Suppose you deposit money into a savings account, even a high-yield one. In that case, the value of your cash can be quickly eroded by inflation.
One of the cornerstone philosophies at 40PlusFinance is that you should invest in cash-flowing assets using a plan, as discussed here on this blog.
With that said, if you have $100,000, here are six things you could do with it, including ways to make some extra money while protecting your original investment.
Key Takeaways:
- $100,000 is a good starting point but not enough for retirement
- Inflation can erode savings account value quickly
- Invest in cash-flowing assets for financial freedom
- Consider investing in Single Family Rentals (SFR) or short-term vacation rentals
- House hacking, flipping primary residence, and the BRRRR method are other real estate strategies
- Assess required return, achievable return, and drawdown tolerance before investing
- Diversify investments with business ownership, angel investing, or trading
6 ideas to consider for investing $100,000
Purchase SFR Property
There is an increase in the number of people and institutions investing their money in SFR properties. The most recent numbers show that there is a reason for the worry.
Arbor’s latest Single-Family Rental Investment Snapshot shows that the SFR asset class had its best year in 2021. The average occupancy rate for all single-family rental homes was nearly 95%. In comparison, rent growth for vacant properties and then occupied was at 13.5%.
SFRs can be found across the country and are generally easy to manage. Various loan programs allow you to make a down payment of around 20% and control 100% of the property and income.
Arbor Realty Trust says that an increase in demand for single-family homes (SFRs) is being driven by demographic trends (such as more people moving to the suburbs and smaller cities) and pandemic-related forces (such as more people working from home).
Single-family real estate is one of the cornerstone investments as part of your financial freedom plan.
Invest in a Short-Term Vacation Rental
The demand for rental property that can be used for vacations is increasing as more people work remotely. In February 2022, 16.5 million nights were booked in short-term rentals, an increase of 21% from the previous year. This data comes from AirDNA, a company specializing in STR analytics.
The gross rental income is another benefit of investing in short-term vacation rental property beyond the growing demand. The average daily rates for STRs are $273, 15.4% higher than last year. The need for STRs is strong in both urban and suburban markets.
This year, AirDNA expects to see a lot more investment in STRs because most hosts still have record occupancy and income levels. Although short-term rentals generate more gross rental income than traditional long-term rentals, higher operating expenses offset that income, as there is more tenant turnover and associated ownership expenses.
Hack Your Home
The house-hacking strategy for investing in real estate involves renting out part of your primary residence. Because the home would be your primary residence, you may qualify for more favorable financing terms, a slightly lower interest rate, and a more down down payment.
Some investors rent out a spare bedroom to generate extra income. In contrast, others convert an attic or basement into a small apartment. Some investors rent out an unused room in their house to make money. In contrast, others convert their basement or attic into a small apartments. Sometimes, you can pay your monthly mortgage and cover other expenses, such as utilities and property taxes, through rental income from house hacking.
One way to hack your home is by purchasing a small multifamily property with 2 to 4 units. As long as you live in one of the units of a duplex or multi-unit property, lenders will view the entire property as your primary residence for loan purposes, even if you generate additional income by renting out the other units to tenants.
Flip Your Primary Residence
Some investors use the low-interest rates and favorable loan terms of financing a primary residence by living in the home for a couple of years, then selling and taking advantage of the capital gains tax exclusion.
According to IRS Topic No. 701, taxpayers who have lived in their homes for at least 2 out of the five years before the sale date may exclude a maximum of $250,000 from their income from the sale or $500,000 if they file a joint tax return. A Federal Housing Administration 203(k) rehab loan may be an option for investors looking to buy a fixer-upper. This type of loan can finance the purchase of the property and the cost of repairs and modernization.
The only downside to this way of investing in real estate is that you’ll have to move every few years. Still, the increased profits might be worth the inconvenience for some people. You could turn your home into a rental property if you don’t want to sell it.
