3 Questions to Consider Before Investing a Million Dollars
1- What Are My Financial Goals?
You should always create an investment plan based on your personal financial goals. If you don’t have a clear direction or goal in mind, how do you ever expect to accomplish it? Ask yourself what it is your are looking to accomplish financially. Your goal could be to save for retirement, set up a college fund for your kids or generate monthly cash flow through investments.
Setting clearly defined goals will help you decide the best ways to invest a million dollars.
2- What is My Timeline?
Once you’ve set a clear goal, the next step is to establish a timeline to achieve that goal. Your timeframe is how long you plan on holding an investment. If your goal is to invest for retirement, you’ll want to look at long-term options, depending on your age. If there’s a chance you’ll need access to your invested money within the next five years, a short-term strategy may work best.
3- What is My Tolerance to Risk?
If you can’t afford to lose your investment, your risk tolerance would be considered on the low end. If you would mostly unaffected financially by losing your investment, your risk tolerance would be considered very high.
Now let’s take a look at the best options for investing a million dollars.
How To Invest a Million Dollars?
1- Private Lending
The first way to invest one million dollars is through private lending. For example, you could borrow the funds and then turn around and lend them to someone else for more. That’s exactly what banks do. They borrow money from the Fed, mark it up about 3% and lend it to individual borrowers like us.
If you borrowed one million dollars for 5 years at 6% interest and turned around to lend it to someone else at 9%, you’d earn $30,000 per year – and over $150,000 during that 5 year period!
The first way to invest one million dollars is through private lending. For example, you could borrow the funds and then turn around and lend them to someone else for more. That’s exactly what banks do. They borrow money from the Fed, mark it up about 3% and lend it to individual borrowers like us.
2 – Rental Income from Real Estate
Another way to invest one million dollars is to purchase real estate investment properties. If you invest in the right real estate markets, it’s possible to yield as much as a 9% return from the cash flow annually.
Let’s say you bought 10 properties averaging $100,000 each, and rent them for $1,000/month. Your net returns would be similar to the private lender’s, except you would have to account for closing costs of about $3,000 on each property. This would lower your profit to $120,000 after 5 years.
However, IF those homes appreciated in value by 3% annually, you’d gain an additional $150,000 in equity. Between the home equity and the cash flow, you could sell eight of the homes to pay back your loan plus interest, and keep two of the homes for yourself. You’d own them free and clear, plus have some left-over cash in your pocket.
Even better, if those homes appreciated in value by 4%, you could sell seven of the homes to pay back your loan and keep the remaining three homes free and clear. And if by chance they appreciated by 6% (which is not out of the question in areas experiencing high job growth), you’d get to keep four of the homes free and clear! Not a bad return on investment, right?
3 – Investing in Business
You could also take that million dollars and invest it in a great business idea. If all goes well, you could double, triple, or even quadruple your investment.
However, this is the riskiest venture out of the three since statistically, 50% of new business fail during the first 5 years. If you invest in a business and it fails, what kind of collateral would you have, if any?
You can see why it’s tough to get a business loan even if you have great credit and a fantastic business idea. If the business fails, you’re stuck with a million dollar debt and no real collateral with which to pay it back.
That’s why you need to be VERY CAREFUL when friends or family come to you asking for your financial support in their business idea. If there’s no collateral, you need to treat your investment like venture capital – assuming there’s a 50% chance you’ll get your money back. And that type of risk should really be left to professional venture capitalists who can afford to take those kinds of losses.
Banks much prefer to lend on property. All they really want to see is that the property is worth more than the loan, that you can afford the monthly loan payments, and that you haven’t taken on more debt than you can handle.
If you have good credit because you pay your bills on time, you will get the best interest rate available. Even if you don’t have a great credit history, you can still get a loan! FHA will lend to borrowers who have had foreclosures just two years prior! Why? Because they still don’t see a real risk. If you don’t pay, they take the property as collateral.
4- Investing in the Stock Market
Putting your money in the stock market has the potential to generate decent returns, especially if you invest wisely. However, the stock market can experience both large and small fluctuations in value. While there is an opportunity see big returns, it may be just as likely to see big losses too. If you decide to invest in the stock market, make sure you spread your money across different industries to diversify your portfolio and minimize risk as much as possible.
5- Real Estate Investment Trusts (REITs)
REITs have been growing in popularity for awhile now. Real estate trusts allow people to invest in real estate, without actually buying a rental property. Instead, investors may buy into bigger real estate projects and own equity in the project as a whole. This is a great way to get into real estate investing, without having to fork over a ton of cash.
Investor Tip: REITs can be a great option for those just starting out in real estate investing. BUT, make sure you’re aware that you’ll have very little control over where the money is going, so it’s imperative to do your due diligence on the REIT that will be managing your investments.
6- Crowdfunding Real Estate
Another relatively new real estate investing option is crowdfunding. The idea is that individuals pool their money together to participate in larger real estate projects. The pooled money is used to fund the project and returns may be a set dollar amount, like a loan, or given a cut when the project is completed and producing income. Crowdfunding offers investors to buy into big real estate deals, without putting up a huge amount of capital.
7- Bonds
One of the safer ways to invest a million dollars is in U.S. Government Bonds, because they’re backed by the government. With bonds, the investor will receive income via interest. Because they are insured by the government, returns are usually pretty limited, yielding around 3 percent. Investing a small amount of money in bonds is great for safe investing and diversifying your portfolio–but understand that the returns are going to be significantly lower than real estate, for instance.
8- ETFs
Exchange Traded Funds allow investors to purchase a number of different stocks, instead of stocks tied to just one company. ETFs provide portfolio diversification and help minimize risk. If you invest in a variety of sectors, you’ll be less impacted when one market drops. You can take advantage of growing markets in one sector and offset losses in other sectors.
There is also the option to invest in REIT ETFs. So instead of investing most or all of your money into one property, investors may buy stock in multiple real estate projects via ETFs.
Note of Caution: Use the Power of Leverage Wisely
There are many ways to make money with money. When you borrow money, you can receive far greater returns than you could achieve using your own capital. That’s why financing is often referred to as “leverage”.
Please use caution and don’t take the use of OPM (other people’s money) lightly! If things go wrong, you could find yourself over leveraged – saddled with debt you can’t pay back.
Never jump into any investment that you don’t understand. Never invest your money with someone who has not succeeded in that particular investment strategy over and over again.
While private lending and rental property can be highly lucrative, they can also become money-pits. For example, if you invest in high-crime zones, in decaying cities lacking job growth, or in property that has deferred maintenance issues.
It is imperative that you get educated on any investment you wish to pursue, or get mentored by someone who has repeatedly done what you are trying to do – successfully.
What To Do Next? How To Start Investing that million dollars…
At RealWealth we believe the best investments are those that help you youcreate real wealth, whichdefine as having the money and the freedom you need to live life on YOUR terms.
In our opinion, one of the very best ways to do this is by investing in real estate that produces positive monthly cash flow. To spot the best markets, we look for three factors: job growth, population growth and affordability. When we find an exceptional market, we then find a team of highly experienced experts in the local area. These experts help us find properties, renovate them to like-new condition, place qualified tenants, and offer on-going property management.
Long story short: if you’re looking to invest one million dollars, there are a variety of options available to you. If you think investing in real estate is your best option, we can help by connecting you with Property Teams around the country that sell single-family and multi-family homes with property management in place. Click the orange Join Now button in the menu above to learn more.
