A financial advisor would tell you that $100,000 is a nice nest egg, but it doesn’t go as far as it used to.
If you deposit money into a savings account, even if it is a high-yield account, 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 like we talk about here on this blog.
With that said, if you do indeed have $100,000, here are six things you could do with it, including ways to make some extra money while also protecting your original investment.
- $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
1. Purchase SFR Property
There is an increase in the number of people and institutions who are 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 ever in 2021. The average occupancy rates for all single-family rental homes was nearly 95%, while rent growth for properties that were vacant and then became occupied was at 13.5%.
SFRs can be found across the country and are generally easy to manage. There are various loan programs available that 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.
2. 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.
An additional benefit of investing in short-term vacation rental property, beyond the growing demand, is the gross rental income. The average daily rates for STRs are $273, which is 15.4% higher than last year. The demand 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 are still having record levels of occupancy and income. Although short-term rentals generate more gross rental income than traditional long-term rentals do, higher operating expenses offset that income, as there is more tenant turnover and associated ownership expenses.
3. 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 and a slightly lower interest rate, along with a lower down payment.
Some investors rent out a spare bedroom to generate extra income, while others convert an attic or basement into a small apartment. Some investors rent out an unused room in their house to make money, while others convert their basement or attic into a small apartment. In some cases you may be able to make your monthly mortgage payment 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 that you own, lenders will view the entire property as your primary residence for loan purposes, even if you are generating additional income by renting out the other units to tenants.
4. 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 5 years prior to the sale date may exclude a maximum of $250,000 from their income from the sale, or $500,000 if they are filing a joint tax return. An 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 as well as 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, but for some people, the increased profits might be worth the inconvenience. If you don’t want to sell your home, you could turn it into a rental property.
5. Buy, Renovate, Rent, Refinance, Repeat
The BRRRR approach to real estate investing involves buying, renovating, renting, and refinancing properties, with the goal of repeating the process in order to maximize profits. Like the “rinse, wash, repeat” method of doing laundry, this strategy involves doing the same thing over and over again, while making small adjustments along the way.
To make BRRRR work, you need to 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.
A good 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 does indeed take a bit of time though, and you should only consider this if you want to really dive deeply into real estate and become an active real estate investor.
6. Fix and Flip
Fixing and flipping is a variation of the BRRRR strategy where you repair a property and then sell it rather than renting 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. You need to find a seller who is motivated and has a home that needs repairs. The total cost of the purchase and repairs should be less than the fair market value.
There are two primary risks associated with fix-and-flip investments: (1) that market conditions could change prior to the completion of repairs, and (2) that the amount of repairs required 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 would should you ask yourself BEFORE you start investing in any of these?
What Questions to Ask Yourself First
What are some questions that individuals and institutions should ask themselves?
There are basically three important ones:
- What is your required return?
- What is your achievable return?
- How big of a drawdown (withdraw) can you take along the way?
In other words, the return that is required to keep the business or an individual investments running?
A pension fund’s cash flow is the amount of money it has available to meet its future obligations. This means figuring out how much money you need to make in order 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 that 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 types of questions.
They are also key to one’s sustainability across a range of market and economic outcomes and have implications for how one might structure a portfolio.
If you have a portfolio of $100,000, you will not be able to retire unless your living expenses are very low.
This means that if the returns from your investment portfolio are less than the amount you require to cover your payments, you will need to 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% every year just to cover the costs without reducing the size of the portfolio.
This kind of return on investment is not possible to achieve with liquid assets, you would need to supplement it with other forms of income.
This is an investment that you would contribute your savings to in order 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 the time you reach 70 years old, your portfolio would be worth just over $1 million. If you use the four percent rule, you can produce slightly over $40,000 per year.
If you’re trying to live off your investments, but always losing money due to bad market conditions or poor investment decisions, it’s going to be a tough struggle.
If this keeps happening a lot and in great quantity, the issue will become bigger and bigger.
The exact way that each investor will approach these questions will be different, depending on what they hope to gain or avoid by investing their money. However, these three questions are always relevant and important to keep in mind when deciding what to do with any amount of money.
Here’s an example allocation following the balanced portfolio approach. This is more of a traditional approach to investing, and not one I personally 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 not last long.
Applying the 4 percent rule, one could expect to generate around $4,000 in annual income (or $300-$350 monthly).
While there are other ways 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 are starting a business from the ground up, you will have more control over your expenditure, but you will also be at a higher risk as there is no guarantee of success.
There are two ways to generate income: owning your own business or working for someone else. Owning your own business can be a great way to generate income 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 own 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, for example, buy an auto-invest platform to bring in younger investors, or buy a prime brokerage technology platform to attract more institutional clients.
#2 Invest in Real Estate (Mentioned Above)
If you’re looking for a way to make money and grow your wealth, investing in real estate may be a good option for you. Real estate can generate income and appreciate in value 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, if you want to maximize your profits, you need to find the best deals and make the most effective improvements.
You also need to take into account the amount of 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 invesements.
Investing in stocks can be a great way to build wealth over time if it is done correctly. 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 in the end. For investors that are able to identify profitable opportunities, this can be a rewarding way to make money.
The most important thing is to have a deep understanding of the companies you’re investing in, as well as the management team, current trends, and potential growth markets.
Do not put all your money into one investment. Diversify your investments to minimize risk.
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 it is difficult to predict how prices will move over such a short period of time.
How well you do depends on the quality of the information you have and how well you use it. If you are good at trading, it can be a way to make money. Don’t spend more money than you can afford to lose and try not to get too invested in the excitement.
Final Thoughts On Investing in Real Estate?
The benefits of investing in real estate are that it 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 normal operating expenses and the monthly mortgage payment, with a little bit left over at the end of the year.
There are few 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!
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