Newbie with amazing opportunity to invest - need advice!

1031 Exchanges
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Newbie with amazing opportunity to invest - need advice!

Lauren N.
Richmond, VA 路 Member since 2016 路 5 posts 路 2 votes

Hi all! I've been diligently reading as much content and BP books as I could consume over the past few months. I've been personally interested in getting involved in REI for a while and have been getting educated. I recently discovered that my Mom will be receiving about half (parents are divorcing) the proceeds from an investment property sale this July or August. The land is in Portland OR and is under contract with a developer for several million.

We've spoken with an attorney about apportioning to the land to be part residential and part investment, as there's a primary residence, and about 8 acres of timber land. I don't know all the details of this, but I believe this is the high level plan for how to manage the tax strategy. They'll do a Section 121 on the residential, and then my Mom wants to execute a 1031 on her half of the investment property. We're working with an estate planning attorney, a 1031 attorney and a real estate CPA, so we're letting them figure this out for us. 

I'm helping her put together a strategy for how to re-invest roughly a $1million or so in capital gains on this land. She has no REI experience, neither do I, but we both recognize that this is a great opportunity to help set her up for cash flow and security in retirement (she's 60). She has "some" interest in managing the properties, but most likely we'll want to use property management company.

Her goal is to generate low maintenance monthly cash flow of at least $4,000 to live on in retirement. She owns her own house outright ($250k). She'll also get about $300k in cash from the sale. We're open to any kind of real estate assets at this point. My Mom is kind of risk averse but is willing to let me help her grow her portfolio over time so she can leave something for her kids. I want to put together a short term plan that can flow into a long term plan. My question for the community is this.....if you were in my shoes helping your Mom invest for retirement what would you do? Thanks in advance! 

Lauren 

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Charlie Fitzgerald
Lender 路 Las Vegas, NV 路 Member since 2015 路 2k+ posts 路 1k+ votes
10y

I'll be the voice of the contrarian here just for a moment and add an opposing viewpoint for you to consider. Your mother is 60 years old and is looking for a "risk averse" manner in which to generate a minimum of a 4.8% annual return on an investment of $1,000,000. Not having the full benefit of sitting down with her personally and doing a complete Financial Needs Analysis for her, I will presume that her other assets you mention her are the total of her life estate at this point and I will further presume that she is debt free. Although you indicate that she would like to be involved in some capacity in the management of a real estate portfolio, you also indicate that the likelihood is that you will engage the services of a property management company. You share that neither you, nor your mother have any experience in with REI, and that you are being guided and advised by 3 professionals that do (which is good) although these three professionals make their livings charging fees for people that are engaged in REI activities and they know you have $1,000,000. The purpose of the investment is to give your mother retirement income ($4,000 per month) and "leave something for her kids".

With the exception of the avoidance of the capital gains taxes, and the possible allure of the future appreciation of a $1,000,000 real estate portfolio, and the potential to perhaps earn a return in the  % you seek, I personally do not feel that moving this money into real estate holdings is the highest and best use for the money, given the short term goal and long term goals of your mother and primarily due to the risk aversion mindset that your mother has.  Coupled with the fact that she has a much shorter time horizon at 60 than she would have at 30, 40 or 50, I would lean more towards getting this money into the hands of a fee based investment advisor and getting it deployed into exchange traded funds (or other suitable principal protected, low fee instruments) that will (if history is any indication) return her much more overall than the real estate portfolio will (if history is any indication), in a completely principal protected environment.  Taxes!  Yes, she is going to pay taxes.  But the far greater returns she will likely realize not investing into real estate will replace that cost much quicker than the anticipated returns on a real estate portfolio will replace the fees associated with that asset category, and the utilization of a property management firm to manage the portfolio will come along with an average annual and ongoing cost of 10% per year...every year, where as the taxes are a one time hit.

