Best use of large amount of cash

107 Replies

Hi David. Thanks for saying this out aloud. That had been my impression from doing analysis, but I had not yet seen someone else say that. For the next few years at least, maybe a decade, the bay area is probably where I will stay. My work is in the Bay Area, and even in the era of COVID, face to face can make a difference to some people. I will connect, let's discuss more.

Mark 

@Mark Seery  Newbie to newbie: take my opinion with a grain of salt.  There are folks on this forum that are much more experienced and have doing great in the Bay Area for years, but they have all figured out a niche that works for them.  Like you said doing the straight forward analysis will usually yield numbers that aren't appealing as a standalone rental.

@Mark Seery

My best advice is to buy the 90 Fay intention journal on BP, use the calculator to evaluate one property every day, and run through 2-3 scenarios for each property: cash purchase, large down payment, say 30-40%, and 20-25% with a house hack strategy.

The calculator is decently flexible so you can start to get some good info. Then do a couple BRRR calculations, do some AirBNB calculations, some fix and flip calculations and listen to one podcast a day and catch up on all of 2021 BP podcasts.

You will have more than a few ideas and then you can buy your second 90 day intention journal and focus on your goal that you refined through your first 90 days.

Quote from a recent podcast: people over estimate what they can get done in a year and under estimate what they can accomplish in five years.

You’ve got time - be patient and focus on learning and evaluating.

We are in a similar situation, albeit our kids just left the house and we sold to downsize. Going to local higher end apartment in The Woodlands for a while. Market in Texas is hot right now although not as expensive as other areas, yet. I am looking at syndicators to buy into a few MF projects/deals with 120+ units in varying metros with good rent outlooks. I look for COC and value plays for 4-6 year run out on full return. LUINC is a good system to look into if you are in it for the long haul. We currently have about 850 units in passive deals and a few sfr, one office building. Watch your expenses if the funds are part of active income allocation..

Congratulations on your windfall! I've seen others say this, but first you need a place to live.  If you are young and single, I would suggest house hacking.  I wish I would have done this when I was in my 20s, but I didn't get into real estate until late 30s.  

If you don't think house hacking is for you, then (after you've found a place for you to live) I would do what @Joe Villeneuve suggested.  In fact, I did do that a couple of years ago. And, thanks to the crazy appreciation we've seen in the last year, my investments have almost double in equity!

Originally posted by @Mark Seery :

If you had $600K in cash and nowhere to live, what would you do with the cash?

Most likely buy a househack or slow live-in flip. Househacks don't have to be bachelor lifestyle in a plex.  2 concepts any homeowner can understand and do well. 

Do you have to stay in the Bay area?  

Either way I'd slow down and learn before investing OOS  or out of area.  Lots to know.  Good luck with your new chapter. Exciting!

From your comments it sounds like you have no prior real estate investing experience, your share of the profits are actually $300K and that you plan to stay in the Bay Area for several more years at least.  Residential real estate nationally has just experienced a 20-25% price increase in the last year and supply is still very limited.  Mortgage rates have increased, although they are still near historic lows.  So, not a great time to buy real estate, let alone investment property anywhere.   In the Bay Area specifically, you need very high equity to make a property cash flow at all.  Most of your gain will be from appreciation.  That said, you need a place to live.  IF you can find a property that works for a house hack, and $300K is enough for a down payment, at least you could reduce your cost of living and ride the appreciation while you live in the property.   

Originally posted by @Joe A. :

Congratulations on your windfall! I've seen others say this, but first you need a place to live.  If you are young and single, I would suggest house hacking.  I wish I would have done this when I was in my 20s, but I didn't get into real estate until late 30s.  

If you don't think house hacking is for you, then (after you've found a place for you to live) I would do what @Joe Villeneuve suggested.  In fact, I did do that a couple of years ago. And, thanks to the crazy appreciation we've seen in the last year, my investments have almost double in equity!

 Must have something to do with your first name?

Not to muddy the waters, but the answer on what to do with the $600,000 is subjective to each experience, geography, etc etc. 

To keep things simple, what do you want to do with your life (i.e. travel, not work again, etc)? How much money do you need to make to live? My advise would be set a timeframe for yourself to gain knowledge (i.e. 2-6 months) and then re-evaluate what you want to do; if you don't know about something but want to/ see value in it, then invest the time. Surround yourself with a great team whatever route you go and make time for the relationships(mentor(s), accountant, lawyer, contractors, etc). There are many variables here (sounds like you may be working, not sure on family, etc) but I think many know where I'm going.  There are great answers here, such as going for cash flow (putting money in the bank after all operating expenses, debt service, and reserves) or equity (having lesser debt on a property compared to what it's worth), or return on value (money into a property / appreciation and future sale) but different investors strive for different goals and those are all relative to whose goals they are.  

Lastly, to those that say $600,000 cash isn't enough and you're too late- tell that to the thousands and likely millions of people that would like to be in your shoes. That's more money than many people will ever see in their lifetimes! It's not fair for any one person on here to judge if that's enough or not enough for you personally.

So maybe this wasn't so simple, ha! But you seem to be on the right track already - asking questions as we all don't know what we don't know! 

Anyone giving you advice here without asking your risk tolerance preferences is not giving good advice.

Let me ask you this. Are you handy? If so, purchasing an all-cash fixer upper and doing work yourself is moderately low risk but can yield incredibly high returns relative to risk. If it is all cosmetic without any foundation issues, you are unlikely to go wrong here.

Are you a gambler? You can buy properties that are turn-key in less-than-desirable areas and generate decent yields and have the properties fully managed. Roofstock has a sizable supply of those kinds of properties but I have never bought anything from them so I cannot give an honest review.

