$1 million or $5,000 a month for life

Investor · Shakopee, MN · Member since 2014 · 219 posts · 88 votes

This is a question that's been bubbling around recently.

My thought is on this form, the majority would take the $1,000,000 to buy multiple homes or multi-family complexes in the hopes of doing better. Meanwhile, many of us are on here, trying to build the cash flow and security of having $5,000 cash flow a month.

Which would you choose and what factors or lifestyle choices would need to take place for you to choose the other option?

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Frank Jiang

Investor · San Diego, CA · Member since 2014 · 592 posts · 765 votes

This is a very simple finance math question.

$5000 per month or 60K per year (essentially a perpetuity) is the same as $1,000,000 right now invested at 6%.

If you can beat 6% with other investments (which I imagine quite a few people here could), take the 1M and invest it. If you can't beat 6% or can't be bothered to do the work that would be required to beat 6%, take the annuity. (I would personally take the annuity and become a worthless, noncontributing member of society).

Easy peezy.

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Nick C.
Investor · Tampa, FL · Member since 2011 · 2k+ posts · 3k+ votes
9y
I'd take the million. I believe invested wisely I can make more than $5k/month on it.
2 Reply
Leona N.
Investor · Sask, Sk · Member since 2017 · 85 posts · 25 votes
9y
Yup I'd take the million as well. So many more opportunities.
1 Reply
Lance Balkus
Lincoln, NE · Member since 2017 · 10 posts · 8 votes
9y
I'm not sure I'm following your question. Why would anyone choose the cash flow? With the straight million you can generate a larger return, even on cash flow. The math is the math.
1 Reply
Russell BrazilBusiness Member
Moderator
Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
9y
In a no tax situation Id take the $1 million. In a situation where both are being taxed as self employed earned income, Id take the $5,000 a month. If both were being taxed as passive income, Id take the $1 million.
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Alexander FelicePro Member
Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
9y
Your question has a design flaw. What you're asking is,
1. would you take cash flow from option A
or
1. less cash flow from option B
You don't need opinions, you just need a calculator. The million is better
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Dan D.
OP
Investor · Shakopee, MN · Member since 2014 · 219 posts · 88 votes
9y
My point is that for some investors, growing their portfolio to get $5,000 a month of pure cashflow is their goal.
$5,000 cash flow (if you run 50% expenses) means gross rents of $10,000.
To get rents of $10,000, that would be 10 properties netting $1,000 a month gross rents at an average price of $100,000 each if purchased for cash.
For those hoping to net $5,000 cash flow a month, why not take it without the headache of 10 properties and tenants?
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Dan D.
OP
Investor · Shakopee, MN · Member since 2014 · 219 posts · 88 votes
9y
What if the $5,000 a month was guaranteed to grow with inflation at 3% a year?
Or what amount of monthly cash flow would you need then to take the guaranteed cash flow instead of $1,000,000?
Is it $10,000, $15,000, $30,000?
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Evan Bell
Real Estate Agent · San Diego, CA · Member since 2015 · 293 posts · 109 votes
9y
$1m, easy decision.
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Jesse Schafer
Investor · Harrisburg, PA · Member since 2017 · 10 posts · 2 votes
9y
Even with 5000 a month in cash flow you're still looking at 16 years to hit that 1m mark, where you could just take the million investment it correctly and easily turn it into a much more substantial amount of cash flow. Now at 30k cash flow you're only looking at 3 years to break that M and so in that case you're better off. IMO
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Frank Jiang
Investor · San Diego, CA · Member since 2014 · 592 posts · 765 votes
9y
This is a very simple finance math question.
$5000 per month or 60K per year (essentially a perpetuity) is the same as $1,000,000 right now invested at 6%.
If you can beat 6% with other investments (which I imagine quite a few people here could), take the 1M and invest it. If you can't beat 6% or can't be bothered to do the work that would be required to beat 6%, take the annuity. (I would personally take the annuity and become a worthless, noncontributing member of society).
Easy peezy.
9 Reply
Andrew Johnson
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
9y
Dan D. I think crux of your follow-up is the word "building". Many people here are trying to build that cash-flow. Piece-by-piece, property-by-property, deferring buying a Rolex to accelerating towards a $5K per month goal. So by offering the $1M today you're offering that end-goal outright. Of course they're going to take it! And everyone on BP is going to assert that they could get better than a 6% return. If they didn't think that then they would join a syndication with a preferred return. The only material reason *not* to take the $1M today is for tax reasons. There's a massive difference in marginal ordinary income rates (especially in California) on $1M today vs. $60K per year in perpetuity. Where I am, I could... Keep $545K of the $1M or... Keep $45K of the $60K So do I pay the government 45% or 25%? That said, you'd probably still have people that would choose the (net) $545K because they can get more than an 11% cash-on-cash return. But at least it makes the decision harder...
