While you don’t need to be a millionaire to invest in real estate, there are plenty of people who have become millionaires by doing so.
Saving money for a down payment on a home may seem impossible if you live in a city where home prices are high. Although home prices have risen in recent years, there are still many areas where homes are affordable. You just need to know where to look.
One particular quote that has stuck with me is from Get Rich Education where they say, “Live where you to, invest where it makes sense”. Often times, it doesn’t make sense from a cashflow perspective to invest right in your own back yard.
Some of the best real estate markets for buying investment property under $200,000 are located in the Mid-West & South, as indicated below.
Benefits of Buying an Investment Property Under $200,000:
1. Jump-start your real estate investing business.
The cost of getting into the rental property business can be prohibitive in markets where housing prices are rapidly increasing. This means that half of all homes listed for sale in San Jose cost more than $1.2 million, and half cost less. If a real estate investor wanted to buy a property in San Jose, they would need to spend at least $200,000 on the down payment, which is usually 20% of the total cost of the property.
Real estate investors don’t have to invest only in the area where they live.
If you are living in a city with a high cost of living and earning a six-figure income, that is great. If you want to get started in real estate investing but are worried about the cost, consider looking for rental property in a different city or state. This could be a great way to get started sooner rather than later.
2. Diversify your investment capital.
If you’re looking to diversify your investments, buying an investment property for under $200,000 can be a good option. You can finance the purchase, which means you won’t have to pay for the entire property upfront in cash. To make a standard 20% down payment on a $40,000 car, you would need $8,000. You would also need some extra money for closing costs and capital reserves.
Investment properties that cost less than $200,000 are easier to buy, which makes it more likely that you’ll be able to save enough money for a down payment.
3. Generate higher potential returns.
Properties that are lower in price may not always offer high levels of appreciation, but they can still generate monthly cash flow and returns on investment. A “cash cow” rental property is one that generates a lot of money compared to the purchase price and cost of ownership, like owning a stock with an annual dividend payment.
The Best Way To Invest $200,000 In Real Estate
Conventional Investment Strategies
Your personal investment allocation is the way you choose to spread your money into different investment vehicles. The strategy you use to invest your money will be different from anyone else’s because it is based on your personal goals, income, age, job, and the lifestyle you want. Remember this as you look at your choices and think about the best way to go.
Investing In The Stock Market Through Retirement Accounts
Most people begin investing in the stock market through their employer-offered retirement accounts, making it the most popular investment option. The following are factors that make retirement accounts more appealing: an employer match, upfront tax advantages from non-Roth options, and the potential for compound interest earnings on invested money.
Wall Street provides a variety of investment opportunities, such as index funds, mutual funds, individual stocks, real estate investment trusts (REITs), and exchange-traded funds (ETFs). An investment portfolio that includes a mix of different types of index and mutual funds is a great way to save for retirement. However, 401Ks and IRAs do not offer the same level of liquidity as other investment options. You will be highly penalized for withdrawing from a tax-advantaged retirement plan before retirement age.
Accessing Wall Street Through A Non-Retirement Brokerage Account
One way to harness the power of the stock market while still having access to your money is to open a non-retirement brokerage account. This would not be part of your retirement accounts or any employer-offered plan. No matter what your budget is, you can start investing in index funds for free at any online brokerage firm. You can often begin picking index funds the same day you open an account!
Pros and Cons of Investing in Stocks:
Stock market investments are a popular option because they can be easily accessed online and don’t require a lot of money to get started. The average yearly increase of the stock market is generally around ten percent, which is considered a good investment.
Even though the stock market is unstable, people still invest in it. Short-term investors can see quick growth in their investments, but they run the risk of losing a lot of money if the market crashes.
Although a simple brokerage account does not have any tax advantages, it is still a desirable option for some investors. If you make money by investing your savings, you will have to pay taxes on the profits you make when you withdraw them. Capital gains taxes are the same as income taxes for investments held for a year or less. However, they are significantly reduced for long-term gains.
Most financial advisors will suggest investing a moderate amount 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
Real estate is a tangible asset and is often seen as a steadier investment than some others. You have a few different options when it comes to investing in real estate. You can buy a house for yourself, invest in other properties that you will rent out, buy commercial real estate, or invest in real estate investment trusts. There are many different investment strategies that can be successful, but the ones you pick will depend on your investment goals, how much money you need access to, and how much effort you’re willing to put in.
x Most financial planners recommend investing 10-15% of your money in real estate. x Let’s look at some of the most common ways people invest in real estate.
Purchasing Your Own Home
Having your own home is not just an American Dream, it is also one of the most traditional investments. While owning a home has been traditionally seen as a good investment, it appreciate in value, building your equity in a stable, tangible asset.
We will go into more detail about this strategy later in the article. Be sure to check back for information on the pros and cons of investing in property versus owning your own home.
When people think about investing in real estate, the first thing that comes to mind is owning and managing rental properties. You need to be in control of everything related to being a landlord, such as finding people to rent from you, fixing things around the property, getting rent from tenants, and dealing with when someone moves out or is kicked out.
