$1 million to invest in real estate - what would you do?

16 Replies

BP- Here is my opportunity. I have been able to attract a $1 million investment from a private source into my newly formed LLC. The terms are that I pay 5% interest per year and have to pay the $1 million back in 7 years. Agreement is that the location has to be NYC, Connecticut or Virginia. I want to start beginning next year.

This is a very special opportunity and I want to be absolutely certain that I have done my due diligence and explored opportunities as thoroughly as possible.  I have explored various options:

1) All cash and being more conservative vs. leveraging and being more ambitious

2) Partnering with a larger more experienced equity partner/developer to invest on larger deals vs. doing deals 100% on my own

3) Residential vs. Commercial 

4) Buying smaller multifamily homes to buying a larger apt unit complex

5) Buy and Hold vs. Flipping/Renovating 

I am intrigued to see what you fellow BPers would do if you had $1 million to invest. 

Thanks,

Angel

I should add that my tendency is to lean more towards a conservative approach to start and get more ambitious once I am established. 

Well, sounds like a real challenge since you're just starting.  I'd divide it up into $200k chunks figuring one path isn't going to work out and another chunk is going to have to make up for the bad investment.

Then I'd figure out my resources for getting 10 - 12% returns. 

  • Hard Money Lender you can provide additional funding to.
  • Established Tax Deed/Lien Investor
  • A great, tier 1 project and project owner
  • A small partner project on which you can learn from a seasoned vet.  Choose wisely.

Best of luck!

Rick

And to add to the great advice above about diversification is that use "Capitalization Rate" as a metric to level the playing field.  Be it real estate or anything else, cap rate does really level that playing field. 

@Angel Hernandez  Without knowing more about you, it's very hard to advise you. What is your experience? Is there some reason someone wants to give you the money at this time, or is it possible to obtain it later (after you've researched possibilities)? 

There will be a lot of people wanting to get their hands on your money, so whatever you do, before doing any business with anyone, check them out THOROUGHLY. 

@Angel Hernandez

I don't know anything about you, but someone asked the same question last week and here was my answer. The wisdom here is to invest in what you have great wealth of knowledge in. 

The Tale of two old friends of mine.

Friend A
I have a friend from college who grew up from a solid middle class family who made his first million from scratch. He now possesses the financial IQ and investing experience of the how to turn his first million net worth into $3M, then to eventually into $5M. He is a man with a financial plan and he is a multi-millionaire today.

Friend B
I have another friend from college who inherited a million dollars from his wealthy Asian parents overseas and grew up from a affluent household of privilege. He ended up spending and losing much of his million dollar inheritance from bad investments in businesses he had little knowledge of, trading stocks, buying real estate right before the crash. He lacked the financial IQ and investing experience that my other friend possessed. If both my friend A and B, lost everything, friend A would know exactly how to rebuild the million again, but my friend B wouldn't have a clue.

If i won the lottery, and suddenly had access of $1,000,000 dollars in tax free money. I would allocate this money the following way, but not invest all of the money at once. I would carefully allocate the money in a gradual manner.

30% allocation: $300,000

My own business (S Corporation) - highest risk, highest reward. If there is a business idea you are passionate about and you have great wealth of knowledge and industry experience in the business you want to start, I would give it a shot. This is one category, I believe one can quickly accelerate their networth faster than real estate. I would expect a return anywhere between 25 - 50% annual. 26% annual return will double your net worth in 3 years.

30 % allocation: $300,000

I would allocate this amount to building a solid single family homes rental portfolio in a "A" school district zone in a high growth emerging area. I would expect average returns of 15% - 18% from my real estate investments.

20% equities and stocks : $200,000

Right now the stock market is over heated and is not a good time to buy now. I would wait for a substantial correction in the DOW or S&P 500 and take a buy and hold strategy. If you have no investment knowledge in the equities market, I would recommend buying the S&P Index 500 which will beat the performance of 80% of all fund managers over the long run. If you are an experienced investor and believe you are among the talented top 20% who can consistently outperform the S&P 500 year after year, I would create my own hedge fund with the $200k. Investing in the S&P Index 500 I would expect an average return of 11%/year over the long term horizon.

