What would you do with $2.5 million dollars cash?

Commercial Real Estate Investing
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What would you do with $2.5 million dollars cash?

Stuart Humphreys
Rental Property Investor · Dallas, TX · Member since 2014 · 15 posts · 5 votes
If you were going to invest all of it into CRE how would you do it? Split it up? One big purchase? Use it as a down payment and take on debt or no debt?
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Michael Le
Developer · Houston, TX · Member since 2015 · 1k+ posts · 1k+ votes
9y

Warren Buffett said “Keep all your eggs in one basket, but watch that basket closely.” 

Since my focus is multifamily I would probably spread that $2.5m across 20-30 properties located across multiple MSAs. That would be my eggs in one basket in terms of asset class yet diversified from the perspective of market.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Paul Fagot  I take it this building is not in Redding CA.

    and if its out in the mid west or rust belt or inner big city back east.. the reason you not getting action is these things are DIME A DOZEN  I can roll into Chicago and find 50 deals like that or better.. I just funded one for 80k that my vendor bought 22 units... ( needs rehab of course.)

    Don't use CA thought process on the mid west or rust belt just don't work.

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  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Stuart Humphreys  very loaded question you look like a young investor.. swing for the fences.

    back a builder or developer.. the real money is made there.. and by real I mean 10X what you can do on any cash flow type investment.  then you can use those profits to slowly build up cash flow.

    I like MHP  almost the best I have owned 3 and just bought another..

    I also like Notes... and lending money and doing JV deals...

    really depends on your time your experience and what you really want to do.

    but NNN is nice.. REITS syndications with top providers all of those would be passive and give you some nice returns.. if you can live off of 200k say a year minus tax... some can some cant... just depends on your lifestyle.

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  • Claude S.
    Investor · Savannah, GA · Member since 2016 · 79 posts · 62 votes
    9y
    Retire immediately.
    2Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    9y

    What would you do with $2.5 million dollars cash?

    First thing I would do is find out where the rest of my money was.

    If I were younger I would seek out a highly qualified financial advisor and determine the most secure, guaranteed and totally passive funds vehicle (maybe REITs) I could find. Actual real estate ownership does not fall into any of those categories.

    With 2.5M generating a small secure income the only work I would do is meet with my advisor quarterly.

    2Reply
  • Andrea S.
    Investor · Siloam Springs, AR · Member since 2015 · 12 posts · 0 votes
    9y

    I would talk to a financial planner to understand all my options. This is were I would start.

    2,500,000.

    625000. Mutual funds

    200K in money market for emergencies.

    200K something fun

    With the rest I would buy some turnkey rentals all cash for monthly income. And then probably BRR as many as I could, but I like renovating distressed properties and I'm a buy and hold investor. 

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  • Justin Fox
    Software Developer · Vidor, TX · Member since 2015 · 922 posts · 639 votes
    9y
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  • Justin Stanfield
    Investor · North Richland Hills, TX · Member since 2016 · 167 posts · 57 votes
    9y

    Rule 1 - NO debt, own if you can

    Rule 2- always buy with an exit strategy (one basket that be exchanged if needed)

    Rule 3- have a mentor or someone more experienced second your opinion

    Rule 4- Keep both upward, and downward economic cycles in mind

    Rule 5-  Be frugal, and be picky ( don't buy just because you can) - timing is everything

    Rule 6-  Real Estate is the best investment --First choice in terms of long-term benefits with upward or downward economies-  Farmlands, then commercials, then multi-family homes (if the economy is down multi-family homes will do better than commercials)

    Rule 7- Invest 10 - 15 % in precious metals, like gold, sliver, etc --- 

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  • Account Closed
    Investor · West Los Angeles, CA · Member since 2014 · 230 posts · 239 votes
    9y

    @Jay Hinrichs

    Could you expand on back a developer or builder?  Do you mean be be an equity investor/debt investor?  By developer do you mean tract homes or custom homes in the suburbs or infill in the city? 

