The Best Way to Invest $200,000 in Real Estate (It’s Not What You Think)

by | Mar 15, 2021 | Financial Freedom, Life of Your Dreams, Passive Investing | 0 comments

In some of the most expensive real estate markets in the country, a regular three-bedroom home may sell for $950,000 or more.

If you were considering buying one, you’d have to put hundreds of thousands of dollars down just to buy a starter home (unless you’re eligible for a VA loan, but that’s a different situation). Yikes!

In a real estate market that’s overheated, does the traditional narrative of “get married, buy a house, and have kids” make sense financially?

Or does it make more sense to ignore “conventional wisdom,” continue renting, and invest that money into a real estate syndication instead?

In this article, we’ll explore the math, as well as the potential risks of two paths a young family might take:

 

  • Savings up $200,000 to buy a single-family home as their primary residence.
  • Renting a home and investing that $200,000 in real estate syndications.

Scenario 1 – Saving up Cash

The traditional or common social expectation in many cases is that when a young couple gets married, they begin saving toward buying a home together. 

Let’s pretend Jack and Jill just got married. They’ve been planning this for a while, so 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 (they live in an expensive market like Seattle or San Francisco). They plan to put 20% (or $200,000) down. (For simplicity’s sake, we’ll keep closing costs out of this scenario.)

Jack and Jill get approved for a 30-year mortgage for $800,000 at 4% interest. Everything goes smoothly, and pretty soon, they’re the proud owners of a beautiful $1 million home.

One month later, their first mortgage bill arrives for $4,195. They’re both well-paid professionals, so this is within their budget.

Over time, they have their first baby, experience their first roof repair, replace
the water heater, and realize foundation repair is needed. 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 and a black lab, and it seems like they’re outgrowing what once seemed like a spacious home. 

Jack and Jill have diligently paid their mortgage each month, which has reduced the principal on their $800,000 loan. In ten years, they’ve paid about $503,000 in mortgage payments ($4,195 x 120 months). About $150,000 applied toward the principal paydown, which leaves a principal balance of about $650,000. 

This also means about $358,000 went toward interest…..whoah!

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, totaling about $830,000 at sale.

$830,000 is pretty eye-opening. Especially when you remember they only started with $200,000!

This is the path of conventional wisdom, remember? “You’re home is your biggest asset.” So surely this is the best choice…right?

Scenario 2 – Rent a Home and Invest in Real Estate Syndications

But what about if Jack and Jill had been rebels and forged their own path against social norms? Few people ever even consider this scenario to be an option, but perhaps they should.

In this scenario, when Jack and Jill got married, they were hesitant to drop their hard-saved $200,00 into a primary residence. So, they decided to rent an adorable three-bedroom apartment for $3,000 a month instead.

They knew their $200,000 in savings should be working for them and found a real estate syndication (i.e., group investment) they liked and decided to invest in.

The real estate syndication was for an apartment community with a preferred return of 7% per year and an estimated equity multiple of 2x over a projected 5-year hold period. This means that between the cash flow distributions and the profits at the sale, they could potentially double their money in just 5 years.

Three years later, as they were expecting their first baby, they received word that the renovations were complete at the apartment complex and the sponsor team was planning on selling soon.

By the end of year three, their healthy new baby was born, and they received their original $200,000 investment back from the sale of the apartment complex, plus $170,000 in profits.

Since they loved their apartment and the real estate syndication 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 their $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 again.

Three years later (which is now 10 years after their wedding and their first go at real estate investing), they have $1.4 million.

Now, of course, we can’t forget the rent that Jack and Jill have been paying each month – the rent that their parents told them was a “waste of money” and that they’d never get back.

Over the course of 10 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?” Or are they perhaps simply buying a different opportunity?

 

Related article: Real Estate Syndications – Are They Right for You?

The Mathematical Comparison

In both cases, Jack and Jill began with $200,000 to put toward whatever they decided to do. In scenario 1, they used it as a down payment for a single-family home to live in. In scenario 2, they chose to rent and use the $200,000 to invest in a real estate syndication.

So, how do these really compare?

Scenario 1

Began with: $200,000

Equity after 10 years: $480,000

Principal paid down after 10 years: $150,000

Interest paid over 10 years: $365,000

Net Gain: $465,000

 

Scenario 2

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

Less rent paid over 10 years: $415,000

Net Gain: $ 985,000

Apparently, if Jack and Jill threw conventional wisdom out and invested instead of buying a single-family home, they could come out with roughly $520,000 more in just 10 years.

Let that sink in for a minute.

That’s an addition of over $50,000 per year, which is like having a third 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 a little bit.

 

1. Home Appreciation Rate

These scenarios assume an annual home value appreciation rate of 4% over ten years. It’s possible that it could be higher than that if the market is hot, but that’s not a guarantee. There are also much more stagnant markets in the United States. Home prices can dip or appreciate at any time based on a myriad of factors, no matter what the historical real estate data reflects.

 

2. Syndication Performance

These scenarios assume that the syndication investments were well vetted and led by a strong team that was able to execute the business plan and exceed expectations. We’re also assuming that the market allowed these syndications to cycle in the time specified in the example.

This is exactly why we work so hard to make sure the teams we’re investing with are strong operators with proven track records.

 

3. Huge Home Loan

Another big consideration is the giant mortgage loan Jack and Jill took on in scenario 1.

That $4,195 payment seems feasible 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’s really more of a liability than the asset the mainstream media would have us believe it is.

 

4. Liability

Consider scenario 2, where Jack and Jill invest their $200,000 into a syndication deal. They take no loan, and as passive investors, the maximum amount they could lose is 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 true asset.

 

5. Taxes

The tax benefits from real estate syndication investments really put them over
the top!

For Veterans Only – A Hybrid Scenario

Of course, if you and/or your spouse served honorably in the military and meet the requirements to qualify for benefits from the Department of Veterans Affairs (i.e., the VA), YOU can have the best of both worlds! One of the best VA benefits available to military veterans is the VA home loan, which lets you finance up to 100% of the cost of your home.

So, using the previous example, you could potentially buy a home with 100% financing PLUS still invest your funds into one or more real estate syndications, getting a head start on building further wealth.
This is a benefit you EARNED by serving our nation, regardless of how far into the path of harm’s way
you served.

Now, before you get too excited, keep in mind that a 100% loan on a $1 million property will be much higher than one that’s 80% loan to value, so the payments will be significantly higher than $4,195. If you want to keep them in the $4,195 range, you’ll need to buy a house that’s more around the $800,000 range.

You’ll also need to budget for home repairs and ensure you still have a “safety buffer” savings in case of layoffs, emergencies, etc. (those aren’t specific to veterans, of course). And before buying a house with 100% loan to value, you’ll want to be as certain as possible the market you’re buying in is more likely to increase than decrease.

But you should know that, thanks to your service, you have a relatively unique opportunity to invest for your future while STILL buying a home. That’s a pretty
big deal!

Conclusion

The moral of the story is, don’t be afraid to choose your own path and ignore the “traditional wisdom.” After all, if it worked so well, all the people who followed it would be rich!

These scenarios aren’t meant to be taken as investment advice. They’re simply meant to show you the difference between two possible paths that are available with your money.

One follows the traditional narrative that generations before us believe and preach. The other, most people aren’t even aware of.

One way comes with a huge liability. The other provides a true asset.

(And…veterans have the ability to take both paths at once!)

Going against conventional wisdom is extremely difficult and there WILL be naysayers. It’s ultimately up to you to choose your path and have confidence in your choice.

 

Further reading: Real Estate vs. a Traditional Retirement Plan: Two Very Different Outcomes