Suggestions for the best way to allocate a $500K cash inheritance

22 Replies

This will be a bit unorthodox compared to a number of the other posts I have seen on BP. I have personally been investing in real estate sporadically over the last 5 years with a small amount of success (about 10 doors consisting of some SFR and a 4-unit). That being said, I have learned a significant amount of knowledge since joining this site and really appreciate the plethora of different views and backgrounds. I have a friend that knows I have dabbled in real estate and she just received an inheritance of about $500K in a lump sum. She has asked me for my advice (which I feel rather unqualified to give, so I am posting and asking for any advice here) for the best way to put this money to work in real estate. Her primary goals are to maximize passive income and cashflow for the long term. Would this be a larger commercial building? A portfolio of SFR? Or perhaps allocating some of this to some sort of private lending fund? Really appreciate any and all advice!

Muchof the answer depends on two factors: 1. Is she an accredited investor?and 2. How passive does she want to be?  If she is an accredited investor and really desires her RE investment to be truly passive there are several good funds she can consider ranging from lending to longer term investments. 

It's a friend, say no more. Send her to a good financial advisor to start her off. I would not advise she step into  real estate investing unless she is fully educated herself. Real estate is not passive income and you should not be advising her at this stage.

Unless of course she is willing to use her 500K to partner with you. That would be a horse of a different colour and I would definatly grab that opportunity. Provided you have a lawyer draw up a comprehensive partnership agreement. 

@Ed Matson @Thomas S.  She is indeed an accredited investor and is looking to do something in real estate that is more actively involved (not so active like becoming an active wholesaler / flipper, but also not just sending her money into a fund).  She would consider forming a partnership with me on some projects as well.  Apologies for not being clear in my original post.

@Willis Chur  , a lot depends on her tolerance for risk. What's appropriate for an aggressive investor will look horrible to a conservative one (and vice versa).

I'll give you my perspective as a conservative investor. I have the majority of my real estate in unleveraged single-family rentals. A landmark study came out a year ago called "the Rate of Return of Everything", that for the first time analyzed stocks, bonds, and real estate returns from the 1830s. What it found is that unleveraged residential properties outperformed everything else on a risk-adjusted basis in both the historic and modern eras.

I believe we are late in the cycle, so my second largest allocation is in conservatively underwritten debt (no more than 65% LTV, first lien, only states that have a nonjudicial/cheaper foreclosure option). Conservatively underwritten debt is a safer portion of the capital stack because if the property fails to meet its debt payments, the investor forecloses and owns it (instead of losing everything after defaulting on the loan on an equity investment). I'm investing in BroadMark and Arixa and currently looking at IronBridge for an even more conservative option.

Then I have a smaller equity allocation to triple NNN leases. These have historically more similar to bonds than real estate (and produced higher returns with less volatility than bonds). I'm investing in BroadStoneNet lease for that. I also have a smaller amount in a very conservative multifamily syndicator (MG Properties) who has multiple cycle experience and has never lost money. They also put considerable skin in the game (often 18% plus). And I continue to look for other things as well if they fit: self storage, mobile homes, etc.

@Willis Chur Step 1. Don’t say how much money you or anyone else has on a public forum Step 2. Tell your friend to go talk to a cpa and lawyer and financial advisor (fee only) Step 3. Profit
Originally posted by @Ian Ippolito :

@Willis Chur , a lot depends on her tolerance for risk. What's appropriate for an aggressive investor will look horrible to a conservative one (and vice versa).

I'll give you my perspective as a conservative investor. I have the majority of my real estate in unleveraged single-family rentals. A landmark study came out a year ago called "the Rate of Return of Everything", that for the first time analyzed stocks, bonds, and real estate returns from the 1830s. What it found is that unleveraged residential properties outperformed everything else on a risk-adjusted basis in both the historic and modern eras.

I believe we are late in the cycle, so my second largest allocation is in conservatively underwritten debt (no more than 65% LTV, first lien, only states that have a nonjudicial/cheaper foreclosure option). Conservatively underwritten debt is a safer portion of the capital stack because if the property fails to meet its debt payments, the investor forecloses and owns it (instead of losing everything after defaulting on the loan on an equity investment). I'm investing in BroadMark and Arixa and currently looking at IronBridge for an even more conservative option.

Then I have a smaller equity allocation to triple NNN leases. These have historically more similar to bonds than real estate (and produced higher returns with less volatility than bonds). I'm investing in BroadStoneNet lease for that. I also have a smaller amount in a very conservative multifamily syndicator (MG Properties) who has multiple cycle experience and has never lost money. They also put considerable skin in the game (often 18% plus). And I continue to look for other things as well if they fit: self storage, mobile homes, etc.

 Thanks very much, Ian.  Other than the unleveraged real estate, do any of the other options provide regular cashflow?

