What to do with $1M

Question

Hello all, I’m a super newbie here. I’ve been trying to brainstorm for ways to get into the investing world. Here’s my situation: My parents want to gift us a house with a budget of $1M- $1.2M. They will purchase and make monthly payments from the cash they have sitting in the bank making 9% of interest instead of paying all cash. And we won’t have any monthly mortgage payment , then we can save money faster + sell our primary home to invest. However, I feel like buying a $1M and waiting to save money to invest later is gonna cause us some opportunity costs. I don’t want to rush into things but I also want to take some actions sooner than later. Here’s my plan of actions:

1. Sell my current primary resident in Edmonds (20 minutes north of Seattle) while the Seattle market is super hyped up right now. ($800K ARV, $470 loan at 2.69%). The house doesn’t cash flow ($2500 PITI, about $2900 median rent). Then I would use the proceed to purchase a 2-4 unit multifamily property to house hack using FHA 3.5% down, use the left over money for repairs and next investment property. My concerns are that househacking might be challenging since we are a family of four, with two kids under 7 due to smaller space, changing schools, and is it a good idea to do this now with the market being crazy around Seattle? And is there a way to purchase a multifamily using FHA before I sell my house? We don’t want to rent.

2. Use $1M to invest instead. I’m thinking of dabbling in wholesaling to get as much experience and knowledge as I can, then do the BRRRR strategy with SFH or MFH, and eventually invest out of state since Seattle market is too expensive and I can’t really do much with $1M.

While all of this can take a while to accomplish, what would be the best thing to do with the upcoming “crash” everyone is talking about while I have access to the fund? (Some of YouTube gurus have been saying to wait until the market slows down).

I’ve been studying hard by reading books (1/3-4 days) , watch a bunch of YouTube videos obsessively and listening to BBP podcast and other podcasts to educate myself as much and as fast as I can, but I still don’t feel like I have a clear sense of direction to pull the trigger. Any input would be much much appreciated!

Michael Haas · Answer

@An Ho we're on our first househack, and as a family with a little one as well we've always prefered more residential, Single Family homes with basement ADU's and/or backyard cottage DADU rental units. Most true multifamily properties in and around Seattle are on busier streets and denser areas that might be a less appealing place to raise your family.

If I was in your shoes I would use your parent's capital to buy a single family home with either a basement ADU already in place or a good setup to build one. If there's any money left over you can ask your parents to build a backyard cabin, like those built by MyKabin.com , leaving you with a residential home for your family, a basement rental for cashflow, and a backyard cottage rental for cashflow.

Sell your Edmonds house and use your own cash to fund similar projects as straight rentals in less expensive areas (Renton, Burien, Tacoma, Everett). Take the experience from your parents home purchase and/or remodel and build on it.

I think the main advantage of this is that it keeps your parents investment and your investment separate. Since it sounds like your parents will have the home in their name, and are really allowing you to live for free until they gift it to you at some later point, this would create a great investment for them (and eventually you!) and the massive savings you'll get on living expenses will allow you to invest in similar projects on your own.

Feel free to message me if you'd like to talk through this in more detail on the phone! I think you have two questions here: the easier question of how to invest in Real Estate both personally and through your parent's generosity, and the harder question of how exactly to structure a gift so that all parties involved are happy, while keeping that essentially separation between your parent's lives and yours. As other posters have pointed out, a no-strings-attached gift is one thing, but if this isn't that simple you'll have to communicate with your family and parents clearly to make sure things don't get messy and feelings don't get hurt. Congratulations and best of luck!

David Paul Westenberger · Answer

@An Ho

1M is a lot of money and you can really stretch this money long term if your smart with it.

Ask yourself what are your long term goals, is it x properties by x years or x money by x year. you get the point.

After you know that come up with a game plan and strategy, and choose a niche.

I currently house hack Single family homes.

You said you want to house hack a multifamily 2-4 unit building.

Second question I would ask you biased off that knowledge, would you be willing to handle a 2-4 unit building that needs work and looks like crap or a value add(adding extra unit/bedroom/bathroom)? This is where you can make your money stretch further by doing a BRRRR on a multifamily, this could also be done on a single family home.

I would not do wholesale due to its such a hard gig to do.

I mean with 1M you could just have it sitting in the index fund and your set for life, making around 8% a year. that's like 60-80k a year! (thats more than what a lot of people make just working)

You could also look into syndications and becoming a accredited investor, and looking into opportunities in that area.

