This article is part of our guide on how to invest 1 million dollars for income, available here.
A million dollars is a large sum of money to invest and one that can make a serious impact if done correctly. Real estate investing is one of the best ways to use that capital to obtain a safe risk-adjusted return on investment.
However, there are various asset classes and ways to invest directly in real estate that can work for you. Which you choose depends on your investor profile and your preferred investment choices.
In this article, your learn how to successfully invest a million dollars in real estate and earn solid profits on your capital.
Key Takeaways
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The first thing you should ask yourself before investing a million dollars in real estate is what investor profile best suits your needs.
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Understand your risk profile. If you can’t afford to lose an investment, your risk tolerance is considered zero, giving you the profile of a conservative investor.
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Investing in a multifamily real estate syndication is one of the best forms of investment since it takes out all the guesswork of real estate investing by investing directly into a private deal with an operator who knows what they’re doing.
What You Need to Ask Yourself First
The first thing you should ask yourself before investing a million dollars in real estate is what investor profile best suits your needs. A big part of this means asking two key questions:
- What’s your investment timeline?
- What is your risk tolerance?
These questions will help you determine where and what asset classes to place your capital.
Let’s take a more in-depth look at these two questions to help you understand how to start investing a million dollars.
What is Your Investment Timeline?
Your investment timeline is how long you wish to leave your investment tied up in an illiquid asset to generate additional income. Therefore, you need to establish how long you’re willing to have your capital tied up before you can begin investing one million dollars.
To establish your investment timeline, ask yourself how long you plan to hold an investment, how long you want to receive a return on the investment, and over what period you want your money to give you a financial return. And if living of the interest of 1 million dollars is even possible for your current and future lifestyle while factoring inflation into the equation.
Also, decide what your purpose is for investing. For example, if you’re considering an investment plan for your retirement or your children’s education, you’ll want to look for long-term options.
On the other hand, if you are investing to use your million dollars in the next five years for any purpose, you should consider a short-term investment that will make it easy to liquidate your assets as needed.
Next, determine your risk tolerance and why this is another important question before investing one million dollars.
What is Your Risk Tolerance?
Some investors have a great amount of capital capable of supporting a failure in an investment. But, at the same time, some are more preoccupied with the possibility of failure and aren’t willing to risk their capital as much. But to be clear, the number 1 rule in investing is not to lose money. Always ensure that whatever you’re investing in can’t go to zero, and at the very least, you can secure your principal.
If you can’t afford to lose an investment, your risk tolerance is considered zero, giving you the profile of a conservative investor.
On the other hand, if you invest blindly, knowing that you can win a lot and lose everything, you have a high tolerance for risk and can be classified as an aggressive investor.
Of course, there should always be a point of balance between the two. So consider how much you are willing to win, lose, and risk before deciding how to invest your capital.
Now that you know what questions to ask about investing $1 million let’s look at how to invest in real estate. These are some of the most profitable investment methods in the real estate market.
How do you Invest $1 Million Dollars in Real Estate?
There are many ways to invest $1 million dollars of your own money in real estate, including through:
- Multifamily Real Estate Syndication
- Purchasing Rental Properties
- Fix & Flipping Properties
- Purchasing Office, Retail, or Industrial Buildings
- Private Lending
- Investing in REITs
Which one of these investment options you select will depend on your investment timeline and risk tolerance. Additionally, you can choose to invest in a variety of these methods to create a diversified portfolio.
So let’s take a closer look at each of these methods for investing $1 million.
Investing in a Multifamily Real Estate Syndication
Investing in a multifamily real estate syndication is one of the best forms of investment since it takes out all the guesswork of real estate investing by investing directly into a private deal with an operator who knows what they’re doing.
With this strategy, several investors combine their funds to buy a property, and a manager or sponsor in charge is the one who does the tasks of closing the deal, coordinating the transaction and financing, and managing the investment once the deal is closed.
One of the most significant advantages when you invest as a limited partner in a multifamily real estate syndication, is that it’s one of the safest and most stable ways to generate true passive income. Multifamily as an asset class has major supply constraints, particularly in the affordable housing cohort, as developers are under building by more than a 100,000 unit delta per year U.S. wide. With this type of investment, a sponsor is responsible for finding and executing the deal and distributing the cash flow evenly amongst investors.
In addition to investing in multifamily real estate syndications, you can also purchase rental properties. Here’s what to know about this type of investment.
Purchasing Rental Properties
Buying one or several real estate investment properties with $1 million is a good idea considering that if you do good research and invest in the right markets, you can get up to 9% annual returns.
At the same time, while the property appreciates, investors can rent the property out to generate income. The value of leases is always on the rise, meaning that even if an investor doesn’t sell the property, the value of the investment rises.
The only downside to investing in rental properties is the administrative procedures you must carry out with the tenants. However, this is something that can be solved by hiring a third-party property management company to handle the day-to-day operations.
Next, let’s look at a fix-and-flip strategy for real estate investing.
