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How to invest $100K

If you’ve reached a milestone in your life where you’re researching the best way to invest $100,000, you’re already on a great path to financial success. This guide will provide you with some considerations on where to invest that money and how to put that money to work for you.

The benefits of investing in real estate

Many seasoned investors will argue that the best investment is in real estate. Instead of putting your money into intangible assets, such as stocks or retirement accounts, investing in real estate allows you to invest in real property. Not only can they earn you substantial cash flow that is steady and predictable, but it is a tangible asset that you and your future generations can enjoy for personal use.

Here are the top 4 benefits described in detail. You also can read our guide that provides further evidence on the benefits of real estate vs. other investments.

Equity

One of the best aspects of real estate is that you can acquire more property than you can actually afford, by leveraging your finances. For example, you could take your $100,000 and use it as a down payment for a loan to acquire a property that is worth $1 million! Over time, you make mortgage payments on your property and build up your equity. During the life of the loan, you’re enjoying the benefits of an asset worth $1 million, rather than just $100,000.

Cash flow

Now let’s talk about some of these said benefits of owning property. Not only do you have access to a home that you could live in, use as a vacation property and even hand down from your generation to the next, you have an enormous potential to earn cash flow. For those wondering how to invest in property, one of the best strategies is to rent it out. By renting out property, you can earn rental income to help pay the mortgage and offset your costs. Better yet, some landlords strategically select a property that will allow them to earn enough rental income that results in profit. Keep reading about rental property cash flow in order to realize the full potential of this passive income strategy.

Tax advantages

Paying taxes as an American is expensive, and there is not a single person who would turn down an opportunity to gain some tax advantages. The good news here is that owning any type of real estate property offers some type of tax incentive. For example, the typical expenses you incur from running a property—maintenance, paying mortgage interest, home improvements—all of these can be reported as deductions to lower your taxes. If you were to sell your investment property, you will be subject to capital gains tax, but using a 1031 exchange, you can transfer the gains to a new property being purchased. The U.S. tax system therefore incentivizes you to continue investing in properties and bolster your wealth.

Personal use

Last, but not least, real estate is a tangible asset that can be used for personal benefit. When you have $100,000 sitting in a savings or an investment account, there’s nothing you can do with it! However, when you have your money invested in real property, you have the advantage of being able to use that property. Perhaps your strategy will be owner-occupied, where you live in the property, and maybe even rent out one of your bedrooms to help with the mortgage. Or, you could turn it completely into a rental property if you already have a home.

Real estate investing precautions

Equity, cash flow, taxes and personal use are just a few of the many real estate investing advantages. However, before you commit on what to do with $100,000, it’s always a good idea to consider any precautions. Real estate, in general, is a safe and steady market in which to invest. The trauma we felt as a nation as a result of the market crash in the early 2000s is nearly gone and the outlook has been generally confident for quite some time. However, this doesn’t mean that you should invest without careful research and analysis. Before investing into any type of property, one should first conduct a careful market analysis, inspection of the property itself, and evaluate the value and condition of the property against others in the neighborhood. These are all crucial steps to be taken before deciding on the exit strategy for that particular property. Minding your due diligence and having the right strategy is the key to successful real estate investing.

Other ways to invest

Many will argue that the best way to invest $100,000 will always be in real estate. However, diversifying your investments in order to hedge against risk is never a bad idea. Below, you will find a run-down on stocks, ETFs and mutual funds, and IRAs to help you get your start.

Individual stocks

Stocks are a great way to diversify your investing portfolio. It provides you with an opportunity to invest in various industries and companies around the world, and to boot, returns are generally quite strong. However, stocks can be quite risky. Your money increases and decreases along with the ebbs and flows of the economy. Because of this, financial advisors typically advise that you invest large sums of money into mutual funds rather than individual stocks.

ETFs and mutual funds

ETFs and mutual funds belong to the stock “family,” but they differ from individual stocks in the sense that they are “pre-bundled” on your behalf. This means that when you invest in either an ETF or a mutual fund, you are investing in a portfolio of assets that have already been selected for you. ETFs typically follow a particular index, while mutual funds are a portfolio of stocks that have been carefully selected by analysts. Investors who are particularly risk-averse, but still want to invest in stocks, are encouraged to consider mutual funds as a strong option.

IRAs

IRAs, or individual retirement accounts, are a type of savings account made specifically for retirement. If you work for a company or organization with retirement benefits, then most likely they offer some type of 401k, 403b or IRA account to which you can contribute. (Your employer will typically match all or a portion of your contributions.) An IRA is a great way to pad your retirement savings. There are two types of IRAs you should be aware of. The first type, a traditional IRA, provides you with a tax credit on your contributions while you’re paying into it, but you’ll be taxed on your income once you retire. The second type, a Roth IRA, forces you to contribute tax income today, but then allows you to be tax-free when you are on retirement.

Other investing considerations

Before you rush into deciding the best investment for money, you also should take a step back and evaluate your financial health as a whole. Let's say you recently had a windfall which provided you with access to this great sum. Is investing it, or all of it, the best choice for you? Here are some other considerations before diving into investing.

Paying down debt

Investing your money is always a great idea, but before you do so, do you have any outstanding debt? Debt is something that always hangs over our heads, such as credit cards, car loans, personal loans, school loans, etc. Life can never exactly be stress free when you owe money to someone or something. Depending on the interest rate, some of the debt grows at a faster pace than at which we can keep up. If you have any debt, your best bet is to pay it down before you invest.

Keeping an emergency fund

Another smart thing to do with extra money is to set up an emergency fund. Having a nest egg in case something unexpected happens—loss of employment, drastic change in income, natural disaster—will help you protect yourself and your family, and can help you avoid financial blunders in the future. Dave Ramsey provides a great guide on how to build an emergency fund.

Summary

If you’ve come up on $100,000 of extra cash, consider yourself fortunate. At the end of the day, it's up to you to decide the best way to invest it. That’s because every individual’s financial circumstances are so significantly different. Perhaps you’re ready to invest in real estate and start building your property wealth right now. Or, perhaps you’ll choose to diversify and invest a portion in real estate and a portion in other types of investments. Finally, perhaps you’ll decide that you want to finally pay off that grad school loan and build up an emergency fund so that you can ease your mind of stress. The choice is yours, but the good news is that your financial outlook is about to improve significantly.

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