What to do with $3 million?

7 Replies

Quick question: If you had $3 million to invest in real estate, what you would do?

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Back Story:

So I've been in the residential buy and hold market for several years, mainly focused on duplexes.  We've started working on growing buy purchasing a few mixed use resdiential/commercial 4-plexes.  Our long term goal is to 1031 exchange our duplexes and keep moving up in size to apartment complexes and commercial spaces.

Recently a friend came across some (very) good fortune and won the lottery.  He approach us about investing with us.  He has several million that he is looking to invest.  He wants his money to work for him, and doesn't want to be involved in the actual business.

As I have not done much in the larger complex and commercial space, I'm just looking for some general thoughts/guidance on how people would go about investing this money.  The guy has the money in CDs right now and is in retirement, so he is just looking for a modest return so he can live off the interest.

 Thanks in advance.

Tom,

I have been originating loans on a lot of multi-tenant retail properties lately.  I have been seeing 8+% cap rates for A- and B+ type properties.  With a 10/30 financing package, these investors are seeing a 10% plus cash on cash return.  Where does your friend want to invest?  These properties have been in Texas.  What kind of return is he looking for?  Is he looking to put all the money in one property?  I have personally met 4 lottery winners, and I think all four went broke.  Sounds like your friend has the right idea to invest it into a vehicle that will provide him a future return.

Mark

@Tom Sylvester  Your friend's a lucky guy!

I think that the instinct to put the money into one or more larger properties is a good one.  The issue here is the banks.  He is going to be limited in the amount of loans he can take out on commercial properties by his net worth.  In other words, if his net worth is $3mm because of the lottery proceeds, that is the outer limit of a mortgage that a bank will let him take on.  In addition, they will require about 10% of his net worth to be liquid.

So, he should plan to keep $300,000 in some liquid investment, be it CDs, stocks, bonds, etc.

He should then find a series of properties to buy where the mortgage will be no more than $2.7mm.  The $2.7mm is not the total amount of debt he will be allowed to take on, but he will find it hard to get a mortgage on any given property for more than that amount, given his net worth.

A conservative strategy would be to buy a series of properties for about $3mm each, taking on debt of only about 70% LTV.

He should be sure that the properties he invests in are professionally managed, and he definitely needs to have an asset manager like you watching over the property manager.

Those are my two cents.

Jonathan

Originally posted by @Tom Sylvester:

Quick question: If you had $3 million to invest in real estate, what you would do?

--

Back Story:

So I've been in the residential buy and hold market for several years, mainly focused on duplexes.  We've started working on growing buy purchasing a few mixed use resdiential/commercial 4-plexes.  Our long term goal is to 1031 exchange our duplexes and keep moving up in size to apartment complexes and commercial spaces.

Recently a friend came across some (very) good fortune and won the lottery.  He approach us about investing with us.  He has several million that he is looking to invest.  He wants his money to work for him, and doesn't want to be involved in the actual business.

As I have not done much in the larger complex and commercial space, I'm just looking for some general thoughts/guidance on how people would go about investing this money.  The guy has the money in CDs right now and is in retirement, so he is just looking for a modest return so he can live off the interest.

 Thanks in advance.

You don't necessarily need to buy a big property. You could set up a partnership with him to place the money in a variety of smaller properties and split the equity. This is still a security though so you'll need to figure that whole matter out. But you'd need to do that either way. 

 @Jonathan Twombly:

Typically, a commercial lender will be looking for net worth equal to the loan value for the property and will want typically reserves equal to 10% of the value of the loan.  I have seen loans were the net worth was less than the loan value.  The reserve requirement I see, is typically on a deal basis.  If the lottery winner wanted to buy a 4 million property, he could go to 75% or 3 million on the loan, which would equal his net worth.  With 1 million down, he would still have 2 million in reserves.  If he bought another 4 million dollar property, he could do a 3 million dollar loan, with 1 million down and still have 1 million in equity, since it would be a completely new deal.

Mark

Tom did he win a lump sum or is he getting payments each year??

If he is getting payments then that can count as income each year coming in on top of what he has already. 

All good advice. However, I don't think you need to buy a series of properties, just one good one. I wouldn't be looking for a core asset. I'd be looking for opportunistic or value add. Your friend can not only make 10-15% on his money, but can significantly increase his net worth through appreciation. There are still many good deals out there, and still many bank owned properties. If the building is cash flowing and the DSCR is high enough, a bank will lend far more than his net worth if the LTV isn't pushing their upper limit. Additionally, if a property is bank owned, they may hold the paper. When dealing with medium to large commercial properties, there is so much opportunity to make money through buying right, it would be a shame just to buy an 8 cap and sit with it.

If he doesn't want to be involved in the business, I would probably suggest that he find a REIT that invests in residential property. If you can earn a steady 5-6% return each year on $3M, that's $150K each year. I love residential real estate, so a REIT that owns apartments would be a good start. 

I'm no fan of REIT's because you have no control. But it's a simple way to deploy a lot of money, and it's all in one location making it easier to manage. 

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