What to do with $1,000,000.00?
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Real Estate Investor · Unadilla NY · Member since 2017 · 418 posts · 297 votes
2yAsk 10 people and youll get at least 3 different answers. It all depends on what the individual would do with their risk tolerance. Each property is also different. You could buy a 1 million apartment building outright and make 65,000 or 30,000 depending how it performs and what market its in. You could put it down on a 4 million dollar property and make 120,000 or zero or negative. Every deal is different.
Personally if I had 1 million just laying around Id probably put some of it into real estate, pay down some existing debts, some of it in treasury bills, and some of it in an index fund.
140 Replies
- 2yMichael SmytheBusiness MemberReal Estate Agent · Metro Detroit · Member since 2023 · 4k+ posts · 3k+ votes
@Kevin S. I'm trying to assist you with a better understanding of your question!
How much work do you think 4 buildings are versus one?
So, how much do YOU want to work in retirement?
Logical Property Management4.9446 Reviews - 2yKevin S.Member since 2024 · 400 posts · 240 votesOP
Quote from @David M.:
First, figure out your strategy, goals, level of involvement, etc. I think further educate yourself. Trying to compare the S&P to purchasing an individual rental property, which people keep doing is ludicrous.
Hmm... Why do licenced/fiducary advisers keep recommending a broad based etf? Risk diversification, don't pick a sector, don't time the market, no leverage, etc.
However, what is real estate investing? Picking a particular sector... picking a particular market... in some ways timing the market, etc.
S&P etf isn't the only way to go. if you want income vs growth, get any of the various income producing securities or funds that have been putting out dividends for years, if not decades. Many are now doing 10% and even 12% yields. Some are even tax free. Its completely hands-off (other than monitoring your account), very liquid, no additional expenses (like a leaking toilet, new roof, new flooring, etc.), and not deferred tax liability (which automaticlaly happens with a rentla).
Oh, and you still get a step up in basis --- don't know why it keep being sold "as-if" real estate is the only asset that gets a step in basis on death... And the transfer is really easy, no probate (just assign a beneficiary), and you don't even have to re-record a deed...
But back to your question about one property all cash or leverage? Generally, if you leverage you'll have reduced cash flow. So... go back to step one and figure out your end goal. Are you really in dire need of cash/income to live on? or trying to leave a legacy?
Hope this helps. Happy to chat. Good luck.
Thanks David. You probably have the most comprehensive response to my post. Appreciate it. Care to share some funds and securities?
- 2yKevin S.Member since 2024 · 400 posts · 240 votesOP
Quote from @Michael Smythe:
@Kevin S. I'm trying to assist you with a better understanding of your question!
How much work do you think 4 buildings are versus one?
So, how much do YOU want to work in retirement?
Appreciate you trying to assist me Michael. My original question was : Should someone buy all cash RE (one or several properties) for 1M or leverage 1M for 4x larger/more RE. It's not the number of properties but choice of all cash for smaller property vs leverage for larger property. For simplicity sake let's just consider one single property and not several small ones. Pros and Cons. Thanks.
- Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes2y
Quote from @Kevin S.:
@Kevin S. sure, you have to assume something when making calculations..
But, rmd's don't start at 60. But, looks like you are saying one pulls from the 401k at 8%... However, not sure at what growth rate you are looking at... If you use some "historical" 10% for the market, then I don't think you will run out.
Meanwhile, for RE you assume a 6.5% cap rate --- maybe thats just a concession from the tax ? I've never understood 5% annual increases in rent. Is that really net of other "fixed" expenses increasing? Also, I've spoken with many investors. I love it when some wonder why their "market rented" rentals net less than their "sub-market rentals," especially in this past 5-7 years. You can't keep raising the rent $50-$100 ever year. Nobody's wages keep up with that, or at least VERY few do. So, for the want of another $50/mo you lose out say a month's rent and turnover costs... That's long term renting 101 to me.
Also, the "tax benefits" of RE is just to let you deduct your expenses. You can't do that iwth your primary. But, you can do that in every other business. You can also depreciate capital equipment in every other business. If anything, some of these "tax benefits" causes everybody headaches because they have to pay them back if/when they sell --- its tax deferred...
Oh, and you may get the "cash flow up" after 10-12 years, but that might be after some capex and usually some repairs. So, where are you then?
Oh, if you are using broad based numbers, the national average rent is already decreasing... Remember, the past 7yrs has seen an astronomical increase in rents... Its up to you if you want to assume in your hypotheticals that it will continue to increase.
