There's no single right way to invest $100,000. Index funds, bonds or cash, REITs, and a rental bought with a loan can all make sense, depending on when you need the money, how much work you'll take on, and how big a swing you can sit through.
This is a side-by-side look for someone who already has a 401(k) and a brokerage account. It's education, not investment advice, so talk to a fiduciary financial advisor and a CPA about your situation. For the return comparison with stocks, see rental property vs. stocks.
The four options side by side
| Index funds | Bonds or cash | REITs | Rental with a loan | |
|---|---|---|---|---|
| Your time | Very little | Very little | Very little | A monthly review, plus decisions on repairs and renewals |
| Main risk | Market declines | Inflation, interest rates, and, for non-Treasury bonds, default | Market declines and interest rates | Price drops magnified by the loan, vacancy, repairs, and one property in one market |
| Liquidity | Sell on any trading day | High for cash, varies for bonds | High if publicly traded, limited if not | Low. Selling takes time and costs money |
| Uses a loan | No | No | Not by you | Yes, 80% of the price in the example below |
Index funds, bonds, and REITs
Index funds
An index fund is a mutual fund or ETF that tracks a market index. The SEC's Investor.gov says tracking an index can lower costs, though not every index fund is cheaper than an actively managed one. It takes almost no time. When the stocks in the index fall, so does the fund. In a brokerage account you generally owe tax on dividends, and on gains when you sell.
Bonds and cash
Treasury bills, insured deposits, and high-quality bonds are the stable end. Bank deposits are FDIC insured up to $250,000 per depositor, per insured bank, for each ownership category. Treasury securities aren't FDIC insured, but they're backed by the U.S. government. Other bonds carry more risk. Investor.gov notes that an issuer can fail to make interest or principal payments, and that you may not always find a buyer when you want to sell.
Returns can trail inflation, and bond prices move when interest rates do. Many people keep money they'll need soon here.
REITs
A REIT owns or finances income-producing real estate. Investor.gov notes that REITs must distribute at least 90% of their taxable income each year. Those dividends generally don't get the lower rate that qualified dividends get, though individuals can generally deduct 20% of qualified REIT dividends. Publicly traded REITs trade like stocks. Non-traded REITs can be hard to sell and have no ready market price.
You own a share of a company and don't choose the properties, the loan, or the manager. More in REITs vs. direct ownership.
A rental property bought with a loan
Here you own the property, with a loan against it, and the rent is meant to cover the payment. When there's no rent, you cover it. It asks more of you than the other three: a monthly look at statements, and decisions when a repair comes up or a lease ends. A property manager handles the day-to-day.
The loan cuts both ways. On the example below, you put $46,000 down on a $230,000 property. A 10% drop in its value is $23,000, half your down payment. A 20% drop is $46,000, all of it, and that's before the cost of selling. The roughly $12,000 spent on closing doesn't come back either way. The loan balance stays the same either way. An index fund or REIT bought without borrowing can't lose more than you put in. A drop only turns into a loss if you sell, but you may not get to choose when.
It's illiquid. You can't sell a slice of a rental to raise cash. Selling the whole thing takes time and costs commissions and closing costs. Many DSCR loans also charge a prepayment penalty if you sell or refinance in the first one to five years. And the plan builder's interest-only loans convert to principal and interest after 10 years, which at an unchanged 6.5% takes the example loan payment from $997 to about $1,372.
The other risks are specific. A vacant month means paying the full payment with no rent coming in. A big repair can take a year of cash flow. And one rental is one property in one market, which is concentrated next to an index fund.
Taxes work in both directions. Rental income is taxable. IRS Publication 527 says residential rental buildings are generally depreciated over 27.5 years, and land isn't, which can offset part of the rental income. It comes back when you sell: the gain is taxable, and the part of it that comes from depreciation you took, or could have taken, is generally taxed at up to 25%. Rental losses are generally passive under IRS rules, which limits when you can use them. Your CPA confirms how it applies to you. More in rental property tax benefits.
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What $100K does as a down payment
Take a real listing: 2107 S Seale Rd in Phenix City, AL, priced at $230,000 with an estimated $1,800 a month in rent.
| Amount | |
|---|---|
| Starting cash | $100,000 |
| Cash to close (includes the $46,000 down payment at 20%) | about -$58,000 |
| Left after closing | about $42,000 |
| Reserves Lineage recommends: six months of the $1,297 payment | $7,782 |
| Left after closing and reserves | about $34,218 |
The total payment is an interest-only loan payment of $997 at 6.5% (not a Lineage quote), plus $226 in taxes and $74 in insurance. The 6.5% rate and 20% down are the site's example terms. Some first-time buyers get them, and some pay a higher rate or put more down, depending on credit, experience, and the lender. Lineage recommends six months of reserves, and your consultant confirms the lender's own minimum. One published matrix asks first-time investors for 12 months.
Lenders generally let reserves sit in a cash or investment account, including a 401(k) or IRA, though some count only part of a retirement balance, for example 70%. So the $7,782 can stay invested, as long as you leave it there.
The remaining $34,218 isn't enough for a second property at about $58,000 to close. It can be a repair cushion, money invested elsewhere, or the start of the next down payment. Lineage's plan builder, for example, shows $65,000 to start plus $25,000 added each year reaching 6 rentals by 2036, with about $527K in projected equity. That model relies on every rental clearing $295 a month with no vacancy allowance, rents and values both rising 3% a year, later rentals costing more, and cash-out refinances, which add debt, helping fund later purchases. It's before selling costs and taxes, and it's not a forecast. Its $65,000 start is also $782 short of the $65,782 Seale Rd takes with reserves, so part of the reserves would sit in an account you already hold. More in how much money you need to buy a rental property.
Illustrative example. Actual returns vary based on market conditions, property performance, and financing terms.
When a rental is the wrong fit
- You'll need the money within a few years. Money for a near-term purchase is usually kept in cash or short-term bonds.
- You can't hold reserves after closing. If the $58,000 to close leaves nothing for six months of payments and a repair cushion, it's too early.
- An empty month would rattle you. On the example, that's $1,297 out of your pocket while the property sits vacant. It'll happen at some point.
General education, not investment, tax, or legal advice, which Lineage doesn't give. Talk to a fiduciary advisor and a CPA about your situation.
See the rental with your own numbers: build my plan, or talk to a consultant.
Frequently asked questions
On the $230,000 example, yes: about $58,000 to close plus $7,782 in reserves, about $65,782 in all. Prices, rates, reserves, and closing costs vary by property, borrower, and lender.
No. A REIT is a share in a company that owns real estate. With a rental, you own the property, choose the loan, make the decisions, and carry the loan's risk.
Often, yes, though some lenders count only part of a retirement balance. Ask your CPA what reaching that money would cost before you need it.