I'm advising you to consider this alternative and to engage the rest of the sibling group in a conversation with your mother as to the overall wishes, desires and individual and collective thoughts on the matter at the same time.  It would not take much of a market correction in real estate (especially commercial real estate) to decimate a $1,000,000 nest egg AND the portfolio it was used to acquire.  I would be more inclined to make sure that the money coming to your mother now was invested in a manner that protected the total of that sum for the remainder of her life, generating whatever means of annual income it is able to generate in a principal protected, relatively low fee environment, and at the time in the future when those funds become legacy assets for you and your siblings, that's when you and your siblings should do with it what you want to do, given your individual circumstances, financial needs, dreams and desires at that time.  Presently, the highest and best use for that money in my opinion, is not to try an do both. 

Hope this helps.

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  • Jonathan Choyce
    Flipper/Rehabber 路 Hawthorne, CA 路 Member since 2015 路 18 posts 路 4 votes
    10y

    I am a newbie myself, I have met lots of Investors and have had lots of Coaching, Always do your own due Diligence... 

    I've been coached well, but this is not about me... 

    Check out http://www.returnonrentals.com

    I learned about them when I attended the Investors Summit in las Vegas in Sept of 2015, by way of  (Success Path Education) and no I am not recommending them to you it was just apart of what I went thru to get to where I am today. I am also a member of (Advanced Real Estate Education) I'm saying both of them so you can just take a look at where this information is coming from and how I have access to my own accounts with each of them. If you're interest in my contacts name at Return on Rentals just ask, this is information you can look into That's all.. Read what the site is all about.... this information is for you..

    This is one place I'd look if it were for my mom... Just Sharing

    0Reply
  • Omar Merced
    Real Estate Investor 路 Las Vegas, NV 路 Member since 2016 路 399 posts 路 260 votes
    10y

    Hi Lauren. I must urge a lot of due diligence on your part to make sure you get the best return. I personally love multifamily. With that amount you could leverage an apartment community that would easily surpass the returns you are looking for. Good luck.

    1Reply
  • Cassie Sherie
    Seattle, WA 路 Member since 2016 路 81 posts 路 43 votes
    10y

    @Lauren N. for cash flow/NOI for your mom and beyond I definitely vote for commercial apartment complexes, 100+ units. The benefits are plentiful when you get up in those unit numbers, things overall get cheaper believe it or not, and obviously NOI increases considerably. You have more than enough cash coming your way to purchase several properties and if you play your cards right leverage those properties, buy more, and keep repeating the process. Find the right property and one complex alone could easily net $100K+ per year. All while the mortgage, taxes, etc. are being paid by the tenants. And the property will also appreciate over time for more returns. Also if you buy properties north of $1M it's more likely you will qualify for a non recourse loan. Always make sure the numbers work, the numbers don't lie, don't get emotional or attached to the property... or overpay...move on to the next if it doesn't make sense. Create a thorough and detailed checklist of everything to go over in the due diligence process. Anyway I can go on and on ...but you get the point! 馃槉 You have a great opportunity here, don't blow it! LOL!

    oh and beware of those "guru" B.S. courses...don't waste your time and money... find a legit and credible investor who's successful in MultiFamily, has done this before and is doing this now in real time and learn from them....put together a great TRUSTWORTHY team that performs, make sure you get all the details and ask questions... stay on top of things...this is your business and don't be afraid to fire someone if need be. 

    Also, just because someone on BP has "pro" on their picture does not mean they are a pro... anyone can be a BP "pro" for $290 a year. 

    2Reply
  • Don KonipolBusiness Member
    Investor 路 The Woodlands TX / Avon, CT 路 Member since 2009 路 6k+ posts 路 10k+ votes
    10y

    Find an individual with the CRE (Counselors of Real Estate) designation, interview him, and if their is mutual interest engage his sevices to guide you and your mother. CRE designees do not earn commissions by selling property, they are compensated on a flat fee basis and therefore unbiased in their advice on both the strategic level and the tactical level.

    Private Mortgage Financing Partners, LLC
    WebsiteView Page
    1Reply
  • Tim Puffer
    Lansing, MI 路 Member since 2015 路 301 posts 路 149 votes
    10y

    @Lauren N.

