Best Way to Invest 3MM

22 Replies

Looking for as passive as possible but at the same time safe

I may seem negative but below are some ideas with their particular drawbacks)

  • Stock Market ( Bernie Madoff)
  • Syndication also risky ( syndicators making all the money with no skin in the game))
  • Apartment buildings ( are prices too high)
  • SFH rentals ( are prices too high)
  • Private Money Lending ( lots of work - capital not always invested - low actual yield)
  • BRRR ( good but too much work - looking for passive)

Ok whats your take on these and better ideas

Updated about 1 month ago

THIS POST IS LOOKING FOR ADVICE ONLY

Hey @Robert A Cuomo !

All are viable options, but like you said, you want to be as passive as possible.

You can always engage in private money lending if you know how to find the deals to lend to.

SFH homes & Apartments (acquiring them yourself) can be passive but have a ton of upfront work.

Stock market to me is just too volatile and doesn't offer the tax advantages of real estate.

Now, I (and my investment group) work with investors who would rather passively invest and we search for properties that match our criteria and offer solid returns. But to your objection, we actually invest into our own deals and have skin in the game, so we care about it, just as much as the passive investors.

Would love to chat about the topic a bit more.

@Robert A Cuomo if you think all syndicators are making always making money with no skin in the game, you're looking at the wrong Sponsors.

Many Sponsors structure in a way that they make NO money until the investor earns a fair return. If you think the fees are where they're always making money, a lot of fees are "keep the lights on" fees - fees to cover expenses associated with running running the property. Of course some Sponsors do charge crazy fees to where they're earning no matter what, but not all.

I personally know of Sponsors putting $100K-$1M in their own deals. If that's no skin to you, you've got some thick skin.

@Robert A Cuomo I would agree with what @Michael Bishop said above. I am sure there are good and not so good syndicaters  out there, it just takes time to vet them. It seems for a totally passive experience from deploying funds through collection income that would by far be the best route.

We currently have 29 rentals worth about 2.2M with around 1M in equity. We are planning on those being paid for and worth about 3M in around 10-12 years when we *might* be looking to 'retire' from day to day PM (or not as it seems very easy at this point in our lives). I have already started sifting through what different syndicators are offering, following their projects and building relationships with the ones that might fit what we are looking for down the road. It is almost like vetting applicants for a job :-).

With that being said, what we are currently doing is bringing on Silent Investing Partners to further acquire buy-n-hold rentals that meet our criteria. We have a 'waiting list' of people wanting to diversify their current investments (mostly stocks, mutual funds, CDs, etc..) by partnering with us. The way we are doing these is that they bring the cash or down payment (all have choose down payment so far) and we do ALL of the work of finding, purchasing, rehab if needed, and ongoing PM and management. Profits including cash flow and equity growth are split 50-50, giving us EACH a 9-12% return ROI over a 10 year hold. As far as OUR 'skin in the game' we are contributing all PM and management time until a profit is seen, and our LLC that is 50% partner is co-signer on the loans, so we are on the hook for 80% LTV if things go south - that gives us a pretty strong incentive to make sure that does not happen!

It might take a while to find people like us to partner up with, but could also give you a feeling of more control in the deal compared to a syndiction too, I would think.

Dan Dietz

$1MM - liquid 

$2MM - conservative asset allocation between vanguard total stock and total bond index fund

Then, I'd keep living my life...

real estate at its base is risk and work..  either others do it for you and get paid to do it. or you do it yourself.

One thing you may want to consider is just be a lender.. first position only.. little bit of work but its fun.

you control the whole loan no partners to worry about.. bring your rates in lower than local HML and you will have the cream of the crop borrowers.. its fun being a lender people chase U .. they who has the gold makes the rules..

I would be uber careful in NY though defaults are tough to deal with. but with the right folks personal guarantee and or cross collateral they can be made safe.

then as that matures U can add in a equity component.. i have done a lot of equity participation notes in my day.  this works well with small builders you get the rate plus 10 to 20% of the upside.. 

I did one in Eugene oregon were i put up 250k at 12% and 30% of the upside  the property sold in a year for 900k  so 650k gain for the builder we made almost 200k in additional profit plus our normal 12% note rate. you can do it.. if i can do it you can.. you just need to think outside the box..  BP is primarily buy and hold investors looking for 10% returns long term.. there are many ways to do quite a bit better than that if you have cash and some smarts.