20% cash and money market : $200,000

Cash is king when we are headed into a deflationary market environment. Cash in hand will give you peace of mind if the market suddenly turns for the worse.

Originally posted by @George Paiva :

And to add to the great advice above about diversification is that use "Capitalization Rate" as a metric to level the playing field.  Be it real estate or anything else, cap rate does really level that playing field. 

 How does cap rate really level that playing field?

Whats your experience level?  Many of the investments that will require little of your time, requires a high level of past experience in real estate.  

Examples: Hard money;  

Past experience: Flipping  or rehabbing single family of multifamily properties. 

I would look into crowd funding as well.  Many of the crowd funding companies find the deals for you and do all the underwriting too. 

The annual rate of return I would be looking for would be around 25%. If you can't get that with a million dollars then you are telling to the wrong people. 

Michael Henry, Real Estate Agent in WI (#56929-90)
4146171740

Angel,

First, I have to congratulate you on being able to attract the investor!  It says something about who you are and how people perceive you!  

Second, I wish I had your same issue...  I will assume a couple of things from your initial post:

1. The investments must be in real estate or related to real estate

2. You must stay in the areas that you have mentioned.

3. You have a monthly payment of roughly $4,200

4. You must earn roughly $143K each year to pay the $1M back in 7 years on top of the interest payments.

My approach is based on the above, your required payouts, and keeping in mind that you are conservative by nature (I am too so this sits well with me!)

I would keep at least a year's worth of interest payments off to the side so that you do not have to worry about the payouts.  50K goes into a nice secure business bank account which pays you interest.  Not glamorous is it?? But it will pay the $4,200 payment each month...

You have 950K.  Now you have some time buffer but still need to ensure that you can make the payouts for the second year.  The other posts are right on the money.  Diversity is key but keeping in mind it has to be real estate.  I would look for a Real Estate Investment trust or a hard money lender that has a proven track record and is always looking for additional funds to loan out.  You should be able to get something along the lines of 10 - 12% return or a bit higher depending on the amount of risk you are willing to take.  Your talking about $350K for this portion since the Hardmoney lenders that I work with require you to have a certain networth and a minimum of at least 250K to invest. The nice part is that you have 350K set aside to help  payback the 1M and all of your interest payments are made for the remaining 6 years.

Keep this in mind...  the 350k goes towards paying of the principal at the end of 7yrs since it has been making all of the interest payments and then some.  Now all you have to come up with is 650K to pay off the loan which translates into roughly $93K/yr which is attainable.  

Now the fun part... you actually have $600K still amazing spot to be in...  plus now you have the time to find someone that is experienced Real Estate investor in the type of opportunity/area you want Fix/flips, buy fix and hold, etc. find the partner/mentor and get your free education.  I am not sure of the price points and market in the areas you  mention but if it were me...  i would look at finding the first house for cash, keep it for at least a year (long vs short term gains) and rent it out,  I would acquire properties like this until you have enough cash left on hand for one property and then fix/flip build up cash until you can purchase again.

At the end of the seven years you have the 350K to payoff one chunk, you can take out nice conservative 15yr loans on your cash flowing rentals to pay off the balance.

End result, one amazing education paid for, an excellent investor that will let you do this again since you made him money, one amazing portfolio built up, and in fifteen years your retirement is done!

Take care Angel

Paying it off in 7 years will be tricky. If you don't have a job, will you be able to refi the properties? If you have a job and stable income from these properties you should be able to refi without a problem.

In theory you could buy SFRs, collect rent, force appreciation, refi and pay back the debt. I would negotiate for more time and be willing to go up to 6% if necessary.

- I would go over my small term and long term financial goals first.
- If your married, Ask your spouse what she thinks and implement that into your goals.
- Create a team of experts: commercial real estate agent, CPA, RE Lawyer, friends/like minded individuals.

This is a good start and I believe this will guide you to your first deal.

Originally posted by @Angel Hernandez :

BP- Here is my opportunity. I have been able to attract a $1 million investment from a private source into my newly formed LLC. The terms are that I pay 5% interest per year and have to pay the $1 million back in 7 years. Agreement is that the location has to be NYC, Connecticut or Virginia. I want to start beginning next year.

