Best way to invest $30,000?

Question

I have received money from a dead relative. I would like to invest as much as possible to build wealth. I have read a few books on real estate and listened to the bigger pockets podcasts and webinars so I have a basic idea of what to do, but, I would like to know what you guys think and how you would invest 30k... Stocks? Real Estate? ETF's?

Randall Alan · Answer

Long term average return on stocks: 7%

Typical return on rental real estate (cash on cash): 20-30%

With that said, it's a bad time to be financing real estate right now, because they have been cranking up the interest rates... but it should still work out.  Lets see:

Let's put some real numbers on the real estate side of that using some basic round numbers.  Know that the actual numbers don't matter as much as the ratios... so if you say, "I can't buy for that price, use numbers that fit your area... rents will generally be higher where real estate is higher... so it's more about the bigger picture of the ratios around all the numbers:

If you bought a $100,000 property, and put 25% down (the typical amount required for an investment property) the numbers would look close to this (where I live).

Principal & interest on $75,000 at 6% interest Loan (using $77,000 to finance in some closing costs): $487/mo. (3 months ago this figure would have been 4.2%, and the P&I would have been $377.

Real Estate Taxes: $1,500/yr = $125/mo

Property Insurance: $1,200/yr = $100/moMaintenance Reserve : $100/mo

Fully loaded mortgage with maintenance reserve = $487+$125+$100 +$100= $812/mo

Lets say you can rent your house for $1,200/month

Your Net profit after expenses each month is $388.

So for the year, your net profit would be $388*12 = $4,656

Your cash into the deal was $25,000.

Your percentage profit on your investment is $4,656 / $25,000, or 18.6%

3 months ago this figure would have been $110 per month better.  Those figures would have totaled out like this:  $498/month net profit times 12 months = $5976.  Divided by your $25,000 investment = 23.9% cash on cash return.

So even with the bad numbers we are getting now with expensive financing, your return will still out pace the stock market on an average year by a factor of 2 or 3 times.

There are many other advantages.  Your property should appreciate (we have been able to sell properties we bought 3-4 years ago for double to triple what we paid for them.)  That's not typical... but it is where we are at currently! (That will more than blow away any comparison to stocks... but lets call that a "one off occurrence".). The tenant pays down your mortgage for you.  And you get great tax write-offs... mortgage interest, and about ~3.3% depreciation on the property per year, etc.

So my vote is for real estate... but you would expect that in this forum!  There are downsides... you have to manage the property (the above figures didn't include property management, and if you do pay that, your numbers will look worse.)  But I can tell you from 4 years experience that managing a few properties is EASY if you buy right and put in good tenants.  We currently self-manage just under 40 properties and it is still easy... but obviously more the consuming than just a few.  It's not rocket science.

What I really like about real estate is that I control all the key decisions.  What I buy, what I sell, who I rent to, what I charge to rent it, etc.  Compare that to buying a stake in Tesla, and Elon decides to tweet about "420" and tanks his stock, or any other corporation that can have accounting fits any given year and your get massive stock movements.  It's just really nice to know that you hold all the cards as to how well your investment performs.  Rentals for us have provided very consistent cash flow and stability.  If stocks have a down year, you may lose 10% (like we have so far this year).  But my rentals just keep chugging along.  It's not like the tenants get to pay 10% less this year... and in fact, their rates just keep going up, so the numbers actually improve over time.

Wish you the best!

Randy

Steven Foster Wilson · Answer

I recommend the major cities in Ohio:

-Columbus, great for appreciation, pp is a bit higher around $220k for multifamily

-Cincinnati, has a mix of cash flow and appreciation, average multifamily around $180k

-Cleveland, has alot of cashflow potential, average multifam around $140k

There are other smaller markets like Dayton, Akron, and Toledo, however there is not alot of economic drivers to those areas.

Looking for cashflow? Look into Cleveland, its got good cashflow potential with appreciation happening as well.

Looking for appreciation come to Columbus, there are still 1% deals, but the more attractive part is the population growth and other economic drivers!

Joe Hammel · Answer

@Raquel Yu

Metro Detroit

(my rental portfolio is here)

Our favorites are 1.2-1.4% deals. They’re the best balance of price/return/location

Purchase: $80k-$130k

Rent: $1200-$1450

ROI: Double Digit

Cash flow: couple hundred/month

Appreciation: Double digit (for past 10 years, will gladly send data)

Location: C, B-  (suburbs and certain markets)

We have over a dozen Fortune 500 companies just in Metro Detroit with huge Healthcare and Auto industries.

The bad reputation comes from OOS investors wanting $20k D market properties.

Educated Investors retire (FIRE) in a few years off these.

Eliott Elias · Answer

1. Put a down payment on two properties in a secondary or tertiary market and have it cash flow

2. Use as a down payment for a flip

Joe Hammel · Answer

@Joshua Stepanov

Buy a $80-$110k property that rents for $1200-$1400/month.

That’s $20k down plus $5-$6k closing costs.

It’s will cash flow $250-$350 a month

It will appreciate at at 3% year (another $3k earned each year)

And about $1500 a year in loan pay down.

Plus you will get to write most of these earnings off and they won’t count as income so you will keep most of the cash flow.

Some day you will wake up and it will be paid off (by your tenants) and it will be worth $200-$250k at that time and you own an asset that’s worth a quarter of a million dollars that all you did was invest $30k.

Now, try to repeat that 10-20 times over the next 10-15 years and you will retire a millionaire.

Sasha Fukuda · Answer

I think this depends on a lot of factors, including luck. If you ask on bigger pockets, of course they'll say real estate. If you ask on bogleheads, of course they'll say index funds. Certainly, real estate is certainly more hands on. It's more like owning a business. And there are risks involved in that. It involves understanding the numbers, understanding the houses themselves/ construction, and understanding how to choose and deal with tenants. If you screw up in any of those three areas, you might find yourself in trouble. However, it also has more upside. You can benefit from equity, cash flow, and paying down the debt.

If i was already rich, i'd be tempted to only invest in index funds. If i was a high wage earner, i'd be tempted to only invest in index funds. Otherwise, i'd probably prefer real estate if possible.

Drew Sygit · Answer

@Joshua Stepanov

Metro Detroit offers many options for meeting the 1% Rule and relatively high ROI.

Follow our "Deep Dive" series we're doing about Metro Detroit cities and City of Detroit Neighborhoods: https://www.biggerpockets.com/...

Jon Kelly · Answer

@Joshua Stepanov Have to go with real estate. That comes from a biased real estate investor so take it for what it's worth :)

Brandon Goldsmith · Answer

I am sure most people on here are going to say to put it into real estate. If you are looking at MF properties, I would suggest looking into the midwest. There are a lot markets in Ohio to choose from. @Joshua Stepanov

Lynn Berg · Answer

@Randall Alan

Hi Randy, great examples. Can I ask what area you invest in?

Best way to invest $30,000?

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