If you have money to put to work in real estate, there are several paths you can choose. Some of them are best suited for active investors, while others are as easy as buying a stock through your brokerage. Some are highly liquid, while others will tie up your money for years. And some come with quite a bit of risk, while others will allow you to sleep like a baby at night.
With that in mind, if you have $100,000 to invest in real estate, there are several excellent options available to you. Here are three of the main ways you could choose to invest and some of the pros and cons of each.
1. Buy an investment property (or a few)
A $100,000 bankroll should certainly be enough to open the door to investment property ownership in most United States markets, and in some areas could even be enough to buy two or more rental properties. It's wise to anticipate needing down payments of about 25% for investment properties, so $100,000 can be reasonably expected to buy about $400,000 worth of real estate.
Now, buying a rental property isn't right for everyone. For one thing, it's a hands-on type of investing. Even if you hire a property manager, owning a rental property is likely to take up more of your time than alternative ways of investing in real estate. Plus, there's a higher level of risk, especially when it comes to income -- after all, if you own shares of a real estate investment trust, or REIT (pronounced "reet"), you can potentially create a steady income stream. With an investment property, a vacancy can cause serious income disruption. And that's not to mention the maintenance problems you could run into.
However, rental properties have the potential to produce some pretty impressive returns, so they certainly belong on this list. Check out our beginner's guide to owning rental properties if you want to learn more.
2. Invest in a crowdfunded real estate deal
One of the newer ways of putting money to work in real estate, crowdfunding allows you to invest in a single-asset commercial real estate deal. For example, if a developer wants to buy an older apartment complex and renovate it, said developer might choose to crowdfund some of the capital required to complete the project.
Crowdfunded real estate has its positives and negatives, just like any other type of real estate investing. On the plus side, the return potential can be fantastic, and without much work on the investor's part. It isn't unusual for crowdfunded real estate deals to generate annualized returns of 15% or more for their investors. However, these investments can have elevated risk profiles, and they typically require investors to keep their money tied up for several years. Plus, they are generally limited to accredited investors.
3. Put your money to work in REITs
A real estate investment trust is a specialized type of company that's primary business functions include owning, operating, managing, or otherwise investing in real estate assets. And many REITs trade on major stock exchanges like the NYSE, allowing investors to buy and sell them with the click of a button.
You can find REITs that invest in virtually any type of commercial real estate you're interested in, such as office buildings, apartments, malls, data centers, and many more. Our beginner's guide to REITs can help point you in the right direction, but the main reasons to choose REITs over the other two options above are that they're passive investments and are diversified (meaning that your returns will depend on hundreds or thousands of properties instead of just one or two).
Which is best for you?
The bottom line is that the best way to put $100,000 to work in real estate depends on the level of involvement you want and the level of risk you're comfortable taking. Obviously, if you want to be a hands-off investor, buying an investment property isn't for you. Even if you decide to hire a property manager, I can tell you firsthand that you'll spend more time on your investment properties than you likely would on a REIT or real estate stock investment.
Furthermore, if you want your investment to be liquid, investment properties and crowdfunding aren't likely to be the best fit. You can sell your REIT shares with the click of a button, while it can take months to sell a property, and it could be years before you can cash out a crowdfunded deal.
Having said that, while owning investment properties and investing in commercial real estate deals have the highest return potential, all three of these investment vehicles have the potential to produce excellent returns, so there's nothing wrong with going the passive and fully liquid route if that's what is the best fit for you.