Given how volatile the stock market has been lately, and how anemic bond yields have been, many investors are looking for alternate asset classes in which to invest their money. If you’re looking to invest $500,000 and double it within three years to make $1 million, one asset class you should consider is real estate.
In this article I’ll cover:
- Why it’s easier and safer to double your money using real estate than with stocks
- Why it works: The power of leverage
- How to apply this strategy to grow your own portfolio from $500k to $1 million.
Side Note: Although we wrote this article specifically for investors with $500k, the strategies outlined here can really apply to any amount of money. Whether you have $100k, 200k or 250k, this article will show you how to double your money within three years.
The Building Block: One House
If you’re reading this article, you likely want to know how to invest $500,000. I’ll answer this question in detail later in this article. But to keep it simple for now, let’s assume you have $50,000 to invest instead of $500,000. With 20% down, that $50,000 will buy you a brand-new construction $250,000 investment property in central Florida, like this one:
The rent your tenant pays will cover the principal, interest, taxes, insurance, and property management, but there won’t be much cash flow left over- it will essentially breakeven. The primary goal though, is capital appreciation. Central Florida real estate, for example, has been appreciating well into the double-digits each year and that’s expected to continue even as interest rates are rising. (To understand why, see the section about Florida below.)
If the property appreciates 10% per year, then after the second year it’s appreciated 21% (compounded) which means you’ve doubled your original investment of 20% down. Even if appreciation were to slow to 7% per year, you would still double your original 20% down payment in three years. (This means if you were to invest $500k instead of $50k you could double it in just three years. More on that below.)
Why It Works: The Power of Leverage.
What leverage enables you to do is use $50,000 to control a $250,000 asset instead of only a $50,000 asset. A $250,000 asset only needs to grow 10% per year for you to double your 20% down payment in two years (or grow 7% per year to double your investment in three years), whereas a $50,000 stock portfolio has to grow 26% per year to double in three years. That’s the power of leverage.
No bank will lend you $200,000 so you can invest in the stock market because the stock market is too volatile and risky. But any bank will lend you $200,000 to buy a brand-new investment property in a booming area of the country.
So, what’s your best bet?
Do you think you can pick stocks that grow 26% per year for each of the next three years, or is it more likely that you can pick real estate (with our help) that grows 7.0% per year for the next three years?
Scaling the Model: Building a $1 Million Portfolio by Investing $500k in Real Estate
Now that you understand the basic model, let’s assume that instead of $50,000 you have the full $500,000 to invest: What would that look like?
If you have $500,000 to invest you could buy 10 such properties or $2.5 million worth of assets. Lending guidelines from Fannie/Freddie are that each investor can have up to 10 loans, so building a portfolio of 10 such houses is very realistic (depending on your good credit).
How Long Would It Take To Turn $500k into $1 million
With $2.5 million of properties appreciating 10% a year, your $500,000 investment would turn into $1,000,000 in two years, or three years, if those properties appreciated only 7% per year.
Caveats
While direct ownership of real estate is a powerful wealth-builder, it also comes with some caveats. Here is a breakdown of its major pros and cons of investing $500k in real estate:
Pros
- Not correlated to the stock market.
- Great hedge against inflation, which we are experiencing now.
- Enables you to use leverage to magnify your returns.
Cons
- Not liquid, with high transaction costs when you sell.
- May require some of your time, usually no more than an hour per month for a new house, but more when you have a tenant turnover and need to coordinate with your property manager.
- Avoid putting all your eggs in one basket by buying your 10 houses in at least two different markets.
- We recommend you dip your toe in the water with one house and see that it works before committing more funds.
Where To Invest $500k Today To Double Your Investment
If you’re looking to invest $500k to make $1 million within two or three years, one of the best real estate markets today is Florida. Economics 101 taught us that prices are set by supply and demand, and the supply/demand dynamics in Florida are bullish for continued home price appreciation for the foreseeable future.
Job Growth
Florida is very pro-business and companies are moving and expanding there. According to the Florida Chamber of Commerce, Florida’s population will grow by 4 million by 2030 and will create 2 million more jobs. (1)
Population Growth
Increasing population means increased demand for housing, so rents go up and property values go up.
Aside from the influx of workers from all the new jobs being created, Florida also gets lots of retirees.
10,000 baby boomers retire every day and Florida is the #1 retirement destination. The state’s homestead exemption (your primary residence is exempt from liens from creditors) (2), lack of state income tax and pleasant climate make it a desirable place for retirees.
Central Florida in particular is home to The Villages, the largest retirement community in the US, with over 138,000 largely affluent retirees. (3) The Villages has received permits to build another 60,000 houses over the next 20 years, ensuring future growth. (4)
Retirees are also recession-proof: They don’t need or want jobs. In fact, retirees bring jobs. For every thousand retirees, the area will need more health care workers, more restaurant workers, more groundskeepers for the golf courses, etc. This makes for a growing and stable place to invest in real estate.
Shortage of Supply
Homebuilders in Florida are unable to keep up with the demand. (4)
Other markets with similar supply/demand characteristics include Dallas, Austin, Atlanta, Charlotte and Huntsville.
Is Real Estate Investing for You?
If you’d like to learn more about how to invest $500k in real estate, become a member of RealWealth. Membership is 100% free and you’ll be able to speak with one of our experienced investment counselors to see if there’s a place for real estate in your portfolio.
You may also like: Too Scared To Invest in Real Estate? End Big-Money Deal Anxiety
Sources:
(1) https://www.flchamber.com/research/research-programs/florida-jobs-2030/
(2) https://www.alperlaw.com/florida-asset-protection/florida-homestead-law/
(3) The median home price in The Villages is $390,000
https://www.redfin.com/city/25985/FL/The-Villages/housing-market
(5) “The Villages expected to nearly double in size in next 20 years”
https://www.villages-news.com/2021/04/12/the-villages-relying-on-two-year-build-out-extension-granted-by-gov-desantis/
(4) https://www.orangeobserver.com/article/forecast-real-estate-demand-vs-supply-will-continue-in-2022