@Robert A Cuomo have you ever considered triple net leased properties NNN? These are often not as sexy as other real estate investments, but are by far the most passive of real estate investments...the landlord has no responsibility, everything is managed and maintained by the tenant and these types of deals usually have long term leases 10-20+ years. The key to all this is finding a property with a strong tenant and a strong lease. You can find good NNN deals in the 6%+ cap range and make sure there are significant built in rental increases and you'll be collecting mailbox money in no time.

I hope this helps and best of luck. Let me know if you'd like any more insight into the world of NNN as I own 2 of them and have been overwhelmingly happy with them.

Really impossible to say without knowing your life goals.

I have clients with extraordinary wealth but can't focus on a clear direction without a phone call. Behind that wealth is a whole life of how they got here today and their plans for the future.

Typically less headache equals less yield. It's a value of supply and demand. NNN is typically the last train on an investors cycle as they reach retirement. NNN is more expensive and takes more amounts down to purchase but can be very passive and has tax advantages.

So someone might start with dumpy houses, then go to small multifamily, then large multifamily, and then decades of time later NNN for retirement and estate planning. Now they did that because their annual income was small and the assets grew equity and cash flow over time. I have clients however that are younger that are surgeons making over 1,000,000 a year in income so they can accelerate equity and cash growth to pursue NNN sooner. I also have business owners that sold off and exited their companies at very larger monetary gains. They typically have money in U.S. bonds and CD's, savings accounts, etc. eeking out 2.5 to 4 percent. They put money in tranches of 3,6,9 month etc. so is making some money but they stay mostly liquid to purchase a property when the right deal comes along.

Investing can be all about expectations. On NNN for example developers are building for break even cost about a 9 cap. They typically have 100 basis points of cost with capital gains tax, attorneys fees, and real estate commissions. So if they sell at a 6 cap they have a potential profit spread of 200 basis points. I go through this alot with potential clients. Anything about 4 million and below usually goes this way. You have some dollar stores at 7 cap with long term leases but they tend to be in poor locations and quality of construction is low and no rental increases to keep up with inflation so dollar return year over year becomes worth less and less. If you get into larger deals then the cost of building and land costs can get cheaper and the developer can afford to sell at slightly higher cap rates and still make a good profit.

We are about 12 years into a full economic cycle. When cycle starts going down the stock market can go sideways as everything is volatile searching for the bottom until the recovery. That is why my clients like NNN properties whether a single tenant or a multi-tenant property. They can model out what return they are getting and leases are locked in. In multifamily the last downturn of 2009 I saw landlords reduce rents, offer specials as vacancy increased to maintain market share and service their debt loads. Multifamily is not this can't lose proposition that everyone thinks. That is usually people who say that and have not been through a few cycles yet and lack the experience.

With syndicators you have to be careful. Those with inexperience might on appearance offer the best terms to the passive investor putting money in. There is a reason for that. Typically they have little to no experience just a dream to exit the rate race and have little money so need to syndicate anything to live off of the upfront sponsor fees. If an investor thinks they are getting a larger return than what the market average offers if the return is zero or next to nothing from a failed syndicate then it doesn't matter.  I know some where if they are investing 1 million in syndicates they might place 50k in more riskier syndicates where if they lose most or all of it they can usually make it back off of their other investments with more experienced syndicators but lessor returns.

In my model I make a great amount of money transacting with my commercial clients where I am the principal broker of my firm. So when I syndicate I can leave the upfront sponsor fee in the deal if that makes a particular investor feel better. Really if it is a stabilized property unless cap rate is high or other opportunities to increase value the syndicator is making the sponsor fee upfront and then just a little cash flow. That is why I like value add. It has to have some value add for me with equity growth otherwise I can just keep transacting real estate.

You will run into 1,000 different ways to invest money. The bottom line is you have a certain risk tolerance, a certain degree of diversification you want or not, and your estate planning and succession goals.

Hope it helps.  

    

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@Jay Hinrichs I think Jay’s response is particularly insightful. You don’t always have to ask for the highest rates, if you’re willing to get interest on your money slightly below the hard money lenders lots of great borrowers will look for you. Jay, where do you typically go to find these deals?

@Robert A Cuomo

My $0.02

• Stock Market ( Bernie Madoff)

AGREED. No control over returns. The guys working on Wall Street are the only ones who make out in the long run.

• Syndication also risky ( syndicators making all the money with no skin in the game))

Not every syndicator works like this. Those that I’ve talked with all put in their own $$ into the LP side of the deal.

