Making A Living: The Investment Conundrum Of 80K

If you're looking to invest $80,000 to build wealth, there are a variety of options to consider. Firstly, investing in real estate can provide steady and high ROI values, with options such as real estate syndication, REITs, rental properties, and self-storage. Additionally, investing in stocks, ETFs, mutual funds, and high-yield savings accounts are also viable options. Diversifying your investment portfolio is crucial to boosting your ROI and reducing risk. It's important to conduct thorough research and consult professionals before making any investment decisions.

Real estate syndications

Real estate syndication is a way for multiple investors to pool their money into an entity to purchase real estate. Syndicates consist of a sponsor and investors. The sponsor is the one person or company that has experience and manages the deal on behalf of the investors. They generally have skin in the game too, often putting up between 5-20% of the total equity. The investors are people who would like to invest in this type of real estate but prefer to be passive investors, or what are called limited partners. Syndications are generally set up as an LLC, and the investor owns an interest in the LLC.

The JOBS (Jumpstart Our Business Startups) Act of 2012 relaxed the rules around general solicitation for private offerings as long as certain conditions were met, including that each investor is accredited. An accredited investor is someone who has an annual income of at least $200,0000, or $300,000 with a spouse, or a net worth of at least $1,000,000.

The benefits of investing in real estate syndicates include a passive monthly steady cash flow, tax benefits, control over which development projects to invest in, and hands-off property management.

However, one risk to be aware of is that the money you invest in a real estate syndicate can't be easily withdrawn early. Your finances must be able to survive on their own without your investment funds.

To invest in a real estate syndicate, you must meet the necessary financial requirements and be considered a sophisticated or accredited investor. The main requirement is that you must have an annual income of at least $200,000 or a net worth of more than $1,000,000.

Once you meet the financial requirements, you can find the right real estate syndication investment by networking with other potential investors or developers, searching online for syndications with a history of developing successful properties, or working with a firm that specializes in real estate syndication, such as Alpha Investing or Peoples Capital Group.

Real Estate Investment Trusts (REITs)

REITs are required to meet certain standards set by the IRS, including:

• Returning a minimum of 90% of taxable income as shareholder dividends each year.
• Investing at least 75% of total assets in real estate or cash.
• Receiving at least 75% of gross income from real estate.
• Having a minimum of 100 shareholders after the first year of existence.
• Having no more than 50% of shares held by five or fewer individuals during the last half of the taxable year.

REITs can be a good investment option as they offer the potential for steady income through dividends, portfolio diversification, and exposure to real estate without the complexities and headaches of directly owning property. They have also historically provided competitive long-term returns and can serve as a hedge against inflation.

However, there are some disadvantages to investing in REITs. These include:

• Heavy debt: REITs are usually among the most indebted companies in the market due to their legal requirement to pay out a large portion of their profits as dividends.
• Low growth and capital appreciation: As REITs pay out most of their profits as dividends, they may struggle to raise funds for new investments during market downturns.
• Tax burden: While REIT companies pay no taxes, their investors are required to pay taxes on any dividends received, unless their REIT investments are held in a tax-advantaged account.
• Non-traded REITs can be expensive: Non-traded and private REITs often have high minimum investment requirements and may only be accessible to accredited investors. They may also have higher fees than publicly traded REITs.
• Illiquidity: Non-traded and private REITs can be difficult to sell and may need to be held for several years before realizing any gains.

There are three main types of REITs:

• Equity REITs: These operate like landlords and handle all management tasks associated with owning a property, such as collecting rent and providing upkeep.
• Mortgage REITs: These REITs do not own the underlying property but instead own debt securities backed by the property, such as mortgages. They generate revenue through interest income.
• Hybrid REITs: These REITs combine strategies from equity and mortgage REITs, owning and operating real estate properties while also holding commercial property mortgages in their portfolio.

When investing in REITs, it is generally recommended to start with publicly traded REITs, as they offer greater liquidity and transparency. Publicly traded REITs can be purchased through online brokerage accounts, traditional IRAs, or 401(k)s. It is also important to do your research and consider factors such as the REIT's portfolio, management team, debt levels, and dividend history. Additionally, diversifying your investments across different types of REITs and real estate sectors can help balance your portfolio.

Rental properties

Choosing the Right Property

When selecting a rental property, look for locations with low property taxes, good school districts, and walkable amenities such as restaurants and parks. A growing population, low crime rate, and easy access to public transportation are also attractive features. Online platforms like Zillow.com and Airbnb.com can provide valuable information on rental rates and investment property values.