Considering you are posting in the MFR form, I think that a good starting point would be to get some sort of education for your friend.

perhaps get her to start reading a book, listening to podcasts and even attending a multifamily seminar / event

There is a good one coming up in Nashville in October, it is by the Wheelbarrow Profit team @Jake Stenziano and @Gino Barbaro . Many of us are going, so it would be great to catch up and learn more. she cant say she cant afford it!! Loll ;-)

I would tell her to educate herself before making a decision. Also, I would tell her to keep it in a low interest account for 4-6 months before investing it. By doing that, it will be more real. Personally I would go all in on Multi-family investing because that is my specialty. For her though, diversification in RE and other asset classes would be best. I would suggest some passive in syndications, NNN leases, etc, and some active in her own property and the rest in stocks, metals, oil, etc

Originally posted by @Hadar Orkibi :

Considering you are posting in the MFR form, I think that a good starting point would be to get some sort of education for your friend.

perhaps get her to start reading a book, listening to podcasts and even attending a multifamily seminar / event

There is a good one coming up in Nashville in October, it is by the Wheelbarrow Profit team @Jake Stenziano and @Gino Barbaro . Many of us are going, so it would be great to catch up and learn more. she cant say she cant afford it!! Loll ;-)

Thank you.  I will definitely let her know! 

Originally posted by @Todd Dexheimer :

I would tell her to educate herself before making a decision. Also, I would tell her to keep it in a low interest account for 4-6 months before investing it. By doing that, it will be more real. Personally I would go all in on Multi-family investing because that is my specialty. For her though, diversification in RE and other asset classes would be best. I would suggest some passive in syndications, NNN leases, etc, and some active in her own property and the rest in stocks, metals, oil, etc

 Many thanks, Todd.  That's helpful!

As stated above, diversification among markets and asset types is critical right now in our skewed, late stage, cycle. Capital preservation should be top priority, and go from there. There are deals in multifamily and in certain markets, self storage, but you need to be careful and select your investments carefully. 

Originally posted by @Mike Krieg :

As stated above, diversification among markets and asset types is critical right now in our skewed, late stage, cycle. Capital preservation should be top priority, and go from there. There are deals in multifamily and in certain markets, self storage, but you need to be careful and select your investments carefully. 

 Noted, Mike. Thank you! 

@Willis Chur - I’ve worked with a few investors in this same bucket.. high liquidity but unsure where to go with it.

I’m a seasoned investor who took a small amount of their money and set up 12 month - 60 month promissory notes at 5-8% interest. I used the money to purchase or fix up property. Investor holds lien or second lien on properties until refi. Pretty standard. 

Let me know if she (or you) are interested. 

@Willis Chur   Has your friend considered Multi-family Syndication's?

Advantages = Scalability, economy of scale discounts, lower property management rates, easier to maintain than small multi-family, the more units, the safer and more efficient the project (in our opinion) We usually deal with 100 units + on each project, rarely exceeding 350 units.

Disadvantages = deal flow (hard to find properties in the domestic US with solid cap rates) We're shifting focus more heavily to Puerto Rico and the opportunities it currently presents.

If you or your friend have any additional questions feel free to reach out. I am more than happy to help.

Originally posted by @Kira Golden :

@Willis Chur  Has your friend considered Multi-family Syndication's?

Advantages = Scalability, economy of scale discounts, lower property management rates, easier to maintain than small multi-family, the more units, the safer and more efficient the project (in our opinion) We usually deal with 100 units + on each project, rarely exceeding 350 units.

Disadvantages = deal flow (hard to find properties in the domestic US with solid cap rates) We're shifting focus more heavily to Puerto Rico and the opportunities it currently presents.

If you or your friend have any additional questions feel free to reach out. I am more than happy to help.

Many thanks, Kira. Am definitely looking into MFR which is why I posted on this forum. I think we will keep it in the US for the time being. If the opportunities are not obvious in the US, we will look at other options. Thanks again.

@Willis Chur You've got a ton of great advice from @Ian Ippolito and @Todd Dexheimer . To reiterate, 

1) education is the key. reading books (I have a whole library. need a link, PM me) and listening to podcast is as important as actually doing it as well as networking with other investors in your/your friend area of interest. real estate investing entails tons of niches, so finding the one (or several) that suit your and your friend's interests and goals is your primary objective and then concentrating on learning in detail about it.

2) diversification is a must. just like the old saying goes, don't put all eggs in one basket, especially since it's new to her. this entails, potentially splitting the funds between RE and the stock market (like mutual funds, etf's. consider using some robo advisers).

Good luck!

Originally posted by @Alina Trigub :

@Willis Chur You've got a ton of great advice from @Ian Ippolito and @Todd Dexheimer . To reiterate, 

1) education is the key. reading books (I have a whole library. need a link, PM me) and listening to podcast is as important as actually doing it as well as networking with other investors in your/your friend area of interest. real estate investing entails tons of niches, so finding the one (or several) that suit your and your friend's interests and goals is your primary objective and then concentrating on learning in detail about it.

2) diversification is a must. just like the old saying goes, don't put all eggs in one basket, especially since it's new to her. this entails, potentially splitting the funds between RE and the stock market (like mutual funds, etf's. consider using some robo advisers).

Good luck!

Many thanks, Alina! Fully agree 

Originally posted by @Percy N. :

@Willis Chur , as others have mentioned, education and diversification are going to be key.

So what investments should one consider? 

The answer to this simple question is multifaceted - I shared my own experience and thought process in a blog post at https://www.biggerpockets.com/blogs/10305/67660-fi...

 I just read and enjoyed your insightful blog on this.  Thank you!

Originally posted by @Willis Chur :
Originally posted by @Percy N.:

@Willis Chur , as others have mentioned, education and diversification are going to be key.

So what investments should one consider? 

The answer to this simple question is multifaceted - I shared my own experience and thought process in a blog post at https://www.biggerpockets.com/blogs/10305/67660-fi...

 I just read and enjoyed your insightful blog on this.  Thank you!

Appreciate your kind words.