How to invest $200k in Real Estate!
So, let’s say you have $200k to invest in Real Estate, and like many others, your first thought is to purchase a single-family home.
If you live in an expensive real estate market such as New York City or the San Francisco Bay Area, you will realize sooner than later that $200k will not get you very far in those markets. The average home price in New York City is $650,000, and in the Bay Area, the average cost is $1.5 Million.
So, what should you do if you only have $200,000 to invest? Do you just avoid real estate altogether? Do you wait to save up more money? The answer is a resounding NO.
There are many ways to invest in real estate that allow individuals to receive a much higher return on their investment.
Throughout this article, we will provide you some insight into how you should invest $200k in real estate.
What is a Real Estate Syndication?
When examining how to invest 200K in real estate- we are going to consider real estate syndications as a viable investment vehicle.
Syndication is the pooling of money from various individuals to invest in one real estate project opportunity, portfolio, or building. By investing in a real estate syndication, large scale investments, which are frequently inaccessible to the average investor, become accessible to individual investors!
For example, a sponsor/manager of the syndication could organize investors to pool their capital together for a two-million-dollar apartment project. Individual investors could contribute as little as $25,000, depending on the criteria set by the sponsor.
When it comes to the question of whether to choose either syndication or a single-family home, there are some considerations to keep in mind.
When considering how to invest 200K in real estate its important to diversify your investment.
Diversification is one of the top reasons that real estate investors choose to put their money into a real estate syndication.
When you invest in syndication, you are able to pull your money together with other investors to purchase multiple properties or larger properties in a specific asset class.
The strategy of real estate syndication allows you to benefit from the diversification of real estate without requiring additional capital.
For example, instead of purchasing or investing in one single-family property at $200,000, you can invest $100,000 into two or more syndications.
Additionally, if you can get 10 investors to contribute $100,000 into a real estate syndication, collectively, you could all own a million-dollar property (or a $4M to $5M property with leverage) that would have otherwise been inaccessible individually.
While it is true, you only own 10% of the property, you also own 10% of the cash flow and appreciation of this million-dollar property. Obviously, the risk is different.
For example, if you own one property that has 10 apartment units within it and one unit becomes vacant, you, as an investor, will still receive 90% of your expected rent from that multi-family property.
Overall, it is easier to afford the mortgage payment and to pay for unexpected expenses compared with a single-family home investment where you depend on the income of one tenant.
Consideration: Access to a larger investment opportunity
Once you begin to invest your money into pooled investment models like syndications, you can possibly own property in shopping centers, mobile home parks, retail strips, self-storage deals, and many other amazing cash flowing investment opportunities.
Sometimes syndications only require a minimum investment of $10,000, which obviously opens up the doors for investors who would otherwise be unable to invest in commercial real estate.
The majority of commercial real estate that you see today have been purchased using some form of a syndication structure.
Consideration: 100% Passive investment
One aspect to understanding how to invest 200k in real estate is determining how active or passive you want to be as an investor!
Arguably, the greatest advantage of investing in a real estate syndication (compared with owning a single-family home) is that you have the ability to become a 100% passive investor.
Typically, once you invest in a real estate syndication, you are completely removed from the asset, the operation, and the management. Specifically, there is usually a fund manager or sponsor who handles all aspects of the syndication’s performance.
Typically, investors pay the manager based on the performance of the syndication with a split between the cash flow and the appreciation; it can be anywhere from 80/20 to a 50/50 split.
While there is a lot of work involved in picking the right syndication that you trust with your money once you have invested, it’s usually pretty much hands-off.
Tax-deferred status when you invest in the syndication that utilizes an LLC opens up a whole new world of tax benefits for investors.
For example, investors are able to take advantage of depreciation, interest payments write-offs, expenses, etc. It’s very possible after all of the write-offs, your tax exposure will be little to none, even though you received thousands of dollars in income from the property.
However, when the property is sold, investors will pay capital gain tax but, a knowledgeable tax advisor can find ways to defer those taxes as well.
Lastly, an added benefit of investing in a syndication versus a single-family home is that you can invest in real estate without exposing yourself to personal liability or any credit risk.
Consideration: Home Mortgage Loan
Another significant aspect to consider when comparing a single-family home purchase to a real estate syndication is the fact that most buyers must take on debt (i.e., a home loan) to purchase a home.
While sound financial planning ensures that buyers can afford their home mortgage, sometimes things don’t always go as planned. If a recession hits, or if the owner loses his or her job or some other unexpected expenses may arise, this could lead to a default in mortgage payments or, even worse, foreclosure.
When you take into consideration a home loan, you start to realize that owning a home is more of a liability than it is an asset. On the other hand, one could take that same $200k and invest in a real estate syndication without having to take out any debt.
Consideration: Forced Appreciation vs. Home Appreciation Rates
In the world of a single-family home, property values are based on comparable properties within the same neighborhood.
A comparable property is one that is similar in structure, size, and location. For example, if a comparable property down the street sold for $200,000 two months ago and another property on the other side of the street sold for $250,000 last week, then the market would determine that your property should be priced in that range.
Typically, the average home appreciates at an average of 2% to 4% annually.
However, when discussing syndications, values are based on the property’s net operating income.
The net operating income of a commercial property can be increased simply by just increasing the rent and/or reducing the property’s expenses.
This type of appreciation in value is called “forced appreciation” because it has nothing to do with the market or outside influences. Instead, it is in control of the investors/managers.
Term (Length of Investment)
Syndications usually have relaxed terms. Typically, the end date is a range instead of a hard date. (e.g., 3-7 years).
However, the exact end date is usually at the discretion of the manager/sponsor of the syndication. Some syndications end up being shorter like 2-3 years because it was an excellent opportunity to sell, but some can go on for 9-10 years.
With a single-family home, you may not be able to take advantage of changes in the market as easily as you would be able to with a real estate syndication.
Bearing all of this in mind, invest your $200k in multifamily real estate syndications or at least take a hybrid approach.
Real estate investing can be a very lucrative field and a great form of passive investing, when done correctly. Investing in multifamily real estate syndications allows for 100% passive investing with no personal liability or credit risk.
Most importantly, you don’t have to take on additional debt to start investing in multifamily real estate syndications.
Overall, the most important thing is to do your research and conduct thorough due diligence if you decide to start your multifamily real estate syndication journey. Learn how to evaluate and vet the right properties for your investment strategy and goals!