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Andrew SyriosPro Member
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Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
9y
$1 million now. Even a 1% return on that is $10,000!
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1 Reply
Dan D.
OP
Investor · Shakopee, MN · Member since 2014 · 219 posts · 88 votes
9y
I assumed most would choose the $1,000,000 as a no-brainer.
I'm curious for those who would opt for the $1,000,000, what monthly payment would you need the rest of your life to pass on the $1,000,000?
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Justin Fox
Software Developer · Vidor, TX · Member since 2015 · 922 posts · 639 votes
9y
Is this money a result from deal I worked on? If so, I would definitely prefer a $1,000,000.00 check at closing. Does the $5,000.00 get auto-deposited into my account with absolutely zero past/future effort from me? If so, I would prefer to take someone else's hard-earned 5,000 and spend it on my leisure.
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Ivan BarrattBusiness Member
Investor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes
9y
I'd need 10k/mo (1,000,000 x 12%). I can make 12% on my cash without taking much risk on my apartment acquisitions. Great discussion!
1 Reply
Cody L.
Rental Property Investor · San Diego, CA · Member since 2013 · 3k+ posts · 4k+ votes
9y
$1m With $1m I could buy a 6 cap $4m property. I'd make 6% on just what I put down ($5k/month) + 1.5%*3 on my leverage So I could easily make $7k/month and have a $4m building appreciating at a few % a year while paying down debt. Yeah. That's an easy one man. To take cash vs cashflow I'd want closer to $10k/month
2 Reply
Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
9y
Both the $1M and the $5K per month are out there and available without a lottery ticket. We just have to decide if we want it bad enough.
2 Reply
David J.
Investor · shawnee oklahoma · Member since 2017 · 194 posts · 148 votes
9y
Money now is better. I would take the $1M
1 Reply
David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
9y
How much work and risk is involved in collecting the $5000/mo? Does it grow with the rate of inflation, or stay $5000 in absolute dollars? Is the $5000/mo transferable? Is it tax free? If it is truly zero risk, zero work, tax free, and guaranteed to grow with inflation, then I could likely sell that income stream on the open market fairly easily for much more than $1M, then buy whatever investment or other thing that I like with the proceeds. 10 yr TIPS currently sell for 4.35% on the open market ... $5000/mo inflation adjusted guaranteed forever could probably be sold for north of $1.4M in today's market.
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Thomas S.
Member since 2016 · 13k+ posts · 12k+ votes
9y
$1M cash equates to retirement. No more tenants, no more PMs, no more headaches.
Rental properties are not passive investments.
1 Reply
Anthony Dooley
Investor · Columbus, GA · Member since 2014 · 2k+ posts · 1k+ votes
9y
$5,000 per month is only a 6% cap on the $1M that you passed up. Real estate investing will enable you to get an infinite rate of return if you know what you are doing.
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Joe SplitrockPro Member
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Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
9y
@Dan D.
With $1,000,000 even in a 6% return investment like index funds you could get $5000 a month return with no effort. With compounding interest, it would grow every year. By investing in a business or real estate, you could get an even better return, but with more effort and risk.
At a rate of $5000 per month, it would take almost 17 years to get $1,000,000 and in that same time at 6% annual interest compounded, you would have $2,692,772 with compounding interest if you took the million dollar option.
However, another thing to consider is that the majority of people SHOULD take $5000 per month. The reason is that most people wouldn't invest the money. They would waste it all. As is evidence by the majority of professional athletes and lottery winners losing everything.
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Dan D.
OP
Investor · Shakopee, MN · Member since 2014 · 219 posts · 88 votes
9y
@Joe Splitrock I'm a big fan of index funds, but part of the risk of investing the $1,000,000 in index funds is what if Murphy's Law takes over and the timing of your investment is sour, and the market tanks by 40% the first year after you invested?
You're not guaranteed the return, where with the $5,000 per month you are.
(Part of it depends on whether you need to be using the money from day one, or if you're still able to work / receive other income). If one could keep earning their regular income (and still want to keep working), the $1,000,000 seems like the only option because the additional cashflow probably isn't as needed.
It partially depends on your age and lifestyle choices I would assume.
That's why some people buy annuities. The piece of mind of seeing a check instead of managing money and "risking" things.
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Account Closed
Investor · Denver, CO · Member since 2016 · 736 posts · 582 votes
9y
$5,000 guaranteed per month for sitting on my arse!? Send me the check! A million would be nice but I'd rather take the lazy way out.
1 Reply
Corby GoadeBusiness Member
Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
9y
If you took the 1 Million, you could easily invest that and get $5k and month and STILL have the 1 million in equity, growing over time. No brainer.
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