Million dollar opportunity

Rental Property Investor · Towson, MD · Member since 2015 · 49 posts · 27 votes

I have been approached by a family to help build a real estate business with them. They propose a 1 million dollar investment to begin with. If we are profitable the first year they will add another million, and this will continue year after year. They are interested in the Baltimore market which I am familiar with. However, I’ve never really considered my investment strategy with a million dollars (all cash, not borrowed). They are interested in everything ... rentals, flips, new construction, multi-families. They’ve asked me to write a strategy proposal but I’m not sure what the best way to go is. With a million dollars I’m estImatIng we could do between 7-10 houses as flips in a year. For my experienced investors out there... what would you guys do if you were given a million dollars to build a real estate company from the ground up?

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J ScottPro Member

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Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes

Please don't take this the wrong way, but I see two issues here:

1. If you don't know what to do what $1M, you probably shouldn't be willing to take $1M from another investor to investor for them;

2. You don't seem to be asking the right questions.

#1 speaks for itself.

As for #2, the correct question isn't what WE'D do with $1M -- the correct question is to the investor, "What are you looking to achieve with your $1M?"

Are they looking for ordinary income? Are they looking for cash flow? Are they looking for tax benefits? Are they looking to build generational wealth? Are they looking to build a brand? Are they looking to help the community?

Without knowing what the investors are looking to achieve, how can you possibly determine the right strategy to help them achieve it?

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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
7y
Please don't take this the wrong way, but I see two issues here:
1. If you don't know what to do what $1M, you probably shouldn't be willing to take $1M from another investor to investor for them;
2. You don't seem to be asking the right questions.
#1 speaks for itself.
As for #2, the correct question isn't what WE'D do with $1M -- the correct question is to the investor, "What are you looking to achieve with your $1M?"
Are they looking for ordinary income? Are they looking for cash flow? Are they looking for tax benefits? Are they looking to build generational wealth? Are they looking to build a brand? Are they looking to help the community?
Without knowing what the investors are looking to achieve, how can you possibly determine the right strategy to help them achieve it?
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Gabriel Ehrlich
OP
Rental Property Investor · Towson, MD · Member since 2015 · 49 posts · 27 votes
7y
@J Scott well personally, if I had a million dollars to invest I would continue with my current strategy of flip 2 rent 1. However, in this scenario, the investors want to increase their wealth by a significant enough amount in order to “prove” the process works. Basically, the son has real estate dreams, the family is very wealthy, and this is their way of teaching him how to build a company. If you were given a chance like this at the beginning of your career how would you use it?
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Frank Wong
Real Estate Broker · Bay Area · Member since 2018 · 1k+ posts · 3k+ votes
7y
Hi Gabriel,
Your current strategy of flip 2 rent 1 can achieve the investor's goals, That is the strategy you know. Stick to what you know. Doing 7-10 flips as you said can increase their wealth by a significant amount. Use your past experience on your own flips to show them what the ROI can be implementing your strategy.
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Mike Dymski
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
7y
Keep flipping X and renting Y (insert whatever numbers you like).
There's capital everywhere in today's market. Can you put ZZZ (insert number) potential opportunities through the funnel? If so, that's your business plan. That's all of our business plans.
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Jason D.
Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
7y
@Gabriel Ehrlich what is the son's role in all of this?? You need to know what the investor's goals are... "build wealth" isnt a specific enough goal for you to build a business on. Are they looking for passive cash flow? Equity? Cash profits? Or are they just looking to give there son experience?
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Ned CareyPro Member
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Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
7y
@Gabriel Ehrlich
That is a pretty wide range of choices. They need to have a better idea what they want to do. I don't see how you can possibly give them a plan if they don't know what they want.
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Ian Barnes
Rental Property Investor · Baltimore, MD · Member since 2014 · 247 posts · 321 votes
7y
Take that million, and just do hard money loans, that's what I do with my investors passive money, take it at 10%, loan it out at 12% and 3 points, keep the spread, rinse and repeat. I happen to only finance projects that are rentals that my gcs partners do the work on, so I have a somewhat unique business model.
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Joseph M.
Flipper/Rehabber · Los Angeles, CA · Member since 2009 · 1k+ posts · 732 votes
7y
@Gabriel Ehrlich Would also be interested to know what the son’s role would be . How well do you know him ? Best situation for you of course would be if the family takes a passive role and lets you make all the decisions . Does he have another job or business or does he want to work full time in this new business his family is investing in ? Does he have certain skills or education that could be beneficial for the business? You don’t have to answer these questions but some things to think about if you haven’t already . best of luck
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Jim Goebel
Real Estate Investor · Des Moines, IA · Member since 2016 · 922 posts · 533 votes
7y
@Gabriel Ehrlich
Typical fix and flip model has scaling challenges. Once you get over a certain amount of capital it becomes hard to effectively allocate it.
If you don't run into that with 1mil, you will as you keep progressing.
I think you owe it to the family to speak honestly to that.
That's the reason most large institutional investors have a hard time in the SFH world and focus on larger, lower cap rate investments.
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Ozzy SirimsiBusiness Member
Real Estate Agent · Baltimore, MD · Member since 2016 · 1k+ posts · 782 votes
7y
Since you want us to give you an action plan and this is what I would do, if I were given the money.
I don't care what their strategy is, I am their CEO, we sat down and they trust me with their money. They must have think I know what I am doing.
Since they have no problem with money, and it is strictly their money, I would mainly go for higher-end flips. I personally don't like 30K houses in bad neighborhoods with lower returns. However, I would do do one or two lower-end too just to spread the risk.
1 lower end and 2 higher end flips first year.
Go for houses like 250k or more, shoot for 75K or more profit.
Buy rentals with your profits, not with principle.
Cash is the king, don't tie it to a rental yet. You dont have to deal with banks first year. Make your profits and work around your rental portfolio next year.
Then scale it up from there.
I see myself making reaching 5 millions at the 4th year :D)))
Good Luck!!!
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Elbert D.
Real Estate Entrepreneur / Investor · Chicago, IL · Member since 2016 · 688 posts · 367 votes
7y
As @J Scott mentioned you dont seem to know what to do let alone start. You need to ask them more questions. Way more questions.

