You Do With Your $200k – Buy A Home Or Invest In Real Estate Syndications?
We’re going to borrow Apple’s tagline here: Think different.
These scenarios are not meant to be investment advice. Rather, they are meant to show you two different theoretical scenarios.
One that follows the traditional narrative that we’ve been taught all our lives. And an alternative investment option that most people have never heard of or even considered.
One comes with a huge liability. And one is a true asset.
At the end of the day, going against conventional wisdom is really difficult.
You have to be sure that you believe in your path because people will question your choices at every turn.
Our goal in diving into these two different scenarios with you was simply to lay the groundwork, plant the seed, and show you that an alternative investment option exists. The hard decision of choosing whether to follow or buck against conventional wisdom is still yours to make.
Regardless of whether you choose to buy, rent, invest, or take on a hybrid approach, we hope your home is filled with the laughter and merriment that fill Jack and Jill’s fictional home. That, and maybe the occasional yell and cry too. You know, to keep things interesting.
Ready To Put Your $200k To Work For You?
Now that you’ve walked through Jack and Jill’s two fictional scenarios, perhaps you’re ready to dip your toes into real estate syndication investing yourself.
If that’s the case, the best thing you can do is to invest your time in educating yourself to make sure that this is the best option for you.
To access our exclusive members-only resources, get samples of our previous real estate syndication deals, and consider investing alongside us, join the Goodegg Investor Club today!