This is a very special opportunity and I want to be absolutely certain that I have done my due diligence and explored opportunities as thoroughly as possible.  I have explored various options:

1) All cash and being more conservative vs. leveraging and being more ambitious

2) Partnering with a larger more experienced equity partner/developer to invest on larger deals vs. doing deals 100% on my own

3) Residential vs. Commercial 

4) Buying smaller multifamily homes to buying a larger apt unit complex

5) Buy and Hold vs. Flipping/Renovating 

I am intrigued to see what you fellow BPers would do if you had $1 million to invest. 

Thanks,

Angel

I find myself having more questions then answers for you. Obviously you will get better profits on commercial properties. Do you have a strong team in your corner? Which state are you leaning to or do you intend on dabbing in more than one(if not all )of those states? If you decide to go with small MFRs  and residentials moreso than commercial you definitely have the funds to invest in all 3 markets. Do you have any experience in Commercial real estate investing? Will you be entertaining large MFRs or strip malls & office buildings( large mixed-used) also? I too am intrigued to learn how this turns out for you and I hope you keep us BPers posted on a monthly if not quarterly basis of your progress.

Kudos,

Mary

Thank you BP for the advice. This is such an excellent forum. A little more clarification:

1) I have several years experience as a internal consultant at a large commercial real estate firm. Although, I am very knowledgable, understand all the terms and aware of pretty much all the options, I have no direct experience in making my own investments in real estate.

2) The capital is from a long time friend who wants to give me an opportunity to achieve my dream of one day being a large scale real estate developer/property owner. I am young, patient and ambitious. Time is on my side, I am in my mid thirties so I have a 30 year horizon to reach this goal. This capital comes from a person that has had an extraordinary career, could invest in anything with their capital, and chooses to help me start on my path to achieve my dream.

3) The capital is not transferred to my LLC yet. I am taking my time with this. When I have my strategy absolutely set and a great first deal then I will acquire the capital and start making interest payments.

4) I agree with most of the comments that diversification will be a key first step.

5) I have a very strong team of real estate pros. I can easily choose from a half dozen people with many years of experience in investing and developing that are close to me and that I trust to conduct due diligence.

6) I plan to leverage my well experienced team to make up for any lack of experience I might have as of now. This is very important.

Great responses but my favorite is by far @James Park !  What an exactly strategy to diversify risk while potentially maximizing your gain.  I see this in my future!

Here are my thoughts. Having knowledge of terms and being around the commercial RE world is a good start, but not enough to jump into the water yet. Get some experience first by doing a small deal or two. Rather than taking the entire $1M, how about starting out with just 20% of that, do a deal and gain some real world experience. Repeat that while stepping up the ladder a bit until you have done several deals and worked your way up to 1/2 of the money. Once you have proven to yourself that you can do it well and profitably, then take on the entire $1M.

Second, get a RE attorney and CPA. You mentioned forming an LLC and funding the LLC with the $1M. That may or may not be the proper entity for you, your strategy plays a large role in that.

Diversification is a good thing for protection, but not everything. Diversification can be a limitation at times. I would take the smaller steps approach I have laid out rather than the entire $1M and diversify.

Lastly, long term holds with income property is a great way to build a lifetime of income streams and net worth, I recommend it if you have the desire and ability to be a landlord and all that it entails. Flipping is a great cash builder and requires some tax planning strategies, hence the CPA should jump in there to assist. Loaning on other projects as a hard or private money lender is also a good idea as is buying notes at discounts, keeping in mind that no matter which strategy you use (or any combination of them all), all of them require some education and that should be your first step on the ladder!

Will,

Thank you very much for your reply. I agree that a long term hold strategy creates the income generation and solid wealth prospects that I desire.

I also agree that starting out small and in a methodical approach build towards investing the $1 million makes a lot of sense. It will mitigate beginner mistakes and in the long run establish the most important thing - credibility with my angel investors.

One more item of food for thought Angel. On your fist go round, you may want to look into finding a reputable investor who is already working in the space you want to go after first. Partner with him or her taking a smaller profit share, but gaining valuable experience.

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