Buy, Renovate, Rent, Refinance, Repeat
The BRRRR approach to real estate investing involves buying, renovating, renting, and refinancing properties to repeat the process to maximize profits. Like the “rinse, wash, repeat” method of doing laundry, this strategy involves doing the same thing repeatedly while making minor adjustments.
To make BRRRR work, buy an affordable home, renovate it to make its fair market value larger, find a qualified tenant to rent it, and save the extra cash flow. When the value of your home has increased enough, you can get a cash-out refinance to pay for a down payment on another rental property.
An excellent way to keep track of an owner’s equity is using the Real Estate Balance feature on Stessa. The value of your property and how much you owe on your mortgage are always up-to-date, so you can easily see when you have enough equity to qualify for a cash-out refinance.
This takes a bit of time, though, and you should only consider this if you want to dive deeply into real estate and become an active investor.
Fix and Flip
Fixing and flipping is a variation of the BRRRR strategy, where you repair a property and then sell it rather than rent it to a tenant.
This strategy for investing could net you a high return; however, it also requires a higher level of risk tolerance and a large amount of money for the down payment and any necessary repairs or upgrades. It would help if you found a motivated seller with a home that needs repairs. The total cost of the purchase and repairs should be less than the fair market value.
Two primary risks are associated with fix-and-flip investments: (1) that market conditions could change before the completion of repairs and (2) that the required repairs could be underestimated. Either of these scenarios could result in a net loss on the sale of the property.
With those six topics in mind, what should you ask yourself BEFORE investing in any of these?
What Questions to Ask Yourself First Before Investing $100,000
What are some questions that individuals and institutions should ask themselves?
There are three important ones:
- What is your required return?
- What is your possible return?
- How big of a drawdown (withdrawal) can you take along the way?
In other words, what is the return required to keep the business or individual investments running?
A pension fund’s cash flow is the money it has to meet its future obligations. This means figuring out how much money you need to make to support your lifestyle.
The return you can get from investing is determined by how much the asset is worth and how good you are at investing.
What is the maximum drop in your principal you would be willing to tolerate without compromising your long-term goals?
These questions are straightforward and common sense. Even though they may be sophisticated, it can be difficult for people to answer these questions.
They are also crucial to sustainability across various market and economic outcomes and have implications for portfolio structuring.
If you have a portfolio of $100,000, you can only retire if your living expenses are meager.
This means that if the returns from your investment portfolio are less than the amount you require to cover your payments, you must sell some of your assets to make up the difference. And as a consequence, the future required return rises.
If you spend $2,000 per month, you would need a portfolio that returns 24% yearly to cover the costs without reducing the portfolio size.
This kind of return on investment is only possible with liquid assets; you would need to supplement it with other forms of income.
You would contribute your savings to this investment to see it grow over time.
An example of this would be if you are 30 years old, have $100,000 to invest, and experience a 6% annual rate of return. By reaching 70, your portfolio will be worth over $1 million. You can produce slightly over $40,000 annually using the four percent rule.
Suppose you’re trying to live off your investments but constantly losing money due to poor market conditions or investment decisions. In that case, it’s going to take a lot of work.
If this keeps happening a lot and in great quantity, the issue will become bigger and bigger.
The exact way each investor will approach these questions will differ, depending on what they hope to gain or avoid by investing their money. However, these three questions are always relevant and vital when deciding what to do with money.
Base Allocation
Here’s an example allocation following the balanced portfolio approach. This is more of a traditional investing system and not one I adhere to.
- Developed market stocks = $25k
- Emerging market stocks = $10k
- Inflation-linked bonds = $30k
- Emerging market bonds = $5k
- Gold = $15k
- Commodities = $5k
- Long-duration government bonds = $15k
What Are Other Options for What to Do with $100k?
If you were to use $100,000 to live off of in perpetuity, it would only last for a while.
Applying the 4 percent rule, one can generate around $4,000 in annual income (or $300-$350 monthly).