• Apartment buildings ( are prices too high)

depends on the market, the type of opportunity of the deal itself, the and how far outside of the particular market you’re willing to invest.

• SFH rentals ( are prices too high)

Again, it depends on the market

• Private Money Lending ( lots of work - capital not always invested - low actual yield)

Lots of work if you’re having to find you own lending opportunities. If you find and trust the right operator, they do all the heavy lifting for you. It would be up to them to get your capital deployed in the right deals to keep the velocity moving.

• BRRR ( good but too much work - looking for passive)

The right operator will take care of the opportunity. You just need to find and trust them.

Interview a couple of operators and invest a small amount of capital to start out with. See what they do, how the do it and if they do what they say, Do this to see who meets your investment criteria and take it from there.

Best of luck.

Cheers

Based on your recent posts and goals, I'd recommend NNN and/or syndications. And stay away from whatever one-sided syndications you are seeing.

@Aaron Wade  many of us are heavily invested in index funds but dropping one large chunk into the stock market at this point in the cycle is extremely risky.

@Robert A Cuomo

What happened in the last two years since you asked the very same question here on BP? Is it the same $3MM? What have you been up to? Did you take any of the advice since that time? 

First and foremost, you have to educate yourself on whatever option you'll chose for yourself. SO whether it's HML, notes, or syndication, you need to fully understand the zone you're entering into.Only after that take action.

If you are seeing only those types of syndications, find some new operators and get in on their offerings. 

I hope you find the vehicle that best suits you and reap the benefits. That sometimes is the pain point all within itself but we eventually figure it out. 

@Michael Reyes hit the nail on the head with syndication. I have skin in the game on my deals, I only invest in deals where the sponsors have skin in the game, and I would suggest that others only invest with sponsors that have skin in the game. 

As passivity goes, syndications are about as passive as it gets in real estate. 

@Robert A Cuomo it seems like you understand the passive/active side of each of the methods you laid out. If you want passive, your returns will be slightly lower and you're giving up control. If you want higher returns, active investing is what you need to do and it will take more effort on your end. Just make a choice. 

I'm not aware of any syndicator 'making all the money' these days. Most equity structures that i'm seeing are 70/30 80/20 85/15 with favorable terms for investors (preferred returns). I might not invest in every single syndication that I sponsor, but it's only because I need to have working capital in my business for due diligence costs, earnest money deposits, application fees, travel costs, operation costs, etc. Being a deal sponsor isn't cheap and some investors assume that just because the sponsor ins't putting money in that they have "no skin in the game". 

Like others have said, maybe look at different operators.

Originally posted by @Robert A Cuomo :

Looking for as passive as possible but at the same time safe

I may seem negative but below are some ideas with their particular drawbacks)

  • Stock Market ( Bernie Madoff)
  • Syndication also risky ( syndicators making all the money with no skin in the game))
  • Apartment buildings ( are prices too high)
  • SFH rentals ( are prices too high)
  • Private Money Lending ( lots of work - capital not always invested - low actual yield)
  • BRRR ( good but too much work - looking for passive)

Ok whats your take on these and better ideas

 

Unfortunately I must personally disagree with most of the above.

1) "Stock Market( Bernie Madoff):" While I personally believe the timing is bad for stock market investment and am not putting money in, I wouldn't say that this is the main risk. First of all, Madoff was not even selling a publicly traded stock, but a private investment, similar to all of the other ones you are describing. Second there are frauds in every type of investment, so this is a risk that you take any time you make an investment, the minute you decide not to put into a CD or under your mattress.

2) "Syndication also risky ( syndicators making all the money with no skin in the game):" this is a caricature and only accurate of a few amateurs, and not even the majority of the average Joe syndicators, let alone the top tier. The solution is easy: pick only syndicators with fair compensation schemes and significant skin in the game to mitigate the fact that the promote structure incentivizes the sponsor to push the risk envelope.

3) "Apartment buildings ( are prices too high)." Lots of people will give you their opinion, but in reality there is no way to tell. In the past 3/6 recessions, commercial real estate/multifamily prices went up or stayed steady. Anyone who is really able to predict this in advance is about to become a trillionaire and would be pretty dumb to share it with everyone else. In my opinion the only solution is to use the vintage year strategy. Invest a little bit every year, so that way no one single bad year will kill your whole portfolio (versus dumping everything in at one time).