    I second what @Cassie Sherie said - Be wary of the BS guru courses. You can gain so much more by reaching out to people on Bigger Pockets. 

    I think as well that a larger apartment complex could be a great route to go. Reach out to some of the seasoned vets on here - Michael Blank possibly. I've read items on his website and he has great knowledge on the larger apartment buildings.

    1Reply
  • David Alvarado
    Investor 路 Silver Spring, MD 路 Member since 2016 路 92 posts 路 42 votes
    10y

    I'll piggy back on what everyone is saying and say that multifamily can be a great way to grow wealth and have steady income but beware that once you enter into the realm of larger properties you are going to want to build out a team you can trust, as I'm sure your mom won't want to handle multiple units turning, potential evictions, capex scheduling, etc. Typically for a professional team in the underwriting I've done at work, one person in the office and one person out on the property can handle 100 units.

    With the $1M to invest there is nice potential to acquire a property in the $3M - $4M dollar range, which could get you 60-80 units assuming around $50K/unit acquisition. I'd identify more on where you are looking to buy, what type of property (garden vs mid-high rise, etc) and potentially link with a broker in the market you want to work in. From there you'll have to scrub the numbers provided and determine what acquisition basis makes sense and follow the procedure to do all your due diligence before going under contract. Due diligence on the front end is imperative with these larger properties as you'll want to identify near term and long term capital improvement costs and what sort of reserves you'll want to have set aside among identifying other potential issues that might arise. Feel free to reach out if you have any specific questions or need a second set of eyes on a potential deal. Good luck!

    0Reply
  • Charlie Fitzgerald
    Lender 路 Las Vegas, NV 路 Member since 2015 路 2k+ posts 路 1k+ votes
    10y

    I'll be the voice of the contrarian here just for a moment and add an opposing viewpoint for you to consider. Your mother is 60 years old and is looking for a "risk averse" manner in which to generate a minimum of a 4.8% annual return on an investment of $1,000,000. Not having the full benefit of sitting down with her personally and doing a complete Financial Needs Analysis for her, I will presume that her other assets you mention her are the total of her life estate at this point and I will further presume that she is debt free. Although you indicate that she would like to be involved in some capacity in the management of a real estate portfolio, you also indicate that the likelihood is that you will engage the services of a property management company. You share that neither you, nor your mother have any experience in with REI, and that you are being guided and advised by 3 professionals that do (which is good) although these three professionals make their livings charging fees for people that are engaged in REI activities and they know you have $1,000,000. The purpose of the investment is to give your mother retirement income ($4,000 per month) and "leave something for her kids".

    With the exception of the avoidance of the capital gains taxes, and the possible allure of the future appreciation of a $1,000,000 real estate portfolio, and the potential to perhaps earn a return in the  % you seek, I personally do not feel that moving this money into real estate holdings is the highest and best use for the money, given the short term goal and long term goals of your mother and primarily due to the risk aversion mindset that your mother has.  Coupled with the fact that she has a much shorter time horizon at 60 than she would have at 30, 40 or 50, I would lean more towards getting this money into the hands of a fee based investment advisor and getting it deployed into exchange traded funds (or other suitable principal protected, low fee instruments) that will (if history is any indication) return her much more overall than the real estate portfolio will (if history is any indication), in a completely principal protected environment.  Taxes!  Yes, she is going to pay taxes.  But the far greater returns she will likely realize not investing into real estate will replace that cost much quicker than the anticipated returns on a real estate portfolio will replace the fees associated with that asset category, and the utilization of a property management firm to manage the portfolio will come along with an average annual and ongoing cost of 10% per year...every year, where as the taxes are a one time hit.

