9 smart ways to consider investing $500K in 2022

There’s quite a bit an investor can do with $500K, because with that amount of money there are potential opportunities that aren’t available to other investors. With the right investments, you may be able to use $500K to generate recurring income and to grow your capital to $1 million or more.

In this article, we’ll take a closer look at 9 ways to invest $500K, including what to do before you invest.


Key takeaways

  • Before investing any amount of money, an investor should set clear, actionable financial goals, understand personal risk tolerance, and pay off existing high-interest debt.
  • Some of the ways to invest $500K include stocks and high-yield bond funds, gold and silver, and rental real estate.

 

 

What to do before you invest $500K

Before investing $500K – or any amount of money, for that matter – there are several things an investor may wish to do:

  • Set clear financial goals, such as generating a specific amount of monthly cash flow or retiring by a certain age.
  • Create a timeline to meet those goals with clear, actionable steps that lead you down the path to reach your goals.
  • Understand your tolerance for risk in exchange for potential reward to help choose the right investments.
  • In general, a younger investor may be willing to accept more risk because they have more time to recover from a financial setback and continue to pursue long term gains.
  • Set up an emergency fund with enough money to pay for unplanned personal expenses so that your investing goals are not interrupted.
  • Maximize contributions to a retirement account such as a 401(k), IRA, or SEP-IRA for more peace of mind, and to have money available for investing in real estate using a self-directed IRA.
  • Pay off high interest debt like credit cards, car loans, or student loans to increase your cash flow and to have a better credit score and debt-to-income ratio when the time comes to apply for a rental property loan.

 

real estate sale for cash

9 ways to invest $500K

If you have $500K to invest, then a “congratulations” is definitely in order. No doubt you’ve worked hard for the money, and that you want to preserve and grow that capital.

To help reach that goal, here are 9 different ways to invest that $500K. Keep in mind that it’s probably wise to allocate your investment portfolio among different investment options instead of putting your eggs all in one basket, so to speak. Also, speaking to a licensed financial advisor can be a great way to identify your goals and hone your strategy.

1. Stock market

Over the past 5 years, the S&P 500 has more than doubled in value (as of November 2021), and growth stocks like Tesla and Facebook have performed even better. Stocks are also good for diversification across different industry sectors and in established and emerging markets. 

However, the stock market can also be very volatile, as this chart of the CBOE Volatility Index (VIX) from the Federal Reserve illustrates. Factors that can cause the stock prices to fluctuate include changes in the interest rate and inflation, monetary policy such as stimulus or tapering, a global pandemic, and geopolitical events.

2. High-yield bonds

A high-yield bond fund may be another good way to invest part of that $500K. An exchange traded fund (ETF) of high-yield bonds provides exposure to debt issued by corporations that are below investment grade. 

According to the ETF Database, the top high yield bond ETFs (based on assets under management) generated average 1-year returns of between 2.62% and 4.97% (as of November 30, 2021). An investor who prefers more predictable returns with much less risk may opt to invest in 10-year Treasury, where yields are currently around 1%.

While bonds may offer more stable returns, bond prices are also impacted by changes in the interest rate and inflation. When interest rates rise, prices of fixed-rate bonds fall, and vice versa. Inflation can also have a negative effect on bond prices if it results in higher interest rates.

3. Rental property

Many investors believe owning rental property provides a winning combination of diversification and robust risk-adjusted returns. There are three ways that real estate helps to generate recurring income and grow investment capital:

  • Recurring cash flow through rental income.
  • Equity appreciation when property values increase over the long term.
  • Tax benefits such as deducting operating and owner expenses, and using depreciation to reduce taxable net income.

An investor can diversify capital among various real estate asset classes such as residential, commercial, and land. Today’s technology also makes remote real estate investing much easier, and may be a good option for people in high-cost-of-living cities like San Francisco and New York.

Oftentimes, lower-cost property in smaller markets where population and job growth is strong generates higher yields. Once a rental property is purchased, an investor can delegate the day-to-day management details to a local professional property manager, or manage it themselves. 

Since real estate is typically easy to finance, $500K can go a long way. For example, instead of buying one single-family rental home for cash in a higher-priced market, the capital can be used as a down payment for rental property in some of the fastest-growing real estate markets throughout the U.S.

4. REITs

A REIT (real estate investment trust) is a company that owns and operates various types of real estate such as residential, retail, office, industrial, health care, self-storage, and data centers. REITs can be public with shares traded on the major stock exchanges, while private REITs are generally limited to institutional and accredited investors. 

REITs are required by law to distribute at least 90% of their net income to investors as dividends, so REITs can be a good source of recurring income, provided there is a profit. According to Nareit, equity REITs have delivered a year-to-date return of over 30% with an average dividend yield of 2.79%, while mortgage REITs have a 21.45% return year to date and a dividend yield of 8.23% (as of October 31, 2021).

