New York City, NY · Member since 2011 · 1 post · 0 votes
Hello
A buddy of mine with little income has inherited $2 million.
what would be some good moves in terms of investing it all in real estate?
Do you think it would be a good idea or even possible use the money as a %25 down payment on a loan to finance a $8 million or so income producing property investment?
What would you do?
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Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
14y
Chris' option sounds like a great plan to me. The key factor here is how much knowledge does your friend have regarding RE? If little to none, it would be foolish to get into becoming a landlord without fully understanding that business.
It also makes a difference if he wants/needs to be passive or active in his investments. If passive, I would start with the ETF investemnts, borrow from that at a low rate (5% or less) then learn all he can about investing in trust deeds (notes) and yield at least 10% (netting 5% from money borrowed).
Flipper/Rehabber · Anaheim, CA · Member since 2010 · 188 posts · 118 votes
14y
Personally, I would invest a majority of it in inversely correlated ETF's with a brokers that allows your to borrow at a low rate against your stock. I would then borrow 75% against my stock and invest it in distressed, high cash flow properties. Works for me :mrgreen:
He could use the money as a down payment, but he would have to show significant income to get that high of a loan.
Investor · Rancho Cucamonga, CA · Member since 2008 · 1k+ posts · 684 votes
14y
I think buying an 8 million property is a big mistake. Your friend would have no reserves left and it sounds like he has no experience. Things could go very bad.
What skill sets does he have? Where does he live? Does he have a job he wants to keep?
I would probably do some lending and pick an area to start buying rental properties. If everything went well I would invest more/all of my money in those.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
14y
Chris' option sounds like a great plan to me. The key factor here is how much knowledge does your friend have regarding RE? If little to none, it would be foolish to get into becoming a landlord without fully understanding that business.
It also makes a difference if he wants/needs to be passive or active in his investments. If passive, I would start with the ETF investemnts, borrow from that at a low rate (5% or less) then learn all he can about investing in trust deeds (notes) and yield at least 10% (netting 5% from money borrowed).
Fresno, CA · Member since 2009 · 116 posts · 85 votes
14y
If he knows nothing of real estate but wants to invest in it, he should put ALL the money in some sort of savings or money market that generates a yield, and take the time to learn as much as he can in real estate.
If he tries to invest without proper knowledge, he will probably get a much lower return than what is possible. Yeah, 5% of $2 Million is $100,000 a year for doing nothing, but when it's 5% vs. 20% or even 30%, the difference is several HUNDRED THOUSAND dollars in missed profits.
The key to a great ROI is leverage.
Example: Say he takes only $1,000,000 and invests it into lower-end SFR rentals with a net return of 25% (which is actually kind of low for low income res.). That amounts to $250,000 a year in net profits. Let's assume he can get either Hard Money or better yet, Private Money loans for 50% of what he paid. So $500,000 at 12% interest only is $60,000 a year. He takes the borrowed $500k and reinvests it into more low income SFRs yielding 25%. That's an additional $125,000 a year. Minus the I/O payments, that is a total $315,000, or 31.5% ROI off of his initial $1,000,000 investment. That's an additional $65,000 a year off the same amount originally invested.
Once he's very familiar and savvy with real estate, he can invest the remaining $1,000,000 and use the profits to keep buying more and more properties.
Well, that's what I would do! (except the learning part) ;)
Cincinnati · Member since 2011 · 77 posts · 16 votes
14y
First off, is the $2 million gross or net? I think with that amount, he'll have to pay some taxes, so if it's gross he won't get the whole $2 million.
Second, I'd encourage him to figure out what he wants. It wouldn't be that hard to put together a stock portfolio that returns 8%. Re-invest 4% to keep up with inflation, and he would still get $80,000/year for the rest of his life without touching the $2 million. Since you say he has "little income", I imagine he may be happy with that and not have the hassles of real estate.
But since you asked about real estate in particular, I wouldn't do the $8 mil loan, at least not in the beginning. Instead I would set aside enough to live on for a couple of years, and then partner up with an experienced invester. Lot of people (even some on this board) would be glad to have him as the money man while they supply the expertise. In a few years when he's a lot more knowledgable about real estate, then he could branch out on his own - or sit back, rake in the money, and continue to let others do the work.
Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes
14y
I'd by 10 to 15 solid 3 bed 2 bath properties cash with 1 million. Then I would pay a property manager to handle the properties but still keep some oversight.
With the other million I would invest it.
The real estate investment should generate easily around 6000 to 9000 per month after expenses depending on your deals (estimating 1200/month rent average)
The other million should probably generate around 30 to 40K per year after adjusting for inflation.
So in total I'd be bringing in about 100 to 150K combined.
Then I'd worry about what I want to do with my annual income. Maybe do some small flips here and there because I enjoy carpentry. Otherwise just enjoy life, travel, read, hang out at Star Buck's, do volunteer work, ride motorcycles, weld.
I like the full investment idea where you don't buy property, but I'd need something to keep life interesting and have a sense of purpose.
Flipper/Rehabber · Anaheim, CA · Member since 2010 · 188 posts · 118 votes
14y
Unfortunately the majority of people who come into money tend to lose most of it in a few years. Perhaps it would be more honest to come to this realization and instead enjoy an extended weekend in Vegas burning the money on loose women, high stakes poker and your mind altering substance of choice.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
14y
Please stay on topic. Please start a new topic if you want to discuss Chris strategy.
I actually agree with Chris' strategy of go have a good time. If your friend is considering getting into a business where he has no experience the odds of doing well are low. There are lots of sharks out there that are all too willing to "help" your friend. Even if he avoids those, there is often a learning curve with a new business. Its easy to make mistakes that cost you money while you're learning.