    I'm advising you to consider this alternative and to engage the rest of the sibling group in a conversation with your mother as to the overall wishes, desires and individual and collective thoughts on the matter at the same time.  It would not take much of a market correction in real estate (especially commercial real estate) to decimate a $1,000,000 nest egg AND the portfolio it was used to acquire.  I would be more inclined to make sure that the money coming to your mother now was invested in a manner that protected the total of that sum for the remainder of her life, generating whatever means of annual income it is able to generate in a principal protected, relatively low fee environment, and at the time in the future when those funds become legacy assets for you and your siblings, that's when you and your siblings should do with it what you want to do, given your individual circumstances, financial needs, dreams and desires at that time.  Presently, the highest and best use for that money in my opinion, is not to try an do both. 

    Hope this helps.

    6Reply
  • Account Closed
    Rental Property Investor 路 Portland, OR 路 Member since 2015 路 338 posts 路 332 votes
    10y

    Wow, @Charlie Fitzgerald, what well-thought-out and incredibly helpful point of view!  

    If your mom really really wants to invest in RE, @Lauren N., she could put aside a small percentage of her cash into a small (1-4 unit) property to get a feel for what REI is like and whether she wants to dive deeper--but still keep the majority in a vehicle like the one Charlie described. (And if cash flow is what your mom is after, then Portland probably isn't your best market.)

    2Reply
  • Charlie Fitzgerald
    Lender 路 Las Vegas, NV 路 Member since 2015 路 2k+ posts 路 1k+ votes
    10y

    @Account Closed  Hi there Dani!  Thanks for the kind words.  :)  How have you been?

    0Reply
  • Cassie Sherie
    Seattle, WA 路 Member since 2016 路 81 posts 路 43 votes
    10y

    @Lauren N. keep in mind at your moms age, being a landlord can be more of pain verses being beneficial. With the smaller properties it won't make sense to hire a property management co. cause the returns are not high enough. When you get into buying solid larger properties the GOI will be more than enough to cover the expenses of hiring a professional property management company to take care of running the complex. This doesn't mean you don't monitor your properties, this does mean you need to be an asset manager moving forward. 

    0Reply
  • Lauren N.
    OP
    Richmond, VA 路 Member since 2016 路 5 posts 路 2 votes
    10y

    Thanks so much to everyone who has responded so far. This is giving us some really good things to think about. @Account Closed - she's planning to meet with a financial advisor as well to get an idea of her options in that arena, so thanks for reiterating that as an alternate possibility. 

    What about buying a commercial office or retail property with a long term lease in place. Would that be a lower maintenance possibility? I know literally nothing about commercial real estate so that scares me a little, but I don't want to rule out potentially good options just because they're a little intimidating. 

    0Reply
  • Cassie Sherie
    Seattle, WA 路 Member since 2016 路 81 posts 路 43 votes
    10y

    @Lauren N. once you get a grasp and build a solid knowledge base about multifamily properties go in with confidence and explain to your mom in a way she would understand that it is not as risky as she thinks to have a mortgage... find a profitable property online and show it to her, and show her the numbers....explain what each term means and why it makes sense. Being scared won't do you any favors, find the answers and you no longer will be scared when you have the information. Find a niche and become a master at it...don't be flailing all over the place. Once you become great at something then yeah move into other areas of investing if you want to. Also, explain to your mom that at times not having a mortgage is more risky in real estate investing because you won't be able to leverage the money you have and create more assets, you will be relying solely on that one or two properties. "don't work for money, make money work for you" 

    the words financial advisor makes me cringe...make sure this person is 10000% legit. that they can perform, comes highly recommended, and is credible...get a second opinion if necessary...and if you at any point feel like something is not right... run don't walk!  

    0Reply
  • Account Closed
    Rental Property Investor 路 Portland, OR 路 Member since 2015 路 338 posts 路 332 votes
    10y

    @Lauren N. I'm no expert in commercial office/retail, BUT if I were a newbie and/or didn't know much about REI, those asset classes would scare me. We've all seen the empty office buildings and vacant storefronts during economic downturns. But everyone needs a place to live, so there's always a market for residential (unless you buy in a bad location).

    Another thing I wonder about is increased telecommuting and outsourcing and how that will affect the demand for office space in the future.  