I'm not anti real estate investing. One just needs to analyze it well and use it in an investing strategy accordingly. Also, you can use "rule of thumb," for lack of better term, percentages but they don't always apply to your local market.
- Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes2y
Quote from @Kevin S.:
@Kevin S. find the various income classes, such as Business Development Comp (BDC) --- bizd is an etf of them for reference. Master Limited Partnerships (MLP) is another income class that is generally tax free/deferred. AMZA is one open-end ETF. Numerous closed end funds exist such as ECC/EIC, rfi (I think its a reit fund if you are still stuck on real estate), jqc, pdi...
I think from the guidance to with eft's people are more comfortable with open ended structures. But, closed end structures have their benefits as well. There is plenty out there. Good luck.
- Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes2y
@Kevin S. oh, and reminder to look at the holdings of the funds to help your search I'm guessing..
And I almost forgot, especially in real estate. With that amount of cash, you can do private lending at 12%. It can be just about completely passive if you use a broker/match-maker to handle everything for you. Beth Johnson runs now a private fund doing just that, and wrote her book Lend2Live. You don't need a huge amount to invest to help with diversification, and this private lending doesn't lock up your funds for a super long length of time.
equity investing (real estate or otherwise) is more so for wealth generation. Its being sold as income/cash generation I think mainly because --- it sells.. However, that's a recent event with the rents soaring these past 7yrs. And, it only works in specific works, at best.
debt investing is for cash/income generation. Different strategy for a different goal. I assume since most people don't have any money the "sale" is for the equity strategy. You rarely, up until recently, have people asking what to do with a pile of cash to live on...
- 2yKevin S.Member since 2024 · 400 posts · 240 votesOP
You covered it extensively, so thanks. I voted for you again. The RMDs do run out eventually. IRS calculations are estimated to run out in about 27.5 yrs. I live in sunbelt state with no state income tax. So rent will very likely increase steadily. But all your points are valid and well taken.
- Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes2y
@Kevin S. thanks.
Back to rmd.... Your hypothetical pull at 8% at 60yrs isn't a RMD. RMD doesn't kick in until 72 or 75 now, depnding on when you were born. So, if you can generate income/growth in the 401k at the 8% rate, you won't be drawing down on the account.
Of course, looking historically, just plain equity investing in the public markets for the past ~20years has blown away 8% and your account would be more than $1mil. Last year s&p was up over 20% (25% or somthing) --- phenominal. But, who would have guessed... But, that's why I like my debt/income investing.
When the rmd does kick in, I agree its next to impossible to keep up with the 1/x distribution. But, by that time you are so old.. And, with proper planning you should have worked around this. Anyway, that means you would start depleting your account at say age 75, not 60.
Thanks for the upvote. But, does this on the rmd make sense? At age 60 you are just doing a withdrawal. But, the actual rmd comes later. To be clear, at age 75 with $1mil, the rmd is only $40,650. So with your $80k withdrawal example, half is rmd and the other half is a voluntary withdrawal. It isn't untl about age 90 where a $1mil balance requires a $81k rmd...
I'm guessing you are trying to average out the numbers. It gets a little involved to work this through...
- 2yKevin S.Member since 2024 · 400 posts · 240 votesOP
Thanks again for your response. My bad when I said RMD. I meant withdrawal (living off the withdrawal) of 1M starting @ 60 or 65. IRS calculator shows roughly $80,000 yearly x 27.5 yrs until depleted(hypothetically). You seem to get a different withdrawal amount. Maybe I am wrong.
- Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes2y
27.5 years is the number for the the residential depreciation schedule...
Maybe you are using some irs calculator trying to help with retirement "stuff" (i didn't know irs had online calculators) with assumed/entered factors.
- Investor · Colorado Springs, CO · Member since 2016 · 15 posts · 10 votes2y
Quote from @Kevin S.:
Thanks for the advice, Rob. Good to hear from someone who actually did BOTH for a LONG time. Would your opinion change if all the RE was handled by professional PM company? This will remove all the factors you mentioned such as managing, keeping with the landlord laws etc? Thanks.