There are also performing notes you could look into.

Hope that helps,

- David.

Aaron W. · Answer

@An Ho Welcome to the community! $1M is not a small amount to invest. I know it is relative as I used to live and own property in the Bay Area. However, your parents gifting you the $1M is a great opportunity.

Before deciding what you want to do, what is your why in investing? What goals do you need in order to accomplish the why? Do you want to invest for cash flow or appreciation? Do you need the cash flow now? What is your appetite for rehab?

You will never know everything there is to know about real estate. It is a life-long learning experience. Some of the best education comes from actually doing.

If you don't feel comfortable jumping in by yourself, you may want to think about partnering with a more experienced investor. While you can probably bring the funds, the investor can bring the knowledge and guide you through a deal or two. This can bring you the knowledge and confidence to continue investing by yourself and potentially help you know where and what you want to invest in.

Good luck!

Joshua D. · Answer

@An Ho

I'm a bit confused. You parents want to buy you a 1 million dollar house and make payments for you? Then you can live for free, sell your house and invest.

Is that right? Why would they do that? Are there strings attached with this money? Do they have expectations? These things can be messy. Ide clean that up first...

Then ide get clear on your goals. Personally ide stay away from wholesaling. If you wanna be active do BRRRR. Its way more reliable for wealth generation. Unless your some kind of marketing genius.

Have fun!

Sherief Elbassuoni · Answer

@An Ho, welcome to BP. We have a great community here. It is awesome that your parents are gifting you a house with a budget of $1M-$1.2M.

To answer your question, it really depends on your long term goal.

For option 2, Wholesale is not easy, time-consuming, and may take a while till you close a deal with a decent assignment fee.

For me, I like the first option more (selling the primary residence and buy small multifamily). I see your concerns with house hacking while having young kids. Not all house hacking options will be open for you, but if we are talking about a small multi-family, you will be living in your own unit, while renting the other unit/units. This will give you and your family the space and privacy you need.

Feel free to reach out. I am always open to more conversation over phone or coffee!

Best of luck!

Sherief Elbassuoni · Answer

@An Ho, yep, the gifting situation is a little confusing, but the great thing is that no string attached.

Daniel McNulty · Answer

@An Ho

It sounds like your parents do not actually want to gift you the money yet. Offering to purchase a property and pay the mortgage for you is a great way for them to help you without actually gifting the money.

For larger estates there are considerable tax consequences to just giving your kids money, and this is likely what you are facing.

You might want to clarify if they are even willing to give you that cash because it sounds like they want to buy a property and indirectly benefit you.

If that’s the case, you can use the 350k from selling your house to invest however you please.

Either way, you need some more clarity.

Good luck!

An Ho · Answer

@Michael Haas

I love your thoughts on the single family with ADU, basement and backyard cabin. From what I’ve read here and some investment Facebook groups, a lot of people in areas around Seattle are doing that for the reasons you mentioned how it’s easier to house hack single family houses, and also there are not many options for multifamily properties, and the good ones get scooped up fast.

I know the gifting situation is a bit confusing. They would essentially buy it in their names, making payments, so we live there for free. They later on, they will put it in a trust and gift it to me, no string attached.

An Ho · Answer

@AJ H. I want to invest for cash flow, that’s why I was thinking of going for househacking a multifamily property by trading my single family home for it. I want to use my own house and money and start and gain some experience with finding deals, rehabbing if needed and being a landlord before using my parents money. They want to buy us a house. I haven’t talked to them about using the money to invest yet. I might need to do some convincing.

My goal is purchase 5 properties in the next 3-5 years. Then 25 in the next 10 years. I would love to get into rehabbing, flipping, brrrr to buy and hold for long term passive income.

Jay Berube · Answer

Welcome, @An Ho! This is a great gift that you're parents are ready to give you! Whatever you decide, you need to start with a thorough assessment of the market in which you want to invest. Keep in mind that for the past years prices have increased in many markets by 15%. Try to understand what that would mean for your future tenants. That had been the case, for instance, in Southwest Florida. Southwest FL has a hospitality market and is a luxury market because it's a place where people buy second homes. But in times of crisis people can choose not to buy second homes. However, there will always be people who work in services in that area but they will probably not afford a 15% increase in their rent. You need to decide who will be your potential renters and try to project what will happen in that market in the next two years. Good luck!

What to do with $1M

What to do with $1M

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