At a high level, there are two steps to building wealth. First, individuals must acquire capital – which means doing things like consistently setting money aside in savings accounts or taking steps to increase income. Once individuals have stockpiled a certain amount of capital – say $100,000, the second step is to deploy it profitability. Over a long period of time, this nest egg can become a substantial amount of money.
In this article, we are going to present ten ideas for how to deploy $100,000 in capital. For each, we will describe what the idea is and the risks and benefits of allocating capital to it. By the end, the goal is for readers to identify one or two ideas that they are comfortable allocating capital to.
At First National Realty Partners, we are a private equity firm that specializes in the acquisition and management of grocery store anchored retail centers. If you are an accredited investor and become interested in private equity real estate as a result of reading this article, click here to learn more about our current investment opportunities.
What To Think About First
Before thinking about where to deploy $100,000 in capital, investors must first consider several important factors. They include:
- Investment Objectives: Investors must first ask themselves what they are trying to accomplish when making an investment. Are they looking for growth? Are they looking for income? Or, are they looking to preserve their capital? These answers to these questions will help identify the most suitable options.
- Taxes: Some investment options, like real estate, provide certain tax advantages while others can create a tax burden. Investors must consider their own tax circumstances and look for options that will improve them.
- Debt Levels: As a general rule, it is best to pay off or reduce debt prior to allocating capital to investments. So, investors should review their own debt levels and decide whether capital is better allocated to reducing them versus chasing investment returns.
- Emergency Funds: Consensus financial wisdom dictates that, before even thinking about making an investment, individuals should have 3-6 months worth of expenses stashed away in an “emergency fund. Each individual should review their own emergency fund to ensure it is sufficient prior to allocating capital to an investment.
- Risk Tolerance: Some investments are inherently riskier than others. For example, cryptocurrency is far more risky and volatile than a US Treasury Bond. So, each individual should consider their own risk tolerance and choose an option that is commensurate with it.
In other words, every individual’s financial circumstances are unique. Prior to committing capital to an investment, they must consider their own needs, objectives, and risk tolerance to identify an option that is suitable for them.
A Word About Diversification
One of the bedrock risk management principles in portfolio construction is diversification This means that investors should allocate capital to a number of different investment options, with non-correlated price movements, rather than just one. This way, they are not as exposed to declines in a single asset class. To illustrate this point, an example is helpful.
Suppose that an individual had a portfolio consisting of two loosely correlated asset classes, real estate and stocks. So, when stock prices decline, real estate may go up, or vice versa. When an investor has capital allocated to both, the loss from stock declines is offset by the gain in real estate.
So, it is important to remember that a portfolio should be diversified across many different assets and asset classes. Many of these options are described below and it would be perfectly acceptable to allocate capital to several of them as part of a diversification effort.
Idea #1: Private Equity Real Estate
Private equity firms invest in the privately held equity of other companies, including those that own real estate. In a typical deal, a private equity firm does all of the hard work of finding, underwriting, financing, and managing a commercial real estate asset while investors who partner with private equity firms provide capital and receive periodic distributions. They have no day to day role in the management of the property.
For individual investors, the most notable benefits of a private equity real estate investment are: (1) stable, consistent returns and periodic cash distributions; (2) reductions in taxable income from non-cash expenses like depreciation and amortization; (3) portfolio diversification; and (4) inflation protection (because real estate values rise along with inflation). For these reasons, we firmly believe that commercial real estate assets deserve an allocation of capital as part of a broadly diversified portfolio of risk assets.
The potential downsides of a private equity real estate are: (1) it can be illiquid, with required holding periods of five to ten years; (2) it can be expensive with fees that are higher than some of the other options on this list; and (3) it is only available to accredited investors who meet certain income and net worth requirements.
Based on the risks and benefits described above, private equity real estate investments tend to be a good fit for wealthy individuals who have a long term time horizon.
Idea #2: Real Estate Investment Trusts (REITs)
A Real Estate Investment Trust is a company that owns, operates, and/or finances commercial real estate. Under this structure, investors can purchase a fractional share of an existing, diversified real estate portfolio. REITs can be publicly traded or privately held and may specialize in certain property types like multifamily or office.
The benefit of a REIT investment – especially a publicly traded one – is that investors gain exposure to institutional quality real estate that they likely could not afford on their own. In addition, REITs have high dividend payouts, low minimum investments and certain tax advantages.
The most notable downside of a REIT is that investors have no say in which properties their capital is used to purchase. In addition, they can be subject to price swings that do not reflect the fundamentals of the underlying properties in the portfolio.
For individuals interested in a commercial real estate investment, a REIT is one of the most accessible ways to get started. They are often a better fit for retail investors or those that don’t have the time and resources to purchase and manage a property on their own.
Idea #3: Direct Real Estate
A direct real estate investment is one where an individual – or group of individuals – purchases a property on their own.
The benefit of this approach is that investors get to choose exactly which property they want to purchase and they get to reap all of the cash flow produced by the asset.
The downside is that commercial real estate is expensive and investors may have to pour all of their available capital into the down payment on just one or two properties, which limits opportunities for diversification. In addition, commercial real estate can be incredibly time consuming to manage and requires significant expertise to operate.
Idea #4: Exchange Traded Funds
Exchange traded funds or ETFs are stock funds that can be purchased on publicly traded exchanges. Often, they focus on certain asset classes or are designed to track certain indices. For example, there is an ETF that tracks the S&P 500 index or there are bond ETFs that track the performance of key bond indices. Or, investors can get even more detailed and buy ETFs that focus on certain sectors of the stock market like financials or energy.