That would depend on the market you're in and your AGE. If you're under 65 or so then you can lever up on the RE and let the tenants pay off the mortgage
1. Cap rates in most markets are pathetic and not much more than the 10 yr T-bond, future "appreciation" is baked in to the RE markets. Thus, to make a good return, and decrease the risk of a long-term flat market, you'll need to use leverage in RE (tenant pays off the mortgage), so you'll make money irregardless. If you can't leverage the RE and cash flow from day 1, then it's a hard pass
2. Important: you'll need to find a good property manager, this will make or break your RE investment. So you'll need to cash flow after PM fees, taxes, insurance, repairs, vacancy and the mortgage pymt
3. The best way, if you're dead set on owning RE rentals, is to find a property in a good neighborhood that will attract GOOD tenants... from a wholesaler. You can find them in Facebook real estate wholesaling groups. Have them add you to their list of cash buyers. When you find one well below market value that needs work, you can put some money into rehab, then rent it, and you'll have instant equity and a higher cash on cash return
4. For stocks, in this environment, I would only own large cap companies with a solid history of increasing dividends year after year, and reinvest the dividends which decreases your cost basis over time. Decreasing the cost basis protects principal
5. You could do a 50/50 mix of stocks and real estate (depending on the real estate market you're in). In CA, not likely, in OH, then yes very likely, for example - Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes2y
Quote from @Kevin S.:
Quote from @Mike Dymski:
Quote from @Kevin S.:
Quote from @Mike Dymski:
Most people nearing retirement would not be interested in active owned real estate and could simply stick the million in a bond ladder and get 4-5% risk free return. The government is paying people and companies a premium to not invest.
Thanks Mike. Someone once said that keeping money in retirement account (401k or otherwise) will cause you to be poorer every year as you live on it and withdraw $$ from your account every year. Where as putting it to work in RE will result you being richer every year. Wanted to put it out there and hear from RE investors who are walking the walk.
Passive investments like bonds and index funds are not comparable or alternatives to active investments like real estate. It's comparing apples to orangutans. The right investment depends on goals. If an investor wants control, passive investments like index funds are a nonstarter. If an investor wants to be passive, most real estate is a nonstarter.
Most of us have retirement accounts (such as 401k) and real estate...and don't consider low cost tax deferred retirement accounts with an employer match to be a bad thing.
Agreed. And agree that person had accumulated both apples and orangutans all his life. He has both in his basket and now need to make a decision. Let's assume the person is willing to do 'whatever' needs to be done for 'maximum' returns with the focus on the words whatever and maximum for either scenario. Mind you whatever doesn't means him physically renovating the properties but making deals, dealing with contractors and property managers, CPAs, attorneys, etc. Yes, you got all your match in 401k, tax deferred benefit, passivity and you are now near retirement. Is there truth in the claim that having retirement (taxed and tax deferred) account for retirement means you get poorer every year as you draw funds to live on vs get richer with RE every year with rent, mortgage pay down, appreciation and tax benefits? People say it's 'diversity' and I agree fully. But the purpose of my question is only to find out if there is truth to the claim. That simple. Thanks for your input Mike.
My real estate returns have been much larger than my stock market returns. There is little reason to invest in active real estate (which is a lot of work) compared to passive index funds (which is very little work) if you can get similar or better returns with index funds.
Regarding getting poorer during retirement with index funds, that depends on how much is saved and drawn down. Many people set target amounts for both of these to allow for 20-30 years of retirement (however many years are needed). Some use the 4% draw rule to achieve this.
- 2ySam YinPro MemberLos Angeles, CA · Member since 2021 · 583 posts · 738 votes
There are so many assumptions that keep getting added on. Members of varying degrees of experience will make different assumptions on this hypothetical question.
For the fun of the thread, thus far assuming approaching 65 (ready to retire) after having worked... so I will also assume there is a sizeable Social Security payment on the way. With that, having worked to 65 and saving $1M, one way or another, there are a few other assumptions to be cleared up. Is this person in poor health, good health, or excellent health with excellent family history. Furthermore, is there a spouse, kids, grandkids, etc... AND is there a primary residence already established or paid off?
This is why it is funny not to predict varied degrees of opinions from the forum.
For the sake of simplicity, based on all the assumption posts thus far, I would carefully consider NOT to invest in RE. For a person coming up on 65, having worked all their life, with good health and normal family health history, that $1M in a secured investment paying out a steady 5-7% is better than the stress of owning any RE. Focus on living within the SSI allotment, supplemented by the interest on the $1M, and enjoy the freedom from Landlording stresses. Find a partner to spend your days and nights with, if you do not already have one. There is nothing more valuable than a person you care for by your side when you are blue and when you want to go out and about. At the same token, if you already have a partner, spend as much free time with them as possible to make up for that lost time of working to 65.
This is just my opinion. I have experienced, first hand, so many healthy people drop out of the blue, as young as 40s, but often in their 50s and 60s. I have also met with many that look back on their chase for wealth, regretting their absence with those that count. $1M is sizeable. With all other normal assumptions, unless this person is ALREADY in the game, I would suggest to put that into a high yield investment account and enjoy life.
