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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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).
Will
@Archie, I make significant investments in both stocks and real estate. I believe a proper portfolio should be diversified into many different assets. Clearly we are on a real estate site and the sentiment will flow toward the real estate side. I happen to believe in both. Below are my responses to some of your comments:
“The biggest difference between stock investing and real estate is control.”
I agree, any descent stock position can be sold in seconds; can you say the same for real estate? So which has better control? I would argue there is more a sense of control in stocks due to its greater liquidity.
“With the stock market you have virtually no (legal) control over which direction a security goes.”
You don’t have control over which direction real estate moves either. They are both investments that move up and down. But if either moves in a direction you don’t like, which is easier to get out of?
“You can only hedge your bets with option strategies.”
“Hedge your bets” could mean two things. Are you talking about the ability to leverage or the ability to limit risk? If you are talking about limiting risk, it is easier to have a diversified stock portfolio with inversely correlated positions than it is to create a similarly diversified property portfolio. If you are talking about leverage you can use a margin account and get a significant amount of leverage on conservative investments without using options.
“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.”
Again both the stock market and investing in real estate are investments. You can chose risky to the point of gambling or you can choose conservative to the point of minimal return.
"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)."
And you can’t with stocks? What you are talking about is value when you buy. In the stock market you can do the research and target significantly undervalued stocks to purchase.
“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.”
Contol and knowledge. I think the main take away here is no matter what the investment, do your homework and invest in what you understand. I feel very comfortable investing in the stock market and real estate. Over time, both have made me a lot of money. If you don’t feel comfortable investing in a particular asset and the thought of doing so makes you lose sleep then by all means only stick to what you understand and what you are comfortable with.