    Thanks 

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Account Closed  both... take raw land and entitle it.... ( Developer)  Build infill and certain markets there is a nice 1st time move up market.  starter housing tends to have very thin margins.

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  • Paul Fagot
    Wholesaler · Redding, CA · Member since 2015 · 218 posts · 27 votes
    9y
    Jay Hinrichs any advice on how I should go about this property in Pennsylvania?
    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    9y

    @Paul Fagot  no advice like I said they are dime a dozen out there in the rust belt... many times they have zero value.. probably a total waste of time. .you cannot use WEst coast value propositions out that way ... you will over pay by 3X if you do

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  • Alex S.
    Professional · Los Angeles, CA · Member since 2015 · 33 posts · 10 votes
    9y

    Just a thought remember its your funds. No one is going to do a better job than you. You probably had some success to accumulate those funds.

    Here are some of my thoughts, Stay liquid to have funds for opportunities. As we are in a rising interest rate environment.  There will be some opportunities to take advantage of.

    5 year Bank CD pays around 2 percent.  risk free rate. that would be 50k a year. That's not enough funds to live like a rock star though. 

    I suspect you can get 4-5 percent with out taking on that much risk.  Example single family free and clear homes in good areas. Probably more in Midwest. Now were are talking 100-125k a year. 

    Still no Rock Star. But not to Shabby.

    If you can figure out how to get around 10 percent return with out taking on too much risk that's 250k a year baby!  you are a Rock Star!

    Be careful of leverage.  Read. Value of debt. cant remember who wrote it. Some leverage might be good.

     What ever you do you don't want the stress of being wealthy twice.  So do it right the first time.

    To your success,

    Alex

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  • Darren SagerPro Member
    Investor · Tampa, FL · Member since 2013 · 2k+ posts · 1k+ votes
    9y

    I agree with @Jerry W.  That or I might find some ways to invest it short term in other people's projects above 10% and then wait for the market correction, allowing me to possibly pick up properties in prime locations that will always produce long term.  And while I'm waiting for that to happen, get educated by finding a good mentor.

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  • Christopher Stobbart
    Investor · Franklin, MA · Member since 2015 · 47 posts · 22 votes
    9y

    Key  =  What do you need to make on return ? Cash now to live on ? Or long term strategy?

    1Reply
  • Chuy Gonzalez
    Investor · Long Beach, CA · Member since 2012 · 313 posts · 190 votes
    9y

    Im using 2 mil to put down on 8 mil worth of property. Im keeping 500k for the inevitable renovation costs. I would try to buy maybe 2 or 3 4 plexes within walking distance of the beach somewhere here in SoCal...and out of those 2 or 3 units...one of them would get turned into my office/ weekend apartment. These building would become my 'work' and i would quit my day job.

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  • Mimi H.
    Investor · Mountain View, CA · Member since 2014 · 120 posts · 51 votes
    9y

    I'd try to restructure things so that the $2.5M is coming from a solo 401k or solo IRA so you can take advantage of tax benefits. Then diversify. I would have put some of it in REITs but these days, they have already been run up so they're kind of pricy. What / where exactly you'd invest has a lot to do with many vectors. Generally, I don't deal with what if scenarios that aren't executable. There's so much opportunity to put real funds into play that at times, the 'what ifs' tend to be a distractor. But hey, it's Sunday so why not... :D

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  • David Thompson
    Investor · Austin, TX · Member since 2013 · 933 posts · 1k+ votes
    9y

    Stuart,

    Most of the wealthiest in this country did it through real estate and especially commercial real estate holding not stocks. Within CRE there are some very interesting niches but you should be looking at macroeconomic trends as a starting point and then the best niches. The millennials, boomers and immigrants are renting more and that is expected to continue. I'm reading a great book by Paul Moore (fellow BP) who I spoke w/last week. His book "The Perfect Investment" lays out the following recipe,

    "Invest in stabilized value-add commercial multifamily properties through a trustworthy operator/expert asset manager who contracts w/a professional property management firm in a large, growing markest."