    Bend is relatively expensive as well.  If your mom isn't planning on managing the property, then why is she fixated on Oregon?  Most cash flow experts would tell you that generally speaking, your best markets are in the Midwest and Mid South.  I personally invest locally, but that's because I'm managing my [only] 3 units right now, and I'm also in it for the very long term in an appreciating market.  If I only cared about cash flow and didn't want to play an active role in property management and/or were 20 years older, I'd hire a property manager and/or buy a turnkey property in the Midwest.  

    Property managers exist for a reason, and it's because they provide a valuable service that investors of all property types (including SFRs) don't want to do. While management at a 100 unit building may cost you 6%, for a SFR it might cost 8% (at least, that's the going rate in Portland). That's not a huge difference, and generally a good property manager knows how to increase income at least as much as they will cost in commissions.

    If you haven't already, I suggest listening to the BP podcast (including old episodes) and reading some books and checking out this free guide.  Educating yourselves will give you and your mother a better sense of your risk tolerance, long and short term goals, and how to get there.  That way, you can refine your strategy to fit those parameters.  Without a basic education and some clear goals, it will be difficult for you to integrate the advice people give you on BP, as it will also be difficult for BP to provide you the best advice for your specific goals.

    2Reply
  • Tommy Townsend
    Professional 路 Fort Mill, SC 路 Member since 2013 路 12 posts 路 6 votes
    10y

    Hi @lauren nelson.  Im from richmond, always nice to see someone from home.  You said the property is in oregon but i didnt see where mom lives.  If she is not in oregon, i also would not limit myself to a small market because you will be limiting your choices and will definitely have the potential to limit your returns.  Also I believe @Dani Z has the right idea, especially for someone starting out - invest locally.  Its difficult enough to be involved in a projext down the street, you dont nees to add travel to it while you are learning.

    I also agree with @Charlie Fitzgerald about looking at a range of investments.  Even if your mom ends up putting part in real estate, I would diversify over several investments.  Good luck!

    0Reply
  • Lauren N.
    OP
    Richmond, VA 路 Member since 2016 路 5 posts 路 2 votes
    10y

    @Account Closed pointed out is the limited returns potential. Oregon is just so expensive now. I'm trying to balance my mom's comfort level and risk tolerance with getting her a good enough deal that she can afford to pay someone to manage it. I'm not sure how to find that sweet spot.  

    0Reply
  • Jeff Wallenius
    Specialist 路 Indianapolis, IN 路 Member since 2014 路 670 posts 路 352 votes
    10y

    @Lauren N. I would look at a bit different strategy. Your mom could partner with a experienced real estate expert, I can put you in contact with several, to invest some of the funds into real estate investments across the country. These investments are quick turn deals (1-6 month holds) and this money becomes a passive income stream for your mom, with returns easily in the 10% range with the safety of working with someone with decades of experience and a proven track record. This is not hard money lending as all deals are cash, and the assets are held as collateral. The money is available and not tied up for years like most syndicates, and gives you time to focus on using the other funds to build a real estate portfolio of long term holds while this money is working for you. I know of a very successful investor in the Portland area that does all I mentioned above, with his investors reaping a very nice return, while keeping the risk to a minimum.

    As far as investing in SFR as long term holds, I agree with all the individuals that the Oregon market is hot, and the high prices make it difficult to cash flow. The outlying areas of Portland are a bit easier to find the deals that will give you a 10-12% return if your looking for a turnkey product with the typical 20-25% down for non-owner. I happen to have a couple coming on the market in the next couple weeks that would hit the 12% cash on cash return for investors, and I've kept some myself for this strategy alone. The problem with buying in Richmond and then moving back to Oregon is the long distance management. You can spend a little time searching all the forums and come across tons of posts with this topic alone. A management company will not care about your property as much as you will, and will take 8-10% off the top. You can find cash flow properties in Oregon!

    I know both these paragraphs are vague, however, I and am currently investing with both of these strategies and can provide more details or references if need be. I also echo the sentiment to stay away from the Gurus, you can find the perfect scenario for your families investment goals without paying money to get the information.