The major benefit of an ETF is that investors can gain access to a diversified basket of stocks within the purchase of a single share. In addition, ETF shares can be bought and sold at will, which means they have a high degree of liquidity and their fees are low, which makes them a low cost way to diversify a portfolio.
The downside of ETFs is that investors don’t have much say in how their capital is allocated across the portfolio and the fees charged, although low, can cut into profits over time.
Idea #5: Individual Stocks
For investors that believe strongly in the future of a specific company, they can purchase shares of stock, which entitles them to equity ownership. For example, popular names for stock purchases include companies like Apple, Disney, Microsoft, or Ford.
The major benefit of an individual stock purchase is that returns can be quite lucrative and capital gains can be significant. For example, an investment in Apple stock alone returned 35%, 82%, and 89% in 2021, 2020, and 2019 respectively. These returns far outpaces benchmark indices like the S&P 500. In addition, publicly traded stocks can be purchased for a small amount of money per share and have a high degree of liquidity.
The downside to an individual stock purchase is that there is a decreased amount of diversification and annual returns can be incredibly volatile. For example, Global Payments, a major payment processor, lost nearly 37% of its value in 2021. Of all of the types of investments on this list, individual stock price movements can be the most volatile. They are high risk, but also have a potentially high reward.
Idea #6: Peer to Peer Lending
Peer to peer lending is exactly what it sounds like. Through the use of technology platforms that match lenders and borrowers, individuals can “lend” money to others and earn a return on their capital as a result. For example, suppose a borrower needed $75,000 to consolidate their credit card debt. If they went to a peer to peer lender for this loan, their platform could put together 75 people who are each willing to lend $1,000 at a certain interest rate. With this type of investment strategy, borrowers get the money they need and lenders get to earn passive income on their capital.
The benefit of this approach is that investors can earn higher returns than other types of debt investments, often 10% or more. In addition, they receive regular income from the loan payments.
The risk in this approach is that borrowers default. Often, these are unsecured loans so there is no recourse to borrowers, meaning that loss of principal is a real possibility. In addition, withdrawals are limited so this may not be the best investment for beginners.
Idea #7: Individual Retirement Accounts
Individual Retirement Accounts aren’t so much an investment type as they are an investment vehicle. These are specialized types of investment accounts that allow borrowers to contribute money (pre-tax for a traditional IRA, post-tax for a Roth IRA) up to a certain contribution limit annually. IRA brokerage accounts can be opened with any major firm like Vanguard or Charles Schwab.
The major benefit of an individual retirement account is that invested funds can grow tax free over time. In addition, retirement account funds can be invested in a variety of options like stocks, bonds, mutual funds, or real estate.
The major downside of an individual retirement account is that funds cannot be withdrawn until a certain age, otherwise they could be subject to penalties and income tax. Combined, these can erase years of investment returns.
An IRA is one of the principal tools used for retirement savings so they are generally a good idea for all investors, but they must be aware of the age limitation on withdrawals.
Idea #8: Money Market Account
Money market accounts are a type of checking account that pays interest, usually in the .50% – 2% range.
The benefit allocating capital to a money market account is that these are extremely safe investments where loss of principal is unlikely. In addition, account balances are FDIC insured up to certain limits.
The downside to a money market account is that the interest rate is low and there may be a cap on the number of transactions that can be processed each month, usually 3-5. As a result, they are not a good fit as a primary checking account and aren’t going to provide investors with significant growth.
Idea #9: Bonds
Bonds are a debt instrument issued by governments and corporations to fund projects. For example, a local government could issue municipal bonds to fund the construction of a new water treatment facility. Or, a multinational corporation could issue corporate bonds to fund the development of a new manufacturing plant. Investors who buy bonds are essentially making a loan to the issuer and have an opportunity to earn interest plus a return of their principal.
The major benefit of a bond is their safety. They are on the safer end of the risk spectrum, especially those issued by the US government. As a result, bond investments can be a low risk way to earn a respectable rate of return that can help individuals achieve their financial goals.
The downside of a bond investment is that returns can be somewhat low and it can take a long time for investors to receive their principal back.
Idea #10: Robo-Advisors
Finally, because asset allocation decisions can be difficult, some investors may be well served to leave them up to algorithms and technology. When allocating capital to a robo-advisor, investors can choose from broad themes or risk levels and leave individual stock or fund allocation decisions up to the “robot” which is programmed to choose the best option for a given risk tolerance and time horizon.
The benefit of a robo-advisor is that investors can take a hands off approach and leave specific investment decisions up to to the robot, which will broadly diversify capital over a number of assets classes. In addition, their fees tend to be low and their technology first approach means that investors can benefit from advanced analytics and reports on portfolio performance.
The downside of a robo-advisor investment is that this is relatively new technology and investors don’t have any input into investment decisions beyond broad themes or risk levels.
Again, individual financial circumstances and needs are unique. A young college graduate just starting their career will likely have a much different investment strategy than someone approaching retirement. For these reasons, individuals must take an inventory of their own needs and objectives prior to making any financial planning decisions.
Once they do, they should remember that diversification is a key risk management principle and it should be the goal when constructing a portfolio.
For investors unfamiliar or uncomfortable with the intricacies of financial markets, it is always a good idea to seek investment advice from a qualified financial advisor. Doing so can help drive higher returns so that individuals can enjoy the benefits of their retirement savings when the time comes.
Interested In Learning More?
First National Realty Partners is one of the country’s leading private equity commercial real estate investment firms. With an intentional focus on finding world-class, multi-tenanted assets well below intrinsic value, we seek to create superior long-term, risk-adjusted returns for our investors while creating strong economic assets for the communities we invest in.
If you are an Accredited Real Estate Investor and would like to learn more about our investment opportunities, contact us at (800) 605-4966 or firstname.lastname@example.org for more information.