Now, if it was me, base on my current situation, I would leverage to the hilt and go for a distressed apartment where there is obvious value add opportunity. Pick up a $4-$5M with 30-50 Units in a C area at the border of a B area, or in an expanding area. Spend 12 - 24 month stabilizing and 1031x when the valuation hits $6-$8M. Then rinse and repeat. If you are aggressive, that original $1M will easily control at least $20M at 50-70% LTV at the end of 10 years. Using average assumptions, that could generate $300- $500K/yr cash flow... easily.
- 2yKevin S.Member since 2024 · 400 posts · 240 votesOP
Quote from @Rob U.:
Quote from @Kevin S.:
Thanks for the advice, Rob. Good to hear from someone who actually did BOTH for a LONG time. Would your opinion change if all the RE was handled by professional PM company? This will remove all the factors you mentioned such as managing, keeping with the landlord laws etc? Thanks.
That would depend on the market you're in and your AGE. If you're under 65 or so then you can lever up on the RE and let the tenants pay off the mortgage
1. Cap rates in most markets are pathetic and not much more than the 10 yr T-bond, future "appreciation" is baked in to the RE markets. Thus, to make a good return, and decrease the risk of a long-term flat market, you'll need to use leverage in RE (tenant pays off the mortgage), so you'll make money irregardless. If you can't leverage the RE and cash flow from day 1, then it's a hard pass
2. Important: you'll need to find a good property manager, this will make or break your RE investment. So you'll need to cash flow after PM fees, taxes, insurance, repairs, vacancy and the mortgage pymt
3. The best way, if you're dead set on owning RE rentals, is to find a property in a good neighborhood that will attract GOOD tenants... from a wholesaler. You can find them in Facebook real estate wholesaling groups. Have them add you to their list of cash buyers. When you find one well below market value that needs work, you can put some money into rehab, then rent it, and you'll have instant equity and a higher cash on cash return
4. For stocks, in this environment, I would only own large cap companies with a solid history of increasing dividends year after year, and reinvest the dividends which decreases your cost basis over time. Decreasing the cost basis protects principal
5. You could do a 50/50 mix of stocks and real estate (depending on the real estate market you're in). In CA, not likely, in OH, then yes very likely, for exampleValuable input. Thank you Rob. Seems like end conclusion is 50/50.
- 2yKevin S.Member since 2024 · 400 posts · 240 votesOP
Quote from @Sam Yin:
There are so many assumptions that keep getting added on. Members of varying degrees of experience will make different assumptions on this hypothetical question.
For the fun of the thread, thus far assuming approaching 65 (ready to retire) after having worked... so I will also assume there is a sizeable Social Security payment on the way. With that, having worked to 65 and saving $1M, one way or another, there are a few other assumptions to be cleared up. Is this person in poor health, good health, or excellent health with excellent family history. Furthermore, is there a spouse, kids, grandkids, etc... AND is there a primary residence already established or paid off?
This is why it is funny not to predict varied degrees of opinions from the forum.
For the sake of simplicity, based on all the assumption posts thus far, I would carefully consider NOT to invest in RE. For a person coming up on 65, having worked all their life, with good health and normal family health history, that $1M in a secured investment paying out a steady 5-7% is better than the stress of owning any RE. Focus on living within the SSI allotment, supplemented by the interest on the $1M, and enjoy the freedom from Landlording stresses. Find a partner to spend your days and nights with, if you do not already have one. There is nothing more valuable than a person you care for by your side when you are blue and when you want to go out and about. At the same token, if you already have a partner, spend as much free time with them as possible to make up for that lost time of working to 65.
This is just my opinion. I have experienced, first hand, so many healthy people drop out of the blue, as young as 40s, but often in their 50s and 60s. I have also met with many that look back on their chase for wealth, regretting their absence with those that count. $1M is sizeable. With all other normal assumptions, unless this person is ALREADY in the game, I would suggest to put that into a high yield investment account and enjoy life.
Now, if it was me, base on my current situation, I would leverage to the hilt and go for a distressed apartment where there is obvious value add opportunity. Pick up a $4-$5M with 30-50 Units in a C area at the border of a B area, or in an expanding area. Spend 12 - 24 month stabilizing and 1031x when the valuation hits $6-$8M. Then rinse and repeat. If you are aggressive, that original $1M will easily control at least $20M at 50-70% LTV at the end of 10 years. Using average assumptions, that could generate $300- $500K/yr cash flow... easily.