Fix & Flipping Properties
Fix and flip properties are real estate that an investor purchases at below market value, repairs, and then sells at a profit.
This investment strategy promises high investment returns as long as the property is obtained at an economical value.
This real estate investment strategy employs some of the highest risks, as most financing these properties with high-interest, short-term, hard money loans, forcing them to hit their value or be vulnerable to foreclosure.
Also, since it’s a more transactional short-term holding period, the market can substantially change, and the ARV (After Repair Value) may not be there when you finally put it on the market, causing you to lose out on your profits. And although the competition is low for this type of million-dollar investment, it’s possible that you lose some principle as the buyer pool is smaller for this type of product.
From my personal experience, fixing and flipping houses can be profitable as long as you have the time to manage the project, which can be time-consuming. I would also avoid deep fixers, and focus on houses that are in need of some cosmetic upgrades.
Besides fix and flip properties, which tend to be single-family properties, there are also commercial and industrial real estate investments that investors can look into. Although they’re generally less favored by investors due to lack of competency and risk, they can generate large profits.
Purchasing Office, Retail, or Industrial Buildings
Purchasing office, retail, or industrial buildings can be done to create a business or rent it out. Either way, investing in commercial property can generate an even higher profit margin than in residential property.
The purchasing value of these assets depends on factors such as the current economy, the area, and local or global crises like we experienced with the COVID-19 pandemic.
It’s also important to note that the IRS says you can only depreciate them over 39 years instead of a 27.5-year deprecation window like on multifamily properties. This means that you can capture fewer “paper losses” annually compared to multifamily, making these investments inferior in terms of multifamily’s tax advantages.
Even with these benefits, some real estate investors turn to private lending in real estate investing instead of choosing to place their money in a commercial real estate investment. Let’s examine this investment option.
Private Lending
Private lending in real estate means becoming a private mortgage lender on a particular property. This type of investment generates income through the interest on the loan.
Although it’s a somewhat more complicated business that requires a lot of knowledge and attention, you as a lender also have the benefit of being able to create your own rules, guidelines, and qualification requirements, always considering the laws that govern it.
Another type of investment you can make into real estate that may not be as high risk is to invest in REITs. Let’s examine what these are and how to invest in them.
Investing in REITs
Real estate investment trusts, or just REITs, have become a bit more popular over time, allowing investors to have all the benefits that a traditional real estate investor would, without the need to own private rental property.
This investment allows you to pool that million dollars to participate in larger real estate projects. This might be an easy way to get started with real estate investing.
However, remember that REITs allow for less control over your capital. It is essential to choose a trustworthy fund that will protect your assets. Additionally, when comparing investing in REITS vs. a real estate syndication, syndications give you access to all the direct benefits of owning commercial real estate. Syndication allows every limited partner or passive investor to further share in all the depreciation or “paper losses” to shelter their gains through the hold period. In a REIT, you only own shares in a publicly traded company, making you vulnerable to whatever marginal tax rate you fall into post-tax.
Now that you know the different ways to invest $1 million in real estate let’s determine the best way to do so and generate a profit.
What's the Best Way to Invest 1 Million Dollars in Real Estate?
Multifamily real estate syndication investing is the best way to invest in real estate, considering all the benefits, features, and freedoms this method offers investors.
For one thing, a multifamily investment can be considered a recession-resilient asset class.
Unlike other commercial asset classes like office and retail, Multifamily landlords re-negotiate the lease with their tenants annually, which allows a landlord to raise rents to keep pace with rising operating costs and inflation, a true hedge against inflations erosion of the dollar.
Finally, these properties provide above-average returns. Real estate syndications can achieve returns of somewhere between 5%-8% per year on your invested capital, a 15% plus IRR, and a 1.5x-2.5x multiple throughout the hold of the deal.
If you still have questions about how to invest $1 million in real estate, keep reading to find the answers to a few frequently asked questions.
Frequently Asked Questions About How to Invest a Million Dollars in Real Estate
Yes, many millionaires invest in real estate since it’s a definitive strategy to achieve a lot of income and allows for the maintenance and gradual increase of wealth. Many choose to invest in multiple properties to increase the amount of cash they earn.
Invest 1 Million in Real Estate - Conclusion
Investing $1 million in real estate is a smart strategy for lowering the probability that you’ll lose money and generate a profit.
While there are many ways to invest in real estate, the best choice is generally to invest in a multifamily real estate syndication. These investments provide the best tax advantages in commercial real estate, low investment amounts, passive income, and a solid risk-adjusted return.
If you still feel that you need to strengthen your knowledge about investing in real estate to achieve financial success, join the investor club here at Willowdale Equity today. You’ll learn how to grow your $1 million and access private value-add multifamily real estate investment offerings across the southeastern United States.
Sources:
The Willowdale Equity Investment Club is a private group of investors that are looking to passively grow their capital and share in all the tax benefits through multifamily real estate investments.