While other ways exist to make more money, they may require more effort or be riskier.
Let’s go through them.
#1 Start or Buy a Business That Leverages Your Skill Set
You could either start your own business or buy an existing one.
When you purchase an existing business, you’re buying into a preexisting customer base, team, and set of processes. This can simplify and shortcut your path to success.
If you start a business from the ground up, you will have more control over your expenditure. Still, you will also be at a higher risk as there is no guarantee of success.
There are two ways to generate income: owning a business or working for someone else. Owning your own business can be a great way to generate revenue and build wealth over time.
Make sure to do your research before making any decisions.
Also, consider how the business can use your skills. If you’re a coder, it’s likely that you’ve created or bought a SaaS project. If you work in SEO, you may start your blog or buy an existing one.
Also, think about synergies. What benefits will this have for businesses that already exist? How will it save them money or create opportunities to sell more products?
An online brokerage might buy an auto-invest platform to bring in younger investors or a prime brokerage technology platform to attract more institutional clients.
#2 Invest in Real Estate (Mentioned Above)
Investing in real estate may be a good option if you’re looking for a way to make money and grow your wealth. Real estate can generate income and appreciate over time, providing you with the potential to build wealth through your investment.
You need to be knowledgeable about real estate to get the most out of it.
For instance, you need to find the best deals and make the most effective improvements to maximize your profits.
You must also consider the time and effort required to manage rental properties.
Real estate can be a risky investment if you’re not careful. But one principal idea is that the risk is inherent with the investor, not the assets.
If done correctly, investing in stocks can be a great way to build wealth over time. Make sure you research what you’re getting into before beginning.
#3 Angel Investing
This can be risky since most venture capital deals do not return any capital. For investors that can identify profitable opportunities, this can be a rewarding way to make money.
The most important thing is to deeply understand the companies you’re investing in, the management team, current trends, and potential growth markets.
Only put some of your money into one investment. Diversify your investments to minimize risk.
#4 Trading
This type of trading is speculative, meaning you buy and sell stocks or other assets within a short time frame, usually within days or weeks.
The goal is to capitalize on short-term price movements. This is a risky investment since predicting how prices will move over such a short time is difficult.
How well you do depends on the quality of your information and how well you use it. If you are good at trading, it can be a way to make money. Only spend what you can afford to lose, and avoid getting too invested in the excitement.
Final Thoughts On Investing in Real Estate
Investing in real estate can offer a more diversified portfolio, generate recurring rental income, generate profits if the property appreciates over time, and provide unique tax benefits.
In many cases, the monthly rent collected from a tenant is enough to cover ordinary operating expenses and the monthly mortgage payment, with a little bit left over at the end of the year.
There are only so many other investments where you can use someone else’s money to achieve your financial goals and grow your wealth over the long term.
Single-family rentals are a fantastic place to start your investing journey!
Frequently Asked Questions (FAQs)
Q: What are some effective strategies for investing $100,000?
A: There are several strategies for investing $100,000. These include purchasing Single Family Rental (SFR) properties, investing in short-term vacation rentals, house hacking, flipping your primary residence, using the Buy, Renovate, Rent, Refinance, Repeat (BRRRR) method, and fixing and flipping properties.
Q: What factors should be considered before investing $100,000?
A: Before investing $100,000, it’s important to consider your required return, possible return, and your tolerance for drawdowns. These considerations will help you determine the best investment strategy that aligns with your financial situation and risk tolerance.
Q: What are some alternatives to real estate for investing $100,000?
A: If real estate isn’t your preferred investment avenue, other options exist, such as starting or buying a business that leverages your skill set, angel investing, and trading. However, these options may require more effort or carry more risk.
Kurt has gone from the financial lows of the ’08 financial crisis to personal financial success. He is a professional real estate investor owning properties in multiple states.
One of his passions is financial education and the pursuit of financial freedom.
You can learn more about Kurt here.