4) "SFH rentals ( are prices too high)::" same as above, with the caveat that there are some markets that tend to be more volatile than others and actually are more predictable. But it's inaccurate to generalize every market like this.

5) "Private Money Lending ( lots of work - capital not always invested - low actual yield)": not accurate if you choose to invest in a hard money loan fund. Zero work (other than vetting the sponsor), your capital is fully invested, plus you have paid for chipping diversified into hundreds of notes rather than one, and you don't have to constantly be doing due diligence on new notes when the old ones come due.

6) "BRRR ( good but too much work - looking for passive)". I will agree with this one! BRRR is great for some but not for you since you are looking for passive and aren't starting off with more time than money like others.

All investing contains elements of risk.  That's why its "investing" not "guarantying".

As passive as possible and as safe as possible = put your money in a CD with your local bank.

If you want better returns, you must take on some risk.  In the world of finance, returns offered is a reflection of risk to entice investors to deploy capital.  The greater the risk, the greater the returns required to entice investors to place capital in that asset class.

Are there strategies and contingencies you can deploy to minimize or ameliorate the risk of loss to you in a particular allocation?  Sure, but that requires someone to be awake at the helm with vision, knowledge, and skill.

Specifically to your question:

  • Directly trade stocks.  Not really passive, but there are good systems to teach this.
  • Most private equity syndications will have some of their own money in the game.  You can look for those.
  • Commercial/residential direct ownership: it's just a matter of looking long enough to get the price you want.
  • Private lending, when done correctly, IS work.  If you don't want to do that work, you can place your money with private lenders to do the work for you at a smaller return.
  • BRRR - you can get much the same from a REIT.
Originally posted by @Robert A Cuomo :

Looking for as passive as possible but at the same time safe

I may seem negative but below are some ideas with their particular drawbacks)

  • Stock Market ( Bernie Madoff)
  • Syndication also risky ( syndicators making all the money with no skin in the game))
  • Apartment buildings ( are prices too high)
  • SFH rentals ( are prices too high)
  • Private Money Lending ( lots of work - capital not always invested - low actual yield)
  • BRRR ( good but too much work - looking for passive)

Ok whats your take on these and better ideas

Robert,

I know you said you may seem negative. Fine. That said, you will tend to find what you want to look for. So, if you are looking for bad deals, focus on it and you will find them.

Ultimately, the market is a mix and your job is to either pay someone to look for you (however that is legally structured - advisor, fund manager, etc), or do the search yourself. 

If you have $3M to invest you have already won the game.  Buy a mix of REITS, Bonds, and S&P 500 index fund from Vanguard.  Your asset allocation will depend on your risk tolerance.  

If you are head strong on buying property then I would suggest using $1M towards a syndication or find a solid property manager in a city you are familiar with and buy only the best properties in cash in that property managers territory.  Buy B+ Properties that are amazing deals and reinvest the cash flow into your low cost Vanguard index fund.

If I had $3M I would have $10-20M a few years later by buying properties but I’m young(27) so the higher risk makes since.  If I have $3M and I’m a day older than 40 I’m putting $1M in bonds and $2M in a low cost Vanguard Index fund and I’m going to go sit on the beach for the rest of my life and watching it grow.

Stocks aren't just pieces of paper you trade, they represent actual ownership of an underlying business. To say you don't want to get in stocks due to Madoff is to say you don't want to own a business because some random other business was fraudulent, if you go this route just analyze the underlying business, make sure they have great fundamentals, vigilant leaders, stable and predictable cash flows and large moats (competitive advantages such as a powerful brand) and that you are buying at a discount to the intrinsic value. Buy a fairly concentrated basket of these and you should do fine if your analysis is good. Make sure you have a long time horizon, preferably more than 10 years if you go this route. It 

If you want to put the money in real estate then if I were you I'd put it in a value add multifamily, whether you are at a high or near a recession shouldn't matter as long as the cash flow makes sense when adjusting for the good and the bad times. 

@Taylor L. I completely agree on skin in the game being an important factor in an investor’s decision. The question is how do you verify a sponsor or syndicator has skin in the game or is committed to doing so prior to closing?

Originally posted by @Barry Dameshek :

@Taylor L. I completely agree on skin in the game being an important factor in an investor’s decision. The question is how do you verify a sponsor or syndicator has skin in the game or is committed to doing so prior to closing?

 The typical answer is to ask them how much they'll have committed after the deal closes. I suppose they could lie, I'm not sure what options you'd have to independently verify the number, since the securities aren't listed

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