While potential returns from REITs may be impressive, there are also risks an investor may wish to consider as well. Although REITs generally are less volatile than the stock market overall, prices may fall during a downturn because publicly-traded REIT shares are easy to panic sell. Also, dividends from a REIT are usually taxed as ordinary income to an investor, and there is no opportunity to deduct operating expenses and depreciation as there is with rental real estate. 

5. Crowdfunding

Crowdfunding is a name for a method of group investing where a large number of investors contribute small amounts of capital to finance new business ventures such as electric vehicles, video game creation, and real estate projects.

For example, some of the top crowdfunding platforms provide opportunities to invest in institutional-grade assets such as retail developments and build-to-rent subdivisions, and debt investments through loans made to property developers.

Generally speaking, the most attractive crowdfund investments are limited to high net worth, accredited investors. However, if you have $500K to invest, you may qualify for investment opportunities that other investors can’t access.

While crowdfunding investments may offer potential high returns, they do come with certain risks. For example, it may take much longer for a project to break ground, which means capital is tied up and not generating a return. Crowdfund investments are also generally illiquid, which means that they can not be sold the same way the stocks, bonds, publicly-traded REITs, or rental real estate can.

6. Hedge fund

A hedge fund pools capital from institutional investors, sovereign wealth funds, family offices, and high net worth investors with the goal of generating oversized rates of return. For example, if the S&P 500 generates an average annual return of 20%, an investor may expect a hedge fund annualized return of 30% or more. 

Hedge funds generally invest in a variety of assets, including stocks and bonds, futures and options, derivatives, collateralized debt obligations, start-up businesses, and private equity investments. In order to try to generate higher profits, a hedge fund may be more aggressive and be willing to accept more risk.

One of the reasons an investor expects a higher return from a hedge fund is because of the fee structure. Hedge funds generally have a fee arrangement known as “2 and 20,” which means the hedge fund receives an annual fee of 2% for the total assets under management, and a performance fee of 20% of the profits made when an asset is sold. 

Hedge funds also typically have a high minimum investment, oftentimes around $500,000. Which means you’ll need to put all of your $500K in a single hedge fund and hope for the best. 

7. Gold and silver

Investing in precious metals by physically holding gold and silver is a strategy investors use to preserve wealth and hedge against inflation. The price of gold and silver are volatile, but generally go up over time, and are affected by inflation and economic uncertainty. 

Similar to owning real estate, gold and silver are real assets that can be touched and seen, and are used to diversify out of more traditional “paper” investments like stocks, bonds, and shares of a REIT. 

However, precious metals do not generate recurring income, and rising prices of precious metals are not guaranteed. Also, holding physical gold and silver requires a safe and secure facility, and payment of an annual storage fee.

8. Cryptocurrency

Cryptocurrency such as Bitcoin may be a place to invest a portion of $500K for an investor who is willing to accept high risk in exchange for a high potential reward. 

According to CoinMarketCap, the price of Bitcoin has increased by 97% since the first of the year (as of December 1, 2021). Once a cryptocurrency is purchased, decentralized lending platforms may offer annual returns of 8% or more. 

While crypto offers the potential to generate income combined with explosive growth, there is also a significant amount of risk involved. Unlike tangible assets such as gold and real estate that have been around forever, Bitcoin came into existence in 2009, providing an investor with a very short performance history. 

Cryptocurrency prices can also be extremely volatile, and an investor could lose a significant portion of capital, or even an entire investment. For example, in 2021 alone, the price of Bitcoin plummeted by nearly 60% in 2 weeks.

9. Buy a business

While owning shares of a stock or REIT is similar to owning a business, an investor with $500K may decide to bypass the exchange middleman entirely and invest in a business directly. Purchasing the right business at the right time can be one of the most potentially profitable ways to invest $500K. 

An investor may start a business, purchase an existing business outright, or invest in an existing business as a silent partner. While investing in an existing business may be less risky because the business has an established track record and reputation, the current business owners will need to trust and have complete confidence in a new partner. 

Although investing in a business comes with high risk, the potential returns may be much higher than other investments such as stocks, bonds, REITs, or crowdfunds.

 

Closing thoughts

Investing in real estate has been a trusted way to build wealth and make money, according to investing legends like Robert Kiyosaki and John D. Rockefeller. While no investment is guaranteed, putting $500K in real estate today can generate reliable, recurring income, appreciation over the long term, and offer tax benefits from the IRS that other assets don’t provide.

 

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This article, and the Roofstock Blog in general, is intended for informational and educational purposes only, and is not investment, tax, financial planning, legal, or real estate advice. Roofstock is not your advisor or agent. Please consult your own experts for advice in these areas. Although Roofstock provides information it believes to be accurate, Roofstock makes no representations or warranties about the accuracy or completeness of the information contained on this blog.
Jeff Rohde

Author

Jeff Rohde

Jeff has over 25 years of experience in all segments of the real estate industry including investing, brokerage, residential, commercial, and property management. While his real estate business runs on autopilot, he writes articles to help other investors grow and manage their real estate portfolios.

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