Definitely another interesting take on this topic. That was great. Thank you Sam.
- 2yEddy OgbekhiluPro MemberInvestor · Lutz Florida . · Member since 2018 · 103 posts · 34 votes
Hi Kevin just a quick note to connect and to say thanks for your thought provoking questions insights and analysis you bring to the forum.
Will be 59 soon and looking to give up active work and the 1M questions was indeed where my emotions has/have been wondering. Am comfortable with income from 1M 4d nxt 30yrs at fairly moderate return of 7% ...Once again thanks and am following ur post keenly.
- Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes2y
Quote from @Kevin S.:
Actually it's Schwab IRA RMD calculator.
@Kevin S. https://www.schwab.com/ira/ira-calculators/rmd
This? So if you do born 1964 and $1mil, its says ~$80 rmd STARTING at age 73. So, for somebody TODAY at age 60, would have a ~$80k rmd WHEN they BECOME age 73 with I'm not sure how much IRA/401k balance at that time.....
As mentioned above.. there are a huge number of assumptions going on here. You even said this post is a hypothecal example. As mentioned, it all comes down to your strategies and goals. That needs to be followed up with sufficient research/education.
- 2yKevin S.Member since 2024 · 400 posts · 240 votesOP
Quote from @Eddy Ogbekhilu:
Hi Kevin just a quick note to connect and to say thanks for your thought provoking questions insights and analysis you bring to the forum.
Will be 59 soon and looking to give up active work and the 1M questions was indeed where my emotions has/have been wondering. Am comfortable with income from 1M 4d nxt 30yrs at fairly moderate return of 7% ...Once again thanks and am following ur post keenly.
Thanks for following this thread. Lot of people have contributed to this subject so far with varied and interesting opinions. Each with valid points. I am just soaking it in and hopefully will make it work for me, only to contribute later to help someone else in the future as a way to give back. Going to your response of 7% return, is that from REI cash flow?
- 2yKevin S.Member since 2024 · 400 posts · 240 votesOP
Quote from @David M.:
Quote from @Kevin S.:
Actually it's Schwab IRA RMD calculator.
@Kevin S. https://www.schwab.com/ira/ira-calculators/rmd
This? So if you do born 1964 and $1mil, its says ~$80 rmd STARTING at age 73. So, for somebody TODAY at age 60, would have a ~$80k rmd WHEN they BECOME age 73 with I'm not sure how much IRA/401k balance at that time.....
As mentioned above.. there are a huge number of assumptions going on here. You even said this post is a hypothecal example. As mentioned, it all comes down to your strategies and goals. That needs to be followed up with sufficient research/education.
The expected balance at that time is estimated to be around $2,100,000.00 based on the same website.
- Morris County, NJ · Member since 2020 · 5k+ posts · 2k+ votes2y
@Kevin S. oh okay. Missed that. But $80k generated by $2.1mil is a ~4% yield…. That’s back to the staple 4% rule.. and doubling of the base amount in some 13yrs is ~5.5% yield, assuming no withdrawals
…. I’m not even sure what we are discussing anymore LOL
- 2yKevin S.Member since 2024 · 400 posts · 240 votesOP
Quote from @David M.:
@Kevin S. oh okay. Missed that. But $80k generated by $2.1mil is a ~4% yield…. That’s back to the staple 4% rule.. and doubling of the base amount in some 13yrs is ~5.5% yield, assuming no withdrawals
…. I’m not even sure what we are discussing anymore LOL
You just made me laugh with your last sentence. LOL
- 2yEddy OgbekhiluPro MemberInvestor · Lutz Florida . · Member since 2018 · 103 posts · 34 votesThe 7% is potential expected/guaranteed return of off 1M invested either by way of dividends and the likes.I am not sure if I answered your question correctly!
Quote from @Kevin S.:
Quote from @Eddy Ogbekhilu:
Hi Kevin just a quick note to connect and to say thanks for your thought provoking questions insights and analysis you bring to the forum.
Will be 59 soon and looking to give up active work and the 1M questions was indeed where my emotions has/have been wondering. Am comfortable with income from 1M 4d nxt 30yrs at fairly moderate return of 7% ...Once again thanks and am following ur post keenly.
Thanks for following this thread. Lot of people have contributed to this subject so far with varied and interesting opinions. Each with valid points. I am just soaking it in and hopefully will make it work for me, only to contribute later to help someone else in the future as a way to give back. Going to your response of 7% return, is that from REI cash flow?
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