The Best Way to Invest $200,000 In Real Estate (It's Not What You Think)
In some of the most expensive real estate markets in the US, a two-bedroom home may sell for over $1,000,000. IF you were considering buying, you'd have to put hundreds of thousands of dollars down to buy a starter home. Yikes! In a real estate market that's overheated, does the traditional narrative of "get married, buy a house, have kids" make sense financially?
Or does it make sense to go against conventional wisdom, continue renting, and invest that money into a real estate syndication instead?
Here, we'll explore the math, as well as the potential risks of two paths a young family might take
1) Savings up $200,000 to buy a single-family home
2) Renting a home and investing that $200,000 in real estate syndications
Scenario 1 - Saving up Cash to Buy a Primary Residence
The traditional assumption or societal expectation in many cases is that when a young couple gets married, they begin by buying a home together. This couple just got married. They've been saving and watching their local real estate market. They quickly find a beautiful three-bedroom home and put it under contract for $1 million. The plan to put 20% (or $200,000) down. (For simplicity's sake, we'll keep closing costs out of this scenario.)
They get approved for a 30-year mortgage loan for $800,000 at 4% interest. Everything goes smoothly, and soon, they have the keys in their hand to their beautiful $1 million home.
One month later, their first mortgage bill arrives for $4,902. They are well-paid tech professionals, so this is well within their budget. Over time, they have their first baby, experience their first roof repair, have the water heater replaced, and decide foundation repair is in order. Ah, the joys of owning property. Their high-income professions cover the costs of these unexpected repairs. Ten years later, they've got two tweens, a dog, and it seems like they're outgrowing what once seemed like a spacious home.
The couple has diligently paid their mortgage each month, which has also reduced the principal on their $800,000 loan.
They've paid out about $588240 in mortgage payments ($4902 x 120 months). About $150,000 applied toward principal, which leaves about $650,000 as a remaining balance. It also means about $438,240 went toward interest, Ouch!
If they sell now, they'll receive their original $200,000 down payment back, $480,000 in equity from appreciation, and $150,000 in principal that they've paid over the years, which totals about $830,000 in their pockets at the sale.
$830,000 is nothing to sneer at, especially when you remember that the two only started with $200,000!
Indeed this is the best choice, no? Keep reading.
Scenario 2 - Rent a Home and Invest in Real Estate Syndications Instead
What if the couple decided to opt for financial freedom over the American dream of owning a home? Few people ever even consider this scenario as an option, but maybe they should.
In this scenario, when the couple got married, they were hesitant to drop their hard-saved $200,000 into a primary residence. So, the two decided to rent a three-bedroom apartment for $3000 a month instead.
They knew the $200,000 in savings should be doing something and found a real estate syndication deal they liked in which to invest.
The real estate syndication (i.e., group investment) was for an apartment community with a preferred return of 8% per year and an estimated equity multiple of 2x over a projected 5-year hold period. Meaning, between the cash flow distributions and the profits at the sale, they could double their money in just five years.
Three years later, the couple expects their first baby and received word that the renovations were complete at the apartment complex. The sponsor team was planning on selling soon. By the end of year three, their healthy new baby was born, they received their original $200,000 investment back, plus $170,000 in profits from the real estate syndication.
Since they are content in their apartment and the real estate syndication deal had gone so well, they decided to stay put and reinvest the $370,000 into another real estate syndication with the same sponsor team.
Four years later, the second real estate syndication sells and doubles the $370,000 capital. By this point, they've had another baby AND told all their friends how great real estate syndications are. They take their $740,000 and reinvest it another time.
Three years later (which is now ten years after their wedding and their first go at real estate investing), they have $1.4 million.
We can't forget the rent that the couple has been paying each month – the rent that their parents told them was a "waste of money" and that they'd never get back.
Over ten years, assuming a rent increase of 3% per year, they have paid $415,000 total in rent. Even still, consider the profits from their real estate syndication investments. Are those payments really "throwing away money?"
The Mathematical Comparison
In both cases, the couple began with $200,000 to put toward whatever they wanted.
In scenario 1, they used it as a down payment for a single-family home in which to live.
In scenario 2, they chose to rent and use the $200,000 as capital toward a real estate syndication investment.
So, how do things shake out?
Began with: $200,000
Equity after 10 years: $480,000
Principal paid down after ten years: $150,000
Interest paid over ten years: $438,240
Net Gain: $191,760
Began with: $200,000
Profits after year 3 (1st syndication): $170,000
Profits after year 7 (2nd syndication): $340,000
Profits after year 10 (3rd syndication): $660,000
Rent paid over ten years: $415,000
Net Gain: $755,000
If the couple were to throw conventional wisdom out the window and invest instead of buying a single-family home, they could come out with roughly $563,240 more in just ten years.
Let that sink in for a minute. That's an addition of over $56,324 per year, which is like having a 3rd income! That's the power of passive investing.
Assumptions & Other Considerations
Of course, for this example, we had to make some assumptions and leave out some details to keep it simple. So, let's explore those.
1) Home Appreciation Rate:
These scenarios are assuming an annual home value appreciation of 4% over ten years. It's highly possible that in a hot market, the average appreciation could be more significant. But, that's not a guarantee. There are also much more stagnant markets in the US. Home prices can dip or appreciate at any time, no matter what the historical real estate data reflects.
2) Syndication Performance:
These scenarios assume that the syndication deals were well vetted and led by a strong team that could execute the business plan and exceed expectations. We're also assuming that the market allowed these syndications to cycle in a reasonable period.
3) Huge Home Loan
Another significant consideration is the giant mortgage loan Jack and Jill took on in scenario 1.
That $4,902.00 payment seems doable if they're both employed and have no kids. But if a recession hit, one of them got laid off, or either of them had to take extended time off for any reason, they might struggle to make that payment. That struggle could turn into default and, if it went on long enough, they could lose their home. When you consider the risk of a mortgage, it is more of a liability than the asset mainstream media tells us.
Consider scenario 2, where the couple invest their $200,000 into a syndication deal. They take no loan, and as passive investors, they aren't liable to lose any more than their original capital. Sure, that would suck to lose $200,000. But it would suck more to be liable for further losses.
No additional payments are required on their investments. That money is making money for them - a real asset.
The tax benefits from real estate syndication investments put them over the top!
We've been conditioned to want to buy a home, so it is a different way of thinking. Take this as food for thought. It illustrates that two possibilities or paths that are available with your money. One follows the traditional narrative that generations before us believe and preach. The other is rarely even considered an option. One way comes with a huge liability. The other provides a real asset. Going against conventional wisdom is extremely difficult, and there WILL be naysayers. It's ultimately up to you to choose your path and have 100% confidence in that choice.