Investing $200,000 in real estate can be a good way to generate extra income while preserving investment capital. With the right investments, a $200K nest egg could significantly increase when real estate is held for the long term.
In this article, we’ll review ways to invest $200K in real estate, along with unique financial benefits of investing in real estate.
Key takeaways
- Benefits of investing $200K in real estate may include hedging against inflation, generating recurring rental income, property appreciation over the long term, and tax advantages.
- Investing in real estate can be active and hands-on or passive by delegating day-to-day work to other professionals.
- In most cases, income earned from real estate is exempt from FICA and unemployment tax.
- Strategies for investing $200K in real estate include single-family rentals (SFRs), short term vacation rentals, real estate investment trusts (REITs), and private money lending.
Why real estate can be a great way to invest $200K
There are many ways someone could invest $200K, including traditional stocks and bonds, precious metals, a small business, or cryptocurrency. However, out of all the different assets to choose from, real estate is often the favored investment asset class for several reasons:
- A low correlation between real estate and the stock market may help investors avoid volatility.
- Real estate can help investors hedge against inflation, since real estate values historically increase faster than the consumer price index (CPI).
- Rents also typically rise faster than inflation, with investors often able to pass increased operating expenses to tenants via rent increases.
- Recurring rental income and long-term appreciation can help investors build long-term wealth.
- Specific real estate investment strategies can be used to create a balanced blend of risk-adjusted reward.
- Technology has made remote real estate investing more manageable than ever before, with fewer geographic limitations.
- Tax benefits include owner expense write-offs, depreciation expense write-offs to reduce taxable net income, exemption from FICA self-employment taxes, and 1031 exchanges to defer paying capital gains tax when an investment property is sold.
- A self-directed individual retirement account (SDIRA) can be used to invest in real estate, providing more direct control over how retirement savings are used.
Real estate investing strategies
There are two general strategies for investing in real estate:
Active
Investors who directly invest in real estate “hands-on” are considered to be active investors. Examples of active real estate investing strategies include self-managing a rental property, real estate wholesaling, and fixing and flipping a home.
Passive
Passive or indirect real estate investors delegate the majority of the work to other professionals. Examples of passive real estate investing strategies include remotely investing in an SFR and hiring a local property manager, investing in a limited partnership, or purchasing shares of a REIT.
It’s important to note that very few investments are truly “passive.” Most require an investor to put in some amount of effort, such as analyzing potential investment returns, vetting real estate partners, or reviewing monthly and annual reports from a property manager.
How to invest $200K in real estate
The options for investing $200,000 in real estate depend on an investor’s strategy, amount of tolerable risk in exchange for greater potential reward, and long-term investment goals.
1. SFRs
There are nearly 94 million single-family homes in the U.S., and houses are the most common type of real estate. They can be easy to find, finance, rent out, and manage—and easy to refinance or sell when the time is right.
However, not all single-family homes offer the same potential returns. You can use the free rental property analyzer in this article to forecast the potential return of a property. Simply enter some information to view projected key return on investment (ROI) metrics, including cash flow, cash-on-cash return, net operating income, and cap rate.
2. Short-term vacation rentals
Last year was a record-breaking year for short-term rental investors, with earnings increasing more than 37% year over year and with rental occupancy reaching nearly 61%. According to AirDNA, the outlook for this year promises continued robust performance, with solid gains predicted in both short-term demand and average daily rates (ADRs).
Three good ways to find short-term rental (STR) property are:
- Using traditional listing services like Zillow and the MLS
- Networking with fellow real estate investors
- Using online marketplaces like the Roofstock Short-Term Rental Marketplace to find properties in prime STR markets
3. Fix and flip
Fixing and flipping may be a good real estate investing strategy for people who like to be active and hands-on. Flipping a home offers the potential for large short-term returns in exchange for a higher level of risk. After purchasing a property at a below-market price, a flipper quickly makes repairs, then sells the property to another investor or owner-occupant, hopefully for a profit.
4. Wholesaling
Unlike fixing and flipping, a real estate wholesaler never wants to close on the property or make any required repairs. Instead, a wholesaler searches for a motivated seller, contracts the property with a sales agreement, then assigns the contract to another investor in exchange for a wholesale fee. While wholesaling may sound easy, being successful requires a lot of time, experience, and luck--and, in some states, requires a real estate license.
5. Private lending
Also known as hard-money lending, private lenders loan money to other real estate investors – such as home flippers – in exchange for a fixed rate of return. For example, if a private lender loaned $200K for 6 months at a 9% interest rate with a 10-year amortization, the interest income generated would be about $9,000.
While there are advantages to investing in real estate debt, such as a predictable, bondlike return, there also are risks as well. If the borrower defaults on the loan, a private lender could end up with a home flip that’s halfway renovated, forcing the lender to finish the work and resell the property to try and recoup the loan principal.
6. Real estate syndications
Real estate syndications, sometimes known as crowdfunds, are created when groups of investors pool their capital to invest in a single large project, such as a build-to-rent (BTR) single-family home development or apartment building.
A real estate syndication can be a good way to participate in a large deal out of the reach of many individual investors and to receive regular distributions on a monthly, quarterly, or annual basis. However, money invested in a syndication is often locked up for several years and, even with the best due diligence, investors are still at the mercy of the real estate syndication sponsor to find the right deal, arrange financing, develop the project, and turn a profit.
7. REITs
REITs own and operate different types of real estate, including single-family homes, apartment buildings, shopping centers, office buildings, and special-use properties like self-storage or data centers. REITs can be private or publicly traded on the major stock exchanges.
By law, REITs are required to distribute most of their net income to investors as dividends, creating the opportunity for a consistent income stream, provided the REIT is profitable. Publicly-traded REIT shares are highly liquid and can be a good way to diversify an investment portfolio geographically and by real estate asset class.
On the downside, REITs don’t offer the same direct tax benefits, such as being able to write off investor expenses or claim depreciation to reduce taxable net income. Also, while REITs generally do not correlate with the overall stock market, investors still may be tempted to sell at the wrong time if the stock market drops.
Things to consider before investing in real estate
There are a variety of ways to invest in real estate. However, before investing any amount of money, it’s important to do a few things first:
- Put together an investing plan describing specific and achievable short- and long-term goals and an investing strategy. As a real estate portfolio grows, some investors diversify with other types of rental property or strategies, such as purchasing an STR or investing in a limited partnership.
- Pay off as much debt as possible, including high-interest credit cards and other revolving debt. Sometimes it’s not financially feasible to become debt-free all at once. In cases like these, you may consider transferring balances onto a single card with a low introductory APR, then paying off the balance as quickly as possible.
- Fund an emergency account for personal use and a capital reserve account for business use. Having a “rainy day” fund can reduce your risk of being forced to sell a rental property at the worst possible time or rack up credit card debt if cash is suddenly needed.