Advertising your money is a sure way to attract sharks. The mere fact your friend has told you about the cash is bad. That you've posted it publicly is even worse. There are lots of folks out there with "the best deal ever" that aren't deals at all.
Your friend should use the money for something he understands. That could be stocks, real estate, or whatever, but it should be something he already knows. If he wants to move into a business he doesn't know, he should start small. If that's rental properties and he's never been a landlord, he should start out buying a house or two and cut his teeth. If he really just wants to get the money invested, and he truly knowns nothing at all about investing, just put it into bank CDs. Even then he needs to spread it around so he's always under the FDIC limit in any one bank. But that way the money's safe while he's learning. Find some area and learn it thoroughly then start moving the money it. It may seem like he's "losing money" by only getting 1-2% from CDs, but the money is safe. Its much easier to have some real losses if he starts putting money into something he does not THOROUGHLY understand.
Real Estate Investor · NJ · Member since 2011 · 4 posts · 6 votes
14y
Go and buy some rental distressed rental properties for cents on the dollar, rehab them then refinance them and pull his money back out and still cash flow. Then hire a property mgr & sit on the beach. [solicitation removed]
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
14y
NOTE: People, you need to read the terms of service which inlcudes the forum rules. This is so typical when someone posts they have money and out comes the solicitations - it makes you look real bad here.
@ David - IRA accounts do not have borrowing provisions but 401k's do. Now back on topic.
I agree with Jon, people asking on a public forum what to do with $2M is just begging for trouble. Your friend may likely be better off hiring a licensed investment manager, particularly if he knows nothing about what he wants to invest in.
Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
14y
Originally posted by Archie Knuckles:
Land development and/or self storage...
Sure, this or any RE investment strategy could be recommended, the key factor here is the investor's knowledge and experience with a specific RE investment and the point all are trying to make is that no matter which startegy that is chosen, one must first understand what they are investing in and how to properly and profitably perform the task.
Residential Real Estate Agent · Costa Mesa, CA · Member since 2008 · 1k+ posts · 380 votes
14y
Whatever he does, it should be with someone he trusts, and it should be diversified if he does not have a thorough understanding, as Jon points out. It shouldn't be through someone you meet on the internet.
As for what I would do personally... I think Chris knows because we had this conversation a little over a week ago, but I would likely apply a similar strategy (perhaps without the leverage). Without a significant income, I'd be a little nervous having to cover debt service (even if it was at a low interest rate) with capital I'm supposed to have as reserve or for investment.
The trick, however, isn't the strategy that is chosen. The trick is the execution. It seems like many investors with large piles of cash (read Wedgewood, Griffin, PGP, etc) are buying at narrower margins these days because they constantly have to place capital. Since investment capital expecting a certain % return can't spend much time being idle (right, Bryan Hancock???), the execution suffers to a degree. Since this is a new venture, it may be wise (as Jon points out) to spend some time getting educated on a number of different strategies, and then choosing one that makes the most sense and can be executed with optimal efficiency and results.
Commercial Landlord · VA · Member since 2008 · 12 posts · 4 votes
14y
OMG, skip the stock market at all costs, unless he likes to gamble and rely on others to determine his future.
Take serious courses in commercial real estate, then pick an asset class with the best current track record in a great market (NOT Las Vegas, MI, etc.) and plop down the 20% down payment on a mobile home property. Those give you 1) the highest return on your investment of any other commercial asset class, 2) the most control over expenses, and 3) the easiest management of anything (how hard is it to manage dirt? Not hard! Key=buy the right park!)
If your friend is not interested in doing hands on stuff, I'd research top investors like Ken McElroy on multifamily (MF) properties, or Dave Reynolds and Frank Rolfe on Mobile Home Parks (MHP) and talk to them about doing some silent partner projects. Dave is particularly good at buying parks and adding lots of value to them and selling them in as little as a year later having added more than a million dollars in value to them. How'd your friend like to get that kind of return in just 12-24 months? I know I would!
Good luck to your friend! He's lucky to have you around to help with research.
Flipper/Rehabber · Anaheim, CA · Member since 2010 · 188 posts · 118 votes
14y
Karen please help me to understand your logic. You state one should not invest in the stock market because you consider it gambling and too reliant on others to determine your future. Yet your answer is to rely on others to determine your future with mobile home park investing?
Would you believe there are many different ways to invest conservatively in the stock market without relying on anyone but yourself and good research? Would you find it hard to agree plenty of people would consider giving their money to someone else to invest in mobile home parks would be gambling?
Real Estate Investor · Washington, DC · Member since 2011 · 7 posts · 0 votes
14y
@Mike - NICE...lol
@Chris - I don't know much about mobile home investing but fundamentally I tend to agree with Karen. The biggest difference between stock investing and real estate is control. With the stock market you have virtually no (legal) control over which direction a security goes. You can only hedge your bets with option strategies. Too many variables out of your control. In many ways it is much more similar to gambling than real estate, unless one's real estate strategy relies purely on speculation.
At least with real estate you can make your money when you buy, and you have some level of control over the value of the investment (repairs/improvements, financing, redevelopment, etc). In any case you'll need to learn what you're doing so you'll be relying on someone to guide and/or educate you either way so that's sort of a moot point.
I agree with you that there's always risk with any investment. IMO it boils down to the level of control.
Real Estate Investor · Bellingham, WA · Member since 2008 · 407 posts · 90 votes
14y
The beauty of his situation is that he has $2 Mill to start off with. Once he sets up his cash flow he can work with the excess to develop some strong RE strategies. Unfortunately most spend the windfall. At least he is thinking about something else.