I also would like to know if you have reliable contractors and a handy man???? Because if you dont know any your in big trouble. Getting any Joe blow will get you smoked. If you dont know already there are many scammers and crooks in the real estate industry.

You mentioned the Baltimore market and you knowing it very well so you should know what areas and certain pockets of the city are rental areas, flipping areas and some areas that are both. I would for sure get ahold of some reliable licensed insured and bonded contractors who are knowledgeable and can provide you with previous work experience and call atleast 5-7 references. Also see if they are good with time management because many of them arent.
Best of luck to you.

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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
7y
Originally posted by @Gabriel Ehrlich:
@J Scott If you were given a chance like this at the beginning of your career how would you use it?
I would have turned it down. At the beginning of my career, I wasn't knowledgeable enough, experienced enough or connected enough to invest other people's money with a level of risk that I would have been comfortable with.
That's just me personally, btw. I tend to have a VERY low risk threshold when it comes to handling other people's money...
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Jeffrey H.
Baltimore, MD · Member since 2018 · 169 posts · 82 votes
7y
Flipping is shortsighted. Even the best "flipper" is only as good as their last deal. Awfully crowded these days and new people are entering, overpaying for things, and ruining the deals. Buy rentals, then buy some more. Make sure they are rock solid in every way, rented, then repeat.....or steal the million and piss it away on drugs and hookers. Whatever youre most comfortable with.
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Shadonna N.
Developer · . · Member since 2014 · 520 posts · 162 votes
7y
Sounds like they may have watched too much HGTV and want to get their hands dirty. The goals are too vague. One answer you should have is the plan to preserve principal. Also your allocation to active projects and a place (liquid) where you can park a reserve and earn a little interest.
1 Reply
Jacqueline Carrington
Investor · Corona, CA · Member since 2014 · 746 posts · 372 votes
7y
Multifamily. Multifamily. Multifamily.
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Gabriel Ehrlich
OP
Rental Property Investor · Towson, MD · Member since 2015 · 49 posts · 27 votes
7y
I really appreciate everyone's reply here, whether it is negative or encouraging - I want to see opinions.
To be clear, i wouldn't just be using this money as an investor, I would actually be building a company with the family, and if successful become a partner. The kick is, if the company profits the first year, the family will invest an additional million and every year thereafter. For everyone asking what the families goal is - it's to build liquid capital quickly.
The son is a real estate analyst that graduated from an ivy league school, hes bright but has 0 experience managing contractors or with construction. The mother was a big developer in the country she moved here from. Both have valuable skills. My role in this would be to help identify deals, strategy and manage contractors.
Thinking about this longer i believe the best strategy may be a combination of 5 flips in the 250 arv range and a couple new construction deals. I believe this would provide the quickest and largest ROI if done correctly.
If I don't take this opportunity, I might regret it forever, even more so than if I take it and fail.
Erase everything you know about the situation from your mind... Someone is giving you a million dollars to build a company and invest for a quick ROI, what's your plan?
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Brian Pulaski
Flipper/Rehabber · Montgomery, NY · Member since 2016 · 2k+ posts · 1k+ votes
7y
If someone gave me $1mil. I would scale up and complete as many flips in a year as possible. I would allocate money towards landing off market deals, and then allocate what I need to flip as many properties at a time as I have quality workers to complete. I have had 3 at once, running them myself. With more capital I would be comfortable with 5 at a single time. With more capital and more deals, I have people I can trust to help and could see running 7-8 at once. This would all depend on finding the deals though, as that is the hardest part.
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JD MartinBusiness Member
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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
7y