Are you patient? You can buy a rental with a decently sized downpayment to learn the ropes for a lower COC return but witha higher downpayment you can withstand vacancies without going underwater and have room to learn from your mistakes.

My first rental property was an all-cash deal and was purchased for less than $200K. I was in for a little bit over $200K after repairs, but the ability to have room to mess up is very valuable. Struggling to fill a unit and learning the best ways to do it was very helpful for learning. If I was in the deal with a low down payment. I would have been in the red from 2 months of vacancy as you absolutely cannot afford that most of the time without a mortgage.

What if you were to put the $600K into a high-yield dividend stock account and then use that stock account as collateral to be able to draw equity from. While you don't have a property, you can earn some decent returns and then when you find something you like you can pull from the stock equity line and buy as if you were paying cash.

Dude, Take a BREATH

Basis is what the property cost you.

Capital gains is what the government taxes

Talk to your tax pro:

--They will help you calculate the basis. It goes up and down with depreciation, improvements, and losses.

--They will suggest how much to SAVE for taxes you will owe on April 15, 2022

Okay, resume normal breathing...

If you are new to business and investing, SLOW YOUR ROLL. Find a mentor. Find a lawyer and CPA to work with. Get good at deal analysis before anything else. There are a LOT of ways that you can go and a lot of good advice in this thread. The problem is that you don't know what you don't know, and the only way to learn is to do, or work alongside someone who has been at this awhile. There are many things to consider here, and opportunity will always be there for those who put the work in. 

Originally posted by @Mark Seery :

Hello. Newbie...

I have $600,000 in cash. Just sold my primary residence.

Am i better off investing in one property and having a high % of equity or

investing in multiple properties and having a lower % of equity in each?

OR

If you had $600K in cash and nowhere to live, what would you do with the cash?

I live in San Jose CA, but not limited to investing there.

TIA

Do you have to pay taxes on the cash, considering your basis? If you want to invest in RE, cool (I do it!). But, you may just want to throw this in a mutual fund and forget about it, given that you haven't invested before. But man - $600k is a good amount to get started in whatever you do!

It is all about your goals and your risk tolerance.  I would be purchasing as may properties with the least leverage to build my portfolio quickly.  You can let the tenant pay the mortgage down, you can also put your monthly cash flow into paying them off quicker.  If you just want one or two properties then go for the higher equity.

Some great advice here, especially in understanding your risk tolerance and your ability to execute on a deal. 

Seems you need to consider the following factors:

1: Where do you want to live? I gather you want to stay in SD but for how long?
2: Have you decided you want to be a landlord? I gather “yes” but then the question is “how big”?
3: Timeline. You have the cash and want to do something with it. But is that an opportunity or something accelerating your decision process?

It may be helpful for you to separate out the three issues.

For example, you could decide to rent in SD (gives you a place to live, allows flexibility of moving in the future, doesn’t tie up your capital), put the money in bonds or something else with low volatility, don’t sweat the low return it’s an opportunity cost, and start researching property investing out of state. This strategy takes all the pressure off and you need breathing space to properly execute on this. Also, I’m guessing you just went through a life event, so even more important to give yourself some space to decide. Real estate is “get rich slowly”, be patient (with yourself!) and methodical, that’s the core of my advise. Good luck to you!

It really depends on what you're looking for. Activity level, your risk tolerance, timeline, etc..

Personally, I'd educate myself on syndications and spread the $600k across 12 different assets in growing metros that are operated by an experienced team that have been in the business for multiple market cycles. You will likely be close 6-8% yearly cash return and around a 15% IRR across them and have little to no involvement besides conducting due diligence on the operator and the deal on the front end.

Originally posted by @Jonathan Pavkov :
Originally posted by @Mark Seery:

Do you have to pay taxes on the cash

There is the possibility that I will face some capital gains tax depending on whether the IRS accepts my argument about my cost basis. But I am assuming it will not be significant.

Mark

Originally posted by @Jim Kittridge :

It really depends on what you're looking for. Activity level, your risk tolerance, timeline, etc..

Personally, I'd educate myself on syndications 

Thanks Jim, this does appear to be an appealing option. I will be definitely looking at it. If you have any syndications you recommend, I would love to hear about them!

@Mark Seery many things would determine that answer. For me it would be my age I would rather have 3 totally paid for units and live off the income. If I was 30 instead of 70 I would probably want more units and carry a 60-70% mortgage. I have gone thru a few real estate bubbles and have seen people make a lot and loose a lot. If I were 30 and know what I know now I would still want to play a safe hand and gradually add to my holding. If you go to bed every night worrying about your mortgages because the government says no to evictions or the rent market crashes then you are going to cash out too soon I would suggest go slowly, nothing wrong with cash in the bank waiting for that good deal to pop up.

Originally posted by @Kevin McGuire :


...you could decide to rent...and start researching property investing out of state...give yourself some space to decide. 

Thanks Kevin, I appreciate the thoughts. This might be a good option indeed. A similar option might be to buy a small place with a small DP, and sit on the rest until the universe reveals the path forward. That said, if there are syndication options that provide return and liquidity, that might be worth looking at as well. 

Originally posted by @Fred Cannon :

...If you go to bed every night worrying about your mortgages...

Thanks Fred, I have received this advice from close friends as well, so will give it some thought. I think the spreadsheet for risk is different than a spreadsheet for return. I am working on both, in an abstract sense.

Originally posted by @Andrea Lane :

I would be purchasing as may properties with the least leverage to build my portfolio quickly.  You can let the tenant pay the mortgage down

Thanks Andrea. It appears for me that if I cannot find many opportunities in CA that actually result in the tenant paying the mortgage down I will need to educate myself on out of state investing. Maybe I will get lucky on the CA front. We'll see.

Mark