Large Sum of Money; Real Estate Trends; Sit-out or Jump-in?

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Hey there - first discussion post here.  Thanks in advance for any feedback.  Recently came into a large chunk of money from family estate -- approx. 800K liquid and ready for investing. Only my wife knows of these funds; none of my friends or colleagues are aware; I'm hesitant to even post this to a forum. (This may not be a lot of money for the seasoned investors, but it is for me).  I have a primary residence with 350K equity. I've determined my investing will be in buy-and-hold rentals,with >50% down.  My goal is to essentially build an annuity and slowly piece together a portfolio with stable cashflow.  

I've listened to all the BP podcasts and read nearly all the recommended RE books, so please don't recommend a book or podcast. I'm wondering about the collective sentiment on market trends, housing appreciation, and strategy.

If you were in my position, and wanted to invest solely in rentals, would you sit-out the market for a few years or jump-in?  Would you trickle in (buy a few rentals) or would you buy a large mutli-family?  Again, thanks for the feedback.   

It is going to depend on your goals. IMHO I would not get a bunch of SFHs and create a job for myself. Personally, I would spread the funds around to several different passive investments such as crowd funding, loan to HML, syndications, Private lending, performing and non performing notes, etc. There are many threads that can provide more information on these and other areas of investment.

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Other things you might want to think about are:

  1. Are you going to manage them yourself?
  2. Are you only looking for properties in your locale or other markets?
  3. What type of return do you want to get?
  4. Why put more than 50% down versus leveraging your funds?

Market timing is a tough thing as you have to be correct twice, when to get out (or stay out) and when to get in.  I think there is a huge benefit to at least getting started as it will make the second deal that much easier.

@Brandon S. , are you looking to invest in the Seattle area, collar cities, or further out?  The market here in Washington state is exceptionally hot, however I am also banking on the fact that there are opportunities out there.  Your windfall is a lot of money, and my only advice is to take it slowly.  Find a good deal and learn from it.  I would be very hesitant to go and buy 3-4 houses in a short period of time and then find out you don't even like being a landlord.  You may even want to consider partnering with someone on a deal in order to learn how it works and provide you with a bit more comfort while doing the deal.  I myself am trying to do just that, so I plan to take my own medicine on this subject.  I am planning to buy my first property and then learn everything I can through that process.  The deal will be on the smaller side so as to limit the amount of "learning expenses" that I will experience.

At the end of the day, $800K in the bank is not a bad thing...only deploy any of it when you are ready to do so.  Very best of luck to you.

You may also want to consider talking to a financial advisor to get a picture of your personal finances to see where you are with a rainy day fund, how much debt you have and how you will fund things like retirement . Your risk tolerance is also important. A financial advisor can help w that. You want to find one that will not try to make you put all your money in to securities but who will give you a roadmap.

Hey Brandon,

My wife and I also previously came across a sum of that size. We live in Los Angeles and recently decided to enter into real estate. Mind you, however, it is extremely competitive and expensive in our area; nearly all properties on the market have multiple offers and require cash, along with a quick close. 

The off-market deals are needles in a hay stack around here especially as a new entrant still networking connections. But, we wanted in -- particularly in multi-family rentals. I believe many areas of Seattle are just as hot right now. With the help of some rather brilliant team members to due some very much needed due diligence, a plan was developed to locate and purchase a single-family residence zoned and large enough to develop multi-family units. 

In an extremely cliff's noted version, we purchased the property all cash and have an incredible developer whom is demolishing the single-family and erecting a 5-unit for us. Valuation of the property will be an estimated $2M+ upon the re-fi in which we will pull our initial capital out and payoff the construction loan and developer.  This will allow us to get some long-term cash flow going and have additional equity to play with. The plan is to then rinse and repeat. 

I am a big fan of diversification and with such a large chunk of starting capital, you could easily split it up into many buckets and deploy them as you see fit.

$100K- REIT investment: will generate pretty stable dividends, you'll need to pay taxes on the gains though, and appreciation will be very limited.

$100K- out of state turnkey purchase(s)

$100K- Bridge loan funding. There are many investors willing to pay very high fees for quick bridge loans to close out deals or handle down payments

$100K- SFR purchase

$200K- loan to a hard money lender (Veristone has a good reputation and they're right in our backyard)

$200K- small or large multifamily complex purchase

Also, as @Pauline Charlton suggested, you should have a conversation with yourself, and your wife about risk tolerance. Maybe you want to keep 75% in low-risk investments, but with the final $200K, you can shoot for higher gains.

TAKE YOUR TIME.

Money is hard to accumulate but easy to lose.

Diversifying for the sake of diversifying doesn't make sense. That's what financial planners tell people making investments that know little to nothing about what they are investing in.

The premise is they think stick a little bit of something in everything and they can't all fail at once etc.

You can buy all of it wrong and lose your shirt just as fast diversifying. People that are experts in their field stick to what they know over,and over, and over again but they are functioning at a higher level than most investors. They tend to make money no matter what the cycle is in that asset class.

Maybe you buy something all cash with a value add component to it. That way at least if real estate isn't your thing you might at least make some upside profit for your troubles.

SFR houses are really at the top in many markets. I wouldn't be saddling myself with inflated debt on these houses close to the peak to generate low cash flow.

Don't let anyone hard sell you or pressure you to ACT FAST with anything. Run very fast from those people. 

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I would answer this question from the other direction.  How much money do you need/want?  800k liquid plus what you have saved in equity and other assets can be enough to retire on depending on where you live and what kind of living standard you have.  What annual income are you shooting for post retirement?

Once you know how much you need on an annual basis, you divide that by what you have and that rate of return lets you know what sort of investments you should be looking at.