@Gabriel Ehrlich : you said "Invest for a quick ROI". I don't really believe that lasting wealth in RE is a "quick ROI". Real estate tends to be a "get rich slowly" game. The first question that came to my mind, when I read your post (other than @J Scott's post, which was really what I was thinking) was "If this family has that many millions to invest, why do they need you in the first place?" In other words, what experience/skill set do you bring to the table to make your expertise necessary?
If your background is 100 flips and 50 buy & hold rentals, and that's what they are thinking of doing, then perhaps you have something to offer. What if they want to buy notes? What if they want to do new construction?
My three thoughts:
1. If your role in all of this is not already clearly defined, it would probably make sense to pass. It's pretty unusual for wealthy people to say "Hey pal, teach my son to do something, here's a cool million, if you make money we'll give you another million next year and each year thereafter, have fun!" If it isn't a scam, it sounds ludicrous to me. Actually, it sounds like a money laundering attempt, something that the mob would do.
2. If you are moving forward anyway, you should probably stick to what you know.
3. If you are going to move forward, and this isn't a scam (i.e. they deposit $1 mil in your account and tell you to carry on), you should probably visit a good contract lawyer to spell out what everyone's responsibility is and try to limit your liability if this thing goes south.
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Gabriel Ehrlich
OP
Rental Property Investor · Towson, MD · Member since 2015 · 49 posts · 27 votes
7y
@Brian Pulaski I think that would be a good plan first year! Thanks for taking the question at face value!
@jdmartin I appreciate your concern, and I thought the same thing initially. However, they check out. Additionally, the reason they want me, and not some ultra successful investor is simple, the mother wants her son to have a partner, not a boss. I have enough experience to be dangerous, but not so much that I overtake every decision. They want quick ROI initially, as any startup would - I understand how real estate works and that it's a get rich slow game (if your're focusing solely on rentals). I'm proposing a flip heavy first year to maximize profits followed by a split investment (flips/new builds/rentals) the following year to help safeguard those profits and provide tax benefits. This is all hypothetical, I haven't accepted anything yet.
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J ScottPro Member
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Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
7y
Originally posted by @Gabriel Ehrlich:
Thinking about this longer i believe the best strategy may be ... a couple new construction deals.
If you think new construction is a good strategy at this point in the economic cycle, I think you need to seriously reconsider your plan.
.
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Joseph M.
Flipper/Rehabber · Los Angeles, CA · Member since 2009 · 1k+ posts · 732 votes
7y
@Gabriel Ehrlich Will all of you be working at this new company full time ? I guess I’d worry about a “too many cooks in the kitchen” situation . What expectation do they have for the first year in order to deem it a success where they will put in another million ? You mentioned that if things go well you’d be a partner but wouldn’t you be a partner from the beginning , or would you be getting paid a salary ?
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Gabriel Ehrlich
OP
Rental Property Investor · Towson, MD · Member since 2015 · 49 posts · 27 votes
7y
Originally posted by @J Scott:

Originally posted by @Gabriel Ehrlich:
Thinking about this longer i believe the best strategy may be ... a couple new construction deals.
If you think new construction is a good strategy at this point in the economic cycle, I think you need to seriously reconsider your plan.
I'm curious why you caution about new construction but not flips? The profit margins are significantly better with new construction. Even if market were to tank there SHOULD be enough room to at least still break even... Minimum profit on new construction is ~50k. But most of the people I know are making way more than that. Additionally, there aren't any surprises once construction begins, so what you estimate the cost to be isn't too far from the actual cost. Whereas on flips, there are construction surprises...constantly. On a 250k house, the MOST you will make is probably around 40-50k (that's using cash) and that would be a diamond in the rough deal.
I'm not being combative, its a serious question.
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J ScottPro Member
Moderator
Investor · Sarasota, FL · Member since 2008 · 17k+ posts · 17k+ votes
7y
Originally posted by @Gabriel Ehrlich:
Originally posted by @J Scott:

Originally posted by @Gabriel Ehrlich:
Thinking about this longer i believe the best strategy may be ... a couple new construction deals.
If you think new construction is a good strategy at this point in the economic cycle, I think you need to seriously reconsider your plan.
I'm curious why you caution about new construction but not flips? The profit margins are significantly better with new construction. Even if market were to tank there SHOULD be enough room to at least still break even... Minimum profit on new construction is ~50k. But most of the people I know are making way more than that. Additionally, there aren't any surprises once construction begins, so what you estimate the cost to be isn't too far from the actual cost. Whereas on flips, there are construction surprises...constantly. On a 250k house, the MOST you will make is probably around 40-50k (that's using cash) and that would be a diamond in the rough deal.
I'm not being combative, its a serious question.
Here are just some of the problems with new construction in this part of the economic cycle:
1. New construction tends to be more expensive than existing homes. The first part of the real estate market to get hit when the economy starts to turn is the higher-end of the market. New home sales will soften before existing home sales. And there is good indication that we're already starting to see that happen.
https://www.reuters.com/article/us-usa-economy-hou...
2. New construction takes a LOT longer than a flip. If you see the market starting to turn, you can generally get your flip completed quickly and get it on the market before you see a serious decline in values/profits. With new construction, you can spend a long time just preparing for the build (dealing with subdivision, zoning, permits, drawings, etc) before the work even starts. And then once the work starts, you're likely looking at at least 4 to 6 months for the build. If the market starts to turn, you could still be months away from a completed product and have little recourse but to stop progress and take a loss. A lot of builders expect to lose money at this point in the market cycle; but because they've been building for the past 5 years, they've earned enough to cover any losses at the end of the cycle.
3. One of the first things that happens when a downturn hits is tightening in lending/credit. That means buyers will find it more difficult to get loans, especially for more "exotic" products. New construction isn't necessarily exotic, but many lenders will tighten up on construction loans before they tighten up on existing home mortgages.
4. Once the market turns, there's going to be an oversupply of existing homes put on the market at below-market prices. Because there is more equity in the average existing home than there is in the average new construction project, buyers will find better deals on existing home sales than you'll be able to offer on your new construction products.
.
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Rich S.
Central, MN · Member since 2015 · 148 posts · 184 votes
7y
If everything checks out, I think you'd be crazy to pass up the opportunity. For those on this site with no or limited track record, 90% of them don't have $$$ to fund deals/start their business. Someone is providing a GOLDEN TICKET and hoping you can be the mentor to grow said business. Everybody thinks being an expert is the answer, but in my opinion "FIT" is the key. If this is a good FIT for them and you, I think you'd be nuts to turn it down. People with unlimited resources create more "fits" than everyone else. Because of their capital and track record, more doors open, hence they can make more things fit. I'd assume that someone like you doesn't have people offering you a million dollars very often to start a business. That doesn't mean you don't have a good business or track record, just the fact of how rare this opportunity is. Can you think of a scenario that would give you as much opportunity to grow financially than this one?
I think the good advice you have gotten: *stick to what you know/what you are good at .... *diversify with flips to rentals to allow yourself some security...*I think new construction is riskier at this point than the other avenues, however, there are niches are that aren't affected near as much as others due to economy... I'd explore those....*in the point about when economy starts to turn and lending regs get stricter, might be a prime opportunity to become a lender as part of the business too... you might not know much about it now, but I'd suggest learning about HML... in order to potentially have another avenue for growth... especially since it seems your partners are sitting on loads of cash.
Good luck!
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JD MartinBusiness Member
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Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
7y
Originally posted by @Gabriel Ehrlich:

@Brian Pulaski I think that would be a good plan first year! Thanks for taking the question at face value!
@jdmartin I appreciate your concern, and I thought the same thing initially. However, they check out. Additionally, the reason they want me, and not some ultra successful investor is simple, the mother wants her son to have a partner, not a boss. I have enough experience to be dangerous, but not so much that I overtake every decision. They want quick ROI initially, as any startup would - I understand how real estate works and that it's a get rich slow game (if your're focusing solely on rentals). I'm proposing a flip heavy first year to maximize profits followed by a split investment (flips/new builds/rentals) the following year to help safeguard those profits and provide tax benefits. This is all hypothetical, I haven't accepted anything yet.
Well, the first step anyone should take in any venture is risk management. Doing otherwise is just casting your lot with the wind. Have you identified, or tried to identify, all the possible risks in this venture, and how you mitigate those risks? That doesn't mean risk doesn't still exist, it just means that you've formulated a plan for minimizing those risks to the extent possible/practical and a game plan for dealing with them if they do come to pass. In this case, because you're now using OPM, that RM exercise needs to include your 'partners'.
So once you have identified what you plan to do with this money, you should put together your plan for dealing with the pitfalls or disasters that may occur. In any case, you really shouldn't need to ask us what to do with $1 million plus more to come - you should ask yourself "If I had access to $1 million in a credit line, what would I do with that money?" Then, assuming you've identified and mitigated your risk factors, you should act accordingly.
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