Rental property can be a great investment strategy since it provides monthly income when tenants pay rent and qualifies for tax benefits. Do you want to live for free? If so, look into “house hacking.”
There are a few negative aspects to this investment strategy that include the lack of liquidity (you can’t just pull your cash out in an emergency) and the extra time and energy you have to invest as the landlord. The extra effort required to keep a property making money in the long term is a big reason why earnings from renting are considered active income. If you are interested in earning passive income, you may want to consider investing in REITs or syndications.
Real Estate Investment Trusts (REITs)
A real estate investment trust (REIT) is a company that owns, and usually operates, income-producing real estate. When you invest in REIT, you invest in a company that owns and operates income-producing real estate, such as apartments, office buildings, warehouses, storage facilities, and hotels.
Real estate trusts offer investors the ability to invest in a variety of different types of property in different locations, making them a more reliable investment than other types of stocks. There are some disadvantages to REITs, since they do not offer the tax benefits of direct ownership of the property and , if they are a private REIT, they may not be able to sell their shares easily.
Best Metro Areas For Investment Properties for Under $200,000:
Here are 5 real estate markets that have homes for sale for $200,000 or less with good rental potential.
Birmingham is the most populous city in Alabama. Its population has been steadily growing. The metro area has over a million residents, most of whom live in rented homes.
A majority of households in Birmingham, 49%, are occupied by renters, and prices for 3-bedroom homes have increased by 13% year over year, according to Zumper. While home prices in Birmingham are still relatively affordable compared to other parts of the country, the median listing price for a home in the city is $150,000.
If you’re looking for investment property priced under $200,000, Cleveland, Ohio is a great city to check out. Cleveland is a city in the United States with a population of just over 2 million residents. It has a large economy and affordable real estate.
The median listing home price in Cleveland is $110,000, according to Realtor.com. Although home prices are low in Cleveland, a majority of housing units in the metro area are still occupied by renters. Zumper’s most recent report indicates that the median rent for 3-bedroom homes in Cleveland increased by 18% over the past year.
Detroit is the largest city in Michigan, home to companies such as General Motors, Quicken Loans, and Little Caesar’s.
Even though the median listing home price in Detroit is $78,000, the city is still popular with renters. 40% or more of the people who live in Detroit rent the homes they live in. Also, the average rent for a 3-bedroom home in Detroit increased by 10% from the previous year.
Gary, Indiana, is a city located less than 30 miles from downtown Chicago. It is often considered one of the more affordable suburbs in the Chicagoland area. The median listing home price in Gary is $98,000, according to Realtor.com. Zumper reports that median rents for 4-bedroom homes in Gary have increased by 39% year over year, and that 45% of households are occupied by renters.
Little Rock, AR
The city of Little Rock is the capital of Arkansas and is also the most populous city in the state. Little Rock is a city located in Arkansas near the Arkansas River. Big companies such as Dillard’s Department Stores, Windstream Communications, and Fidelity National Information Services are all headquartered here.
The median listing price for homes in Little Rock is $200,000, and Realtor.com ranks the real estate market as a buyer’s market, meaning there is a greater supply of homes than there is current demand. The median rent price for 3-bedroom homes in Little Rock has increased by 8% in the last year, and 42% of all housing units in the city are occupied by renters.
Tips for Buying Investment Property Under $200,000
1. Tenant turnover.
Cheaper properties may have more tenant turnover, depending on the location and condition of the house and how well the tenants are screened. If you turn your tenants over every year, you may have periods where you’re paying bills but not receiving any rental income.
2. Due diligence.
Though cheaper, affordable homes may demand more repairs such as roof or HVAC replacement, a paint job, or new appliances.
It’s especially important to do your research and financial analysis when you’re buying an investment property for less than $200,000. You should factor in the cost of any required maintenance and renovations when you are buying a property.
Real estate investors peace of mind by providing transparent due diligence up front to avoid unpleasant surprises after the transaction closes:
- An inspection report is available for each property listing, or there is an inspection contingency.
- Purchase and sale agreements may be contingent on a professional inspection paid for. After reviewing the report, you can proceed with the transaction or cancel your offer.
- A complete financial analysis is available, including interactive tools for visualizing return and cost estimates based on adjustable assumptions.
3. Market trends.
No matter where you invest in real estate, it is essential to understand the local market’s dynamics and quirks. The potential financial performance of different $200,000 investment properties might look good on paper, but other external factors can affect the overall return.
Ready To Put Your $200k To Work For You?
If so, you may be wondering what the requirements are to qualify as an accredited investor. You may be ready to invest in real estate syndication yourself if you meet the requirements to qualify as an accredited investor.
If you’re not sure if this is the best option for you, spend some time educating yourself to make sure.
Kurt has gone from the financial lows of the ’08 financial crisis to personal financial success. He is a professional real estate investor, media buyer, faithful Red Sox Fan.
One of his passions is financial education and the pursuit of financial freedom.
You can learn more about Kurt here, or get a hold of him on Facebook or Twitter.