Ways to make money, when you have money

[Charlton Thiede]

I'm new on BP and joined after I started listening to Joe Fairless' "Best Real Estate Investing Advice Ever" podcast. It's very motivating to hear other investor's stories. Curenrly I work full time in mental health and I have a fairly considerable amount of capital at my disposal to start my real estate investing business. "Fairly considerable" is relative and vague, I know, but I'm hesitant to post a dollar amount. It's over $250,000. I'll leave it at that unless you want to talk personally. 

I know that having funds starting out is a huge advantage when going into real estate investing but I'm new at this. It would be easy to rush into something and make poor choices. My families goal in a nutshell is to increase our cash flow and for me to be able to move away from full time mental health work. 

Because I am inexperienced and my current knowledge is limited, I am looking to develop a plan for how to wisely invest my money so that it can grow and work for me long into the future. I'm interested in rental properties but I know that there are other ways to make money in real estate. I think ideally I would like to fund my own deals and use earnings to buy rental properties free and clear but I'm looking for sound advice on how to make my dream a reality. I'd love to find a great mentor. 

Here's the big question I have: If you had $250,000 how would you invest that money? 

[Ian Ippolito]

@Charlton , first, congratulations on being in the great position of having some money to invest. It's definitely a lot easier than people starting off with nothing. It may not be fair, but everything gets easier the more money you have.

At the same time, some of the advice given would be better to someone starting off with little funds. Unlike many of the people on this forum, I have a slightly different background and a different perspective. Real estate has many advantages, but like any investment it goes through cycles and will have its ups and downs. Diversifying to different real estate investments is crucial, but not enough. If you really want to count on your portfolio to generate income reliably over a long period of time, it needs to be diversified into multiple asset classes. 

Most financial planners recommend 10% of the portfolio in real estate, however, since real estate is not considered a "traditional" investment by many,and not fully understood, I believe this is a fairly conservative number. There is a strong case to be made for 20%, since the Yale endowment (which is one of the most successful investing funds of all time) allocates that much. I know some high net worth individuals (meaning over $10 million in liquid assets) who allocate closer to 40 or 50%, because they keep close track of individual investments. 

But you are a newbie, and you can expect that you will make mistakes. I would not recommend placing 100% of your portfolio into real estate. There are many other asset classes that can also generate income that will give you greater stability over the long term.

I would recommend that you consider putting 10% into consumer loans (such as the lendingclub), which historically have held up well in recessions and yielding about 7% now. I recommend placing another 10% into prime and super prime business loans (such as at Funding Circle) which have similar performance but even higher yields.

Consider putting another 20 to 50% in real estate. If you have more than $1 million in assets, you're considered an accredited investor. If so, you have many high-yielding opportunities available, that the typical person on BP does not. For example, you can invest in a diversified fund of hard money loans, which are very short term,but yield very well now, and you can wind down and get out of if the economy turns bad. That way if one property goes bust it, it doesn't hurt you at all. Compare this to the typical BP investor who has just a handful of properties and is exposed to much more risk.

You can invest in a fund of triple net leases, which yields very well, and also has protection if and when the economy has a downturn. Other areas that are good for income producing/defensive investing our mobile home parks, self storage and senior living. All of these will do well in a downturn.

Some other people have recommended that you use leverage. Just remember that leverage is a double-edged sword. It works great and helps you move quicker to your goals when times are good. And stabs you in the back and can wipe out your investment when times are bad. People without money are forced to use as much leverage as possible. People with money can use it when it makes sense, and avoid it when it's too risky. Above all, preservation of capital should be her ultimate goal. It doesn't make sense to reach out for a few extra points of yield, if you're risking losing 20% or more of your investment in the next downturn.

Another 20% should generally be invested in traditional markets (income-producing stocks with dividends, bonds). However, I would wait on this until the market volatility of the stock market dies down. That way, if we are in the start of a bear market, you will not have to wait 2 to 3 years before you break even. Or, if you are worried about missing out on the huge gains that typically follow the end of a bear market or correction, you can dollar cost average your investment over a year or two, to reduce the risk.

Sorry for funny with so much information. I know this is a lot to digest, and before getting into any investment you should learn as much about it as possible. Investing a large sum of money is actually a full-time job, but it's also a heck of a lot easier than clocking in 9-to-5. I wish you the best of luck. If you have any other questions, feel free to reach out to me.