Also, dollar cost averaging is a real thing in real estate too.  This is where in the stock market, instead of trying to time the ups and downs of the market, you buy a little bit at a time over a long period of time, allowing you to buy some things cheap and some things at peaks.  This is a far superior strategy than speculatively trying to guess where market tops and bottoms are.

In the same way, you should start with smaller deals to get a greater understanding of the business and build organically.  At no point in time, even if I thought this were a down market (HAHA), would I recommend you "jump in" and invest everything all at once as quickly as possible.

Originally posted by @Alex Chin :

$100K- REIT investment: will generate pretty stable dividends, you'll need to pay taxes on the gains though, and appreciation will be very limited.

$100K- Bridge loan funding. There are many investors willing to pay very high fees for quick bridge loans to close out deals or handle down payments

$200K- loan to a hard money lender (Veristone has a good reputation and they're right in our backyard)

Alex can you put some numbers to the above as far as expected returns would be?  I have some cash that needs to go someplace and am considering options also and am curious what the expected returns could be on those options you listed.

Thanks

The people I know whether the stock market or real estate constantly buy. The difference is that when markets are down they buy as much as possible. When the market rises again they stick to their preset amount.

This way you have a steady plan but capitalize on the down turns.

4 to 5 years ago someone could buy a multifamily at a 9 or 10 cap and do nothing to it and lets rent growth and cap rate compression create the yield.

These days it's all about buying value add to create the high cap for equity after stabilizing or doing new development where you cap rate to cost is high once built out. 

This where a lot of asset classes are at right now in the cycle. 

Stick with properties very close to your home.  They are far easier to manage or oversee that way.  Also, be very patient in making purchases.  Cash is powerful, and learning a market takes time.  I've bought and sold more than 200 properties, and I can tell you that patience makes a lot of difference.  While I expect a long-term increase in real estate prices in good markets around the country, making ten well-considered offers to get one purchase will probably save you 10% on the purchase price.  That's worth the patience.  Most buyers won't do that, but the long-term principle that "you make your money when you buy" is real.  Watch the other conventional wisdom, too--buy in neighborhoods which are on the rise, not on the decline.  Buy a lower-priced property for the street, not a higher-end property.  Stay in a market which will draw renter demand in good markets and bad.  And set your rents a bit below market in order to attract high-quality tenants--it's way worth it!

Hi @Brandon S. , if you are an accredited investor, you can buy into institutional grade $50-125M projects with as little as $100,000 and diversify. Professionals with decades of experience and very impressive track records do all the heavy lifting for you. You get potential cash flow, tax shelter and appreciation. Loans are non-recourse. This is the world of Delaware Statutory Trusts. I wrote a book on this that was released on Amazon in January called Cashing In Tax Free. If this interests you, please connect with me here on BP let me know if I can help. Leslie

What a RE market will do tomorrow or even within the next years is unknown and unkowable within any reasonable range of confidence. If your investment strategy depends on short term market trends, then you are not ready to invest IMO. I stress test all of my investments to the extreme. Basically, ask yourself if the market absolutely tanked the day after I closed escrow on this deal, would I still be able to make money? Would I stay out of financial trouble? If the answer to either of those questions is no, then it is not a sound investment. The trick is finding, structuring, and executing deals such that the answers are yes, and volumes could be written on that topic, but this is the underlying philosophy. 

A short tip is on having multiple exit strategies ... if you have more ways to make money and fewer ways to lose money you tilt the odds in your favor. Heads you win big, tails you lose small, but the house always wins, and you're the house. If you can't stack the deck in your favor in this way, then you're not ready to play the game ... find somebody who can and watch carefully how they shuffle.

@Joel Owens is correct. Diversification simply for diversification's sake is no real strategy, but should be undertaken as part of a well thought out plan. Appetite for risk, anticipated income needs, desired income...all these will play their part.

Like others have said, be patient, take your time and do some serious research on the various avenues. If you really feel that real estate investing is the route you want to go, then take a few months and really explore the different avenues and determine what you and your wife really value. Is it higher income to retire sooner? Do you want to minimize your personal time used to monitor your investments? Are you highly risk tolerant and interested in greater returns? Do you simply want to replace your W-2 income in order to quit your job?

Please don't take the numbers that I spat out as a road map of any kind, nor should I ever be mistaken for a financial or real estate expert. I do like to diversify my personal investments, it works with the plan I have thought out and put some serious work into over the years.

@Mike F. - I am not experienced enough in all these field to tell you what you should expect as a return rate. The question is also a little tricky to answer as for many of these vehicles, you may need to look at cash-on-cash, total return, and probably half a dozen other factors I'm not remembering at the moment. However, below is a few quick blurbs on a few of them:

Investing in a REIT as a general consumer has the benefit of a fairly stable dividend, plus VERY low time investment. I have focused on medical REITs for the long-term appreciation play, as well as consistent 5-8% dividend yields in my ROTH IRA and 401(k), since I won't be touching that money for another 30yrs. Note that these yields don't take into account fees or taxes.

Turnkey rentals can have returns as wide as the sky. Generally speaking though, the guys who have been doing turnkeys for awhile with success seem to get their cash-on-cash ROI into the 10-20% range. Take that with a grain of salt, as I don't have any turnkeys of my own.

Bridge loans for flippers are very risky, but yield potential returns that can dwarf the others. I've seen the ROI for such a loan as high as 40% for a 6 month loan. On the downside, you're probably in 3rd or 4th-lien position, so good luck getting your money back if things go south.

SFR purchases and multifamily investing have both been gone over in detail by other, much more knowledgeable investors. Generally though, most seem to feel that you should be getting at least 8% on your money and beating market index returns, plus you have greater control and thus greater potential for returns through your own hard work.