    Some other stats you may find interesting that Paul has researched:

    1) Loan deliquency rates from 2005 to 2015 showing the delinquency rates for MF is extremely low.  In 2009 at its peak, MF delinquency was 90% lower than residential.  How is that for stability.  During this downturn, MF recovered faster as well.

    2) Risk adjusted returns demonstrate that the risk/return ratio of commercial MF investing is about 400% better than the stock market.  

    I have witnessed first hand a partner of ours in Houston that has 10+ large B/C class Apt properties and during the oil plunge they actually have done quite well, occupancy at their properties have stayed about 93% and moved up slightly while class A fell off the cliff down 15 to 25% in certain submarkets.  Now, that is stability and is a great test of what can happen if we have a downturn.

    Now, barriers to entry are high so participating as a fractional owner in large MF and investing w/in these large growth markets, specially (class B/C value add large apts) with experienced operators is one area you should seriously consider.

    I do not think all your money should go here.  But I do think that some portion of one's assets should be put into this niche.  I also think you should take your time and research good sponsors w/solid track records.

    There are other niches like mobile home parks and storage that are also seeing favorable trends such as shortage of affordable housing and folks leveraging storage due to increase in renters.

    Wish you the best.  Be patient, take your time and gradually move some of these funds into these solid niches.

    0Reply
  • Michael Noto
    Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes
    9y

    The first thing I would do is align myself with people who have either had $2.5 million to invest and have been successful or people who have advised people at that level on how to deploy that kind of money into investments. 

    0Reply
  • Joseph Austin
    Commercial Real Estate Broker · Boise, ID · Member since 2016 · 12 posts · 2 votes
    9y

    Regarding the debt question, there are many other details I'd need to understand before advising someone how they should spend that money. What stage of life are they in? What is their risk tolerance? What are their primary goals and objectives with the investments? Etc.

    Positive Leverage, when used correctly can be one of the most powerful tools you use to build wealth. For example, make the following assumptions about a property you are considering purchasing:

    • Price is $1,000,000.
    • The capitalization rate is 7.5%.
    • Debt (assuming you obtain debt): down payment of 30% and interest rate of 5%

    The question is, do you pay "all-cash" for the property or do you take out a loan? What does the math look like?

    As the above example shows, the property produces a 7.5% return and if the borrower pays “all cash” for the property the final return is 7.5%. However, because the borrower is only charged 5% on the debt amount, if the borrower instead uses leverage (i.e. debt), their rate of return increases from 7.5% (all-cash) to 13.3% (leveraged). This amounts to a 77% greater return than the borrower would have otherwise received. Where else can you obtain a 77% return?!?!?

    Of course, the above example is an overly simplified calculation of these two options. In reality, the loan will most likely involve principal and interest payments and the internal rate of return (IRR) calculation would be a better method for calculating the actual return on the investment, but it makes the point about what positive leverage is and how it can significantly help you increase your rate of return on investment real estate.

    Does this mean I should always use debt when purchasing investment real estate? Absolutely not! The answer for you will come down to your answers on some of the other questions I asked at the beginning.

    Leverage (i.e. debt) can be an awesome tool, but it needs to used appropriately. I've personally witnessed hundreds of people lose their investments due to over leveraging themselves and we know that real estate has always been cyclical.

    Despite what the above numbers show, I'm a big fan of paying all-cash when possible. Good luck!

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  • Anje Walfoort
    Redding, CA · Member since 2014 · 77 posts · 18 votes
    9y

    Take a look at investing in Anderson, CA.  Message me if you would like some ideas.  I have been working closely with City Manager here and I truly believe that this is going to be an upcoming area full of opportunity. There has never been a better time for Anderson to grow than now.  There are incentives for businesses and developers.  The 5 year forecast is great for the area!  Feel free to contact me, I'd be happy to put a package together for you.  

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