    Cheers!

    0Reply
  • David Thompson
    Investor 路 Austin, TX 路 Member since 2013 路 933 posts 路 1k+ votes
    10y

    Agree w/several folks on this thread that unless you and your mom want to be active and invest time and energy into learning a ton that just purchasing an apt w/o a lot of knowledge is dangerous.  I certainly am not advocating that all your funds should be going into real estate but certainly think there are some opportunities for good value plays in syndicated deals where your mom could participate passively and get good solid 8-10 % cash on cash returns w/some upside on re-positioning / forced appreciation at time of sale.  PM me for some ideas to share w/your trusted inner circle.

    0Reply
  • Lauren N.
    OP
    Richmond, VA 路 Member since 2016 路 5 posts 路 2 votes
    10y

    @Jeff Wallenius thanks so much for offering to help us make contacts. I may take you up on that. Quick question about the strategy you're referring to....can that be done with a 1031 and only a 1031? @David Thompson same question. 

    Again thank you so much to everyone jumping in on this. This has been incredibly helpful.

    0Reply
  • Jeff Wallenius
    Specialist 路 Indianapolis, IN 路 Member since 2014 路 670 posts 路 352 votes
    10y

    I assume your asking if you can roll profits from a sale into a passive real estate partnership. I am not a 1031 exchange expert, but the rules are for property to be exchanged for "like kind" property. I don't know what your mom is selling here in Oregon but a 1031 strategy most likely will not work in this case. Another thing to remember is a 1031 is tax deferred and not tax free. At some point Uncle Sam will get his take, unless you defer out long enough that the heirs to the property take over in an estate scenario......etc. I would look at all the alternatives, run all the numbers and see what the best case scenario may be. Sometimes paying the tax opens up avenues to create more income streams or provide better returns. Sometimes that tax will chew up so much capital that there is no better way. I don't know the specifics of your scenario. 1031 exchanges are just one strategy, make sure you know all the options. I'm happy to help in anyway.

    Cheers!

    0Reply
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges 路 St. Petersburg, FL 路 Member since 2013 路 9k+ posts 路 9k+ votes
    10y

    @Lauren N., The 1031 can be used to move between classes of real estate including some types of syndicated passive opportunities.  The two most common are Delaware Statutory Trusts and Tenant In Common projects.  There are folks on the site here who specialize in them.  @Mark Creason, @Leslie Pappas? 

    Like kind does not refer to the type of real estate in a 1031.  It refers to the use of the property.  So what your mother is selling is irrelevant as a type.  It only must be real estate that has been held for productive use.  She can exchange that into raw land, commercial, multifamily, a fractional tic interest, etc etc.  The 1031 also does not limit her to a one to one sale to purchase and it doesn't matter where the real estate is.

    The 1031 Investor5140 Reviews
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  • David Thompson
    Investor 路 Austin, TX 路 Member since 2013 路 933 posts 路 1k+ votes
    10y

    Lauren unfortunately our current offering is not setup to accept 1031 exchanges.  That is possible under certain structures I'm told and we are reviewing options of doing that in the future.  It's an important question to ask up front w/any route you are pursuing and you are smart to ask it.

    0Reply
  • Oleg Mikhailov
    Investor 路 Nashua, NH 路 Member since 2016 路 11 posts 路 11 votes
    10y

    Lauren, take a look at investing in NNN properties. These are very low hustle investments, require no management whatsoever. Nothing but pure cash flow. Easy to finance with a good down payment.

    Usually these are properties leased to national chains or large franchises. Unfortunately cap rates for these properties have come down a lot over the past few years, and finding really good deals is hard. But an average deal right now can get you 6-6.5% return, and for the purposes of your mother's cash flow, it would be sufficient. Most important, she'll have a peace of mind.

    0Reply
  • Nola Akilo
    San Jose, CA 路 Member since 2017 路 14 posts 路 3 votes
    9y
    Lauren Nelson I have a question for you regarding your situation, please PM me if you have the chance, thanks!
    0Reply
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