It’s happened to all of us: You’re scrolling through TikTok one day and stumble upon a 25-year-old real estate millionaire who says, “You’ve gotta invest in real estate to build wealth. That’s how I’m worth more than $5 trillion dollars.” Hyperbole aside, it can get your gears turning because you just got that $100K bonus and you want to know how to invest it.

Truth is that real estate is a phenomenal tool to build wealth, but, as with many other things in life, it’s no silver bullet to wealth. Let’s talk about passive real estate investment and some of its corresponding tax implications. 

What’s the first step in real estate investment?

Simple: cash. Liquid cash.

Say you just came into a $100k after-tax bonus and think real estate could be a good fit for at least some of it. The next part is figuring out how much you want to use to invest and how much of it you want to keep to flex on your friends. Let’s assume here that no flexing shall occur and all of it will go to the investment. (You can always flex later.) 

How is real estate investment different from stock investment?

Real estate and stock investments are like your sibling and your high school crush: completely unrelated (sorry, that got weird).

Stocks are volatile investments and tied to what is known as the random walk. Over the long term, stocks tend to appreciate, but if you happen to be a person who needed to retire in 2020, you were kinda SOL. Stocks pay dividends and appreciate in value … but you can’t ask for more dividends because your boat’s hull needs a new coat of paint.

Real estate is a steadier asset that also appreciates in value, though at a slower pace. Just liek in the stock market, there’s always a chance of hitting it big: Some of my clients over the years have purchased high-rise buildings in New York for $1,000,000 that are now worth $800,000,000+ (must be nice). Real estate pays with rental income and appreciates in value but you can increase rent every year. 

4 ways to invest in real estate

Purchase a $500,000 investment property to rent out 

Depending on where you live in the country, finding an investment property to rent out could be very easy or super challenging. 

Say you find a property for around $500,000, and you can put down your $100,000 and finance the remaining $400,000.

From a tax perspective, this is also a win because the depreciation on the property will reduce taxable income. The 27 ½ -year depreciation deduction for residential property translates to roughly $14,500 a year (reduced by some land allocation, which is not depreciable).

Purchase a $500,000 duplex and live in one unit

Maybe you want to live rent- and mortgage-free in your own home. If you choose to deploy your money into purchasing a duplex, you can live in one unit while renting the other. Even if the renter just barely covers your carrying costs —  property taxes, mortgage, utilities, and insurance — for both units, you are winning by building equity for free.

With this example, you would also get a depreciation write-off — but only on half of the value of the property since that is the only “business portion” of the duplex. The other one would be personal for you. 

Invest in a syndicate

Syndicates are methods by which you can pool money together with other investors and purchase a larger property that is managed by someone else. This is the pure definition of passive income because you just invest your $100k and receive your share of the rental income, after expenses, that belongs to you. 

In many structured deals, the syndicator (aka the deal creator) has a plan to pull the cash back out of the property via refinance and give the investors their money back while continuing to generate income. In this example, you would just receive a K-1 from the syndicator partnership and report that on your personal return. There is no depreciation deduction at the personal level — only at the entity level, which then flows to your personal return via the K-1.

Co-invest with a friend who also got a big bonus

Getting into business with a friend can be tricky, but it’s certainly your mess to consider. To share an investment property with a friend, a formal partnership agreement needs to be formed. However, pooling resources will give you access to purchase larger properties with more earning potential, like multi-family properties.

The takeaway

Whether you drop the $100k on a used Nissan GTR or on a $500k passive investment is your choice. As Uncle Ben said, “With great power comes great responsibility,” so choose wisely.

This article is not meant to be taken as tax advice but as a general thought-provoking topic meant to encourage more conversation. Please consult your tax advisor before taking on any of these strategies.