Financing Your Rental Property

The process of obtaining a rental property loan is similar to a primary residence mortgage but with some key differences. Lenders typically charge higher interest rates for rental properties due to a higher default rate. Underwriting standards are often stricter, with a focus on credit score, down payment, and debt-to-income ratio. A higher down payment of 15% to 25% is usually required for investment properties.

Operating Expenses and Maintenance

Maintenance and upkeep costs can significantly impact your rental income. It is recommended to set aside 1% of the property's value annually for repairs and maintenance. Operating expenses can range from 35% to 80% of your gross operating income, so it's crucial to factor these costs into your calculations.

Legal and Insurance Considerations

As a landlord, it is essential to understand the landlord-tenant laws in your state and locale. Familiarize yourself with tenant and landlord rights and obligations regarding security deposits, lease requirements, eviction rules, and fair housing laws. Additionally, consider purchasing landlord insurance to protect your investment. This type of insurance covers property damage, lost rental income, and liability protection.

Time Commitment and Property Management

Investing in rental properties requires a commitment of time. Full-time rental property investors spend considerable time choosing houses, making repairs, and managing their properties. If you are unable or unwilling to take on these tasks, consider hiring a property manager, who typically charges between 8% and 12% of collected rents.

Alternative Approaches

If the challenges of direct property investment seem daunting, there are alternative ways to invest in real estate. Real estate syndication allows multiple investors to pool their funds to acquire properties they couldn't manage individually. Real Estate Investment Trusts (REITs) offer the opportunity to invest in a portfolio of real estate properties without direct ownership.

In conclusion, investing in rental properties can be a profitable venture, but it requires careful planning, financial readiness, and a long-term commitment. By considering the above factors and seeking further expert advice, you can make informed decisions about investing in rental properties.

High-yield savings accounts

Like most deposit accounts in the U.S., high-yield savings accounts are protected by the Federal Deposit Insurance Corporation (FDIC). This means that deposits are insured up to $250,000 per depositor, per insured bank, and per ownership category in case the financial institution fails. If you hold an account at an FDIC-insured bank, your funds are covered, making high-yield savings accounts a safe place to store your money.

One of the main advantages of using a high-yield savings account for emergency savings is the accessibility of funds. You may withdraw money without penalty, making it easy to access in a crisis. Many banks also allow instant transfers between high-yield savings and checking accounts, ensuring that your emergency funds are just a few clicks away when needed. Plus, while your money remains readily available, it continues to grow through compound interest, making high-yield accounts a better option than traditional savings accounts with lower returns.

However, there are some downsides to high-yield savings accounts. Interest rates are variable and can change at any time. While you can grow your money with a high-yield savings account, it's not the best way to generate long-term wealth for retirement because the yield often doesn't keep up with inflation. As a result, working with a broker or robo-advisor to develop an investment portfolio may be better for long-range plans.

In addition, high-yield savings accounts may have monthly fees and minimum deposit or balance requirements. Many banks also limit the number of free withdrawals you can make from these accounts.

Individual Retirement Accounts (IRAs)

There are several types of IRAs, each with different rules regarding eligibility, taxation, and withdrawals. These include:

• Traditional IRAs: These allow you to invest pre-tax income towards your retirement. Contributions can grow tax-deferred until withdrawal and may be tax-deductible. The maximum contribution limit for 2024 and 2025 is $7,000, or $8,000 if you're 50 or older.
• Roth IRAs: These are funded with after-tax income, so there are no taxes on withdrawals in retirement. Like traditional IRAs, the maximum contribution limit is $7,000 in 2024 and 2025, or $8,000 if you're 50 or older. However, Roth IRAs have income limits on who can contribute.
• Simplified Employee Pension (SEP) IRAs: These are for self-employed individuals or small business owners. The annual contribution limit is 25% of compensation or $69,000 in 2024, and $70,000 in 2025. There are no income limits for contributing to a SEP IRA.
• Savings Incentive Match Plan for Employees (SIMPLE) IRAs: These are also for small business owners and self-employed individuals. Both employers and employees can contribute, and all contributions are tax-deductible. The contribution limit is $16,000 in 2024 and $16,500 in 2025, with a catch-up contribution of $3,500.

IRAs offer a range of investment options, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs). Additionally, self-directed IRAs (SDIRAs) allow investors to make all investment decisions and offer access to a broader range of investments, such as real estate and commodities.

It's important to note that IRAs are meant for long-term retirement savings, and early withdrawals typically incur a 10% tax penalty, in addition to regular taxes owed. However, there are exceptions to this penalty for certain situations, such as educational expenses, first-time home purchases, and other unusual life events.

Frequently asked questions