If you were given one million dollars right now, how would you spend it? Some might decide to buy a sports car, or go on an extended vacation. The more financially savvy may decide to invest their million to see it grow even further.
While that’s not a bad idea, it's easier said than done. Investments, especially one as large as one million dollars, are not simply a box that you put money in and take out more later. A smart investor should understand what they are investing in and why. A poorly thought-out investment may underperform or worse – end up losing you money.
Real estate is a great place to invest your money into. In particular, real estate tends to be pretty expensive so starting with a large sum will help you get your foot in the door much more easily. Once you start real estate investing, it can offer significant benefits over other investments like the stock market, mutual funds, and more. However, even focusing on the specific field of real estate, there are still numerous different avenues to invest your money into.
With that in mind, let's look at the best ways that a hypothetical investor could use one million dollars in the real estate market.
Before you invest
Before you begin looking for ways to invest your money, you should do some thinking (and some research).
First of all, you need to know what options are available to you. If you only had one investment avenue, it may seem like the best option, but you can't know without comparing it to others. In real estate, there are far more options than just buying property and each will have its own pros and cons.
You also need to decide your own financial goals and what exactly you want out of your investment. This is a complex question, so it will be different for every single investor.
Ask yourself: How long do you want to invest? How much risk can you tolerate? What sorts of returns do you want to see from your investment? How much work are you willing to handle to maintain your investments?
Depending on how you answer these questions, different investment avenues may stand out to you. Considering that $1 million is a decent sum to start with, you may even want to consider multiple different investments, each with its own strategy. And, if you are a long-term investor, you may want to change your strategy over time as your needs and risk capacity change.
All in all, this is a complex but crucial step. This sum of money is not something you want to play around with so always do your due diligence. When in doubt, a financial planner or investment advisor can help you identify your goals and cement your investment strategy. Professional financial advice can be invaluable and will be well worth the compensation for their work.
Options for investing a large sum in real estate
The obvious answer: buy a house
The simplest way to answer this question, and perhaps one of the most popular options, is to immediately buy a home. In Canada, the average price of a home is still below $1 million (for now) and even in the smaller number of areas in which average prices have risen beyond that point, you still have many other property types that can go for less such as condominiums. That's assuming you bought the home outright. If you do choose to go that route, you gain some benefits. For one, you don't need to worry about going through the process to get financing, and the need to keep up with payments for the next number of years. The lack of a mortgage can also be a great help if you are interested in doing something like a house flip where financing can be a bit more complicated. In this case, you can simply buy the home and sell it once the flip is complete. The same is true for rentals where you will be able to start generating substantial positive cash flow immediately without having to wait to pay down your mortgage.
That's not to say that you shouldn't choose to get mortgage financing, however. With a maximum of $1 million to spend, you would be able to afford the down payment on all but the most expensive homes in the country. This would leave you with some extra cash to spend, invest in other places, or keep as an emergency fund. It can be a great benefit to an investor to not have all of their money tied up in a single property as this is not a very liquid asset.
You could also consider how spending less now on a more valuable asset could earn you more down the line, like how buying a more desirable rental property may have a higher purchase price in return for higher rents. Ultimately, this will come down to your specific circumstances, but suffice to say that just because you can afford a home outright, doesn't mean you should buy it in full.
Keep in mind that just having one million dollars doesn't automatically get you a mortgage. You will still need to demonstrate adequate income and debt ratios to be approved as well as a healthy credit score to get the best rates.
A smarter option: buy multifamily or multiple properties
Considering that one million dollars is more than enough for a down payment on a home, why not expand your horizon and go for multiple properties or a more expensive multifamily property with multiple units?
Multifamily properties are a great option for investors because they offer some of the best cash flow when it comes to rentals. This will allow you to earn a lot of income from your invested money. Another benefit of having multiple units in a single property, as opposed to many properties in different areas, is that you can hire property managers who will take care of the everyday needs of your property and allow you to collect passive income.
The benefit of buying multiple properties is simply the number of options it offers to you. You could purchase a stake in multiple different cities or different property types and diversify your portfolio that way. You could also experiment with different returns, for example, owning one property as a rental, purchasing another to flip, or buying commercial space to run your own business.
Though you will likely need to pursue financing on these larger purchases and jump through the hoops that this entails, once all is said and done, you will have a much larger portfolio that can allow you to grow even faster down the line.
A passive option: Become a lender
If you like the idea of buying and owning multiple properties but aren't interested in the hassle to get everything set up, you may want to consider being a lender and letting someone else do the work for you.
As a lender, you work with an investor who needs financing and provides the funds so they can pursue their project. Though it can be nerve-racking to give your own money to someone else, as the lender, you are ultimately in control of who you want the money to go to. You can vet your borrower, make sure that they are a trustworthy person and that the investment they plan to pursue is viable. You can also set the terms of the loan. This includes the length so you can decide how soon you get your money back. It can also include what sort of returns you want to see. Some lenders charge interest on their loans and collect a fixed percentage of the value back. Again, you decide exactly what that percentage is.
Another option is to reach a deal based on the equity of the property in question, meaning that as the investment property grows in value, you own a portion of the equity.
These two options have their downsides and benefits. Overall, a fixed percentage is a safer bet and may payout sooner while an equity share can be a huge benefit when you expect the investment to grow a lot down the line.
Being a lender provides you with a lot of control over your money and how it is used while also taking most of the hard work off of your hands. However, you will still have to put in some effort, especially in vetting your borrower as you put yourself at risk by lending to someone who does not have your fullest confidence.
The easiest way: Invest in a real estate fund
Being a lender provides you with a lot of options, but it also comes with a lot of risk and effort. Another similar option is to invest money in a real estate fund. The difference is that, while your lending relies on the success of a single real estate investor, a real estate fund allows you to collect passive returns reliably due to the qualified team who manage large real estate portfolios.
Since real estate funds tend to be larger and established, they usually have an investment portfolio of multiple different real estate assets and asset types. This, combined with their leadership, makes them an easy and lower-risk way to invest your money in real estate. It also can provide you with exposure to new areas that you may not be able to get into on your own such as large commercial properties or new developments.
Other passive options such as real estate investment trusts and crowdfunding are also good choices, however, real estate funds are the easiest way to invest a large sum all at once.
If you are looking for a place to invest a large amount of money, real estate investments are one of the best options available. Due to the potential for high growth, stability, and many different investment options, real estate is unsurprisingly a very popular investment choice. Though one million dollars is not too shabby on its own, with some careful planning and execution, you can easily see that amount grow greatly through real estate investing.