How to invest a large sum of money in R.E.

Question

It would be great to hear from people who have been in the business a while and deal with significant portfolios.  What would you do if you were starting all over and were given a very large lump sum of money (approx. $1M) to invest in real estate.  Additionally, these are the goals/considerations:

#1) Cashflow

#2) Passive Income

#3) Intention of using property management

#4) Possible to live out of state

What would you do? SFH, Duplex, Larger Multi Units?  How leveraged would you go? How fast or slow would you go? What else should be considered?

It has been great reading and learning on here for a few months and I look forward to hearing others' advice.

Thanks

Account Closed · Answer

@Shane  G.

I think it would all depend on how much work you want to do on the acquisition side. SF would probably be the most, or smaller note transactions. MF could potentially be one deal.

Andrew

Jonathan Twombly · Answer

Dear @Shane  G. :  there is a lot to unpack here.  But if you really have this problem, it is a nice problem to have.

$1mm gives you enough money to buy a decent sized MFRE property outside of a major city at a very attractive rate of return.  However, obtaining financing will be a problem unless you have a net worth equal to the amount you want to borrow, because no bank will lend -- even non-recourse -- unless you have the net worth to repay the loan if you trip one of the so-called "bad boy" carve outs from non-recourse debt.  (The subject of a whole other discussion.)

Thus, if I had that kind of fund to use, I would start out by buying a number of smaller properties.  I would use $300,000 to buy a $1mm property at 70% leverage, using the remaining $700,000 to satisfy the net worth requirement.  Then I would repeat the process two times.  Now you have a $3mm portfolio with $900,000 in equity and $100,000 left over to satisfy any liquidity requirements the bank might have.  If you buy the properties at an attractive capitalization rate (cap rate, or net operating income divided by purchase price), you could wind up with about $60,000 or more in income from these properties.  As your equity in the properties climbs over time, your net worth will climb and you can obtain more debt for other deals.

As someone starting out, professional property management is a good idea, especially if you are investing far from home.  But you have to watch management closely, holding regular calls with them, getting regular rent rolls, proper financials, etc.  And you must show up at the property unannounced from time to time to make sure they know you are watching them.

I am sure there are many ways to spend $1 million, but those are my two cents.

Brant Richardson · Answer

You live in a great market for cash flow.  I would buy SFH's in cash.  It would take a long time and a lot of work on the front end to acquire a million dollars worth of good deals.  I would have a professional property manager running them.  The long acquisition phase would give you time to make sure you had a good PM.  After I spent through the million, if I was enjoying finding and fixing properties, I would get a portfolio loan against some of my properties and start buying in cash again.  You would have to leverage to get into the 10-15k per month range.

Joel Owens · Answer

Hi Shane,

You need to first define how active or passive or you want to be. Then look at investment goals and annual COC pre-tax return desired.

In commercial real estate or large multifamily unless you are paying all cash the debt dictates the return with the spread. Risk is calculated based on how long the interest rate and favorable loan terms are locked versus leverage. Having 1 million you can definitely get into more passive assets. Without really a phone call I couldn't go into to much detail. Commercial investments can be great but there are many types and various things to consider.

Without knowing your liquidity and net worth and property time horizons along with retirement goals it's hard to give more info. The forums are great for general info. More private type information is shared offline. Sometimes after discussing investors discover large multifamily or commercial isn't what they thought at first and others times they are more intrigued.

Account Closed · Answer

I am in Kansas City and have lived here for basically 30  years.  I know the metro area quite well.  Additionally I got my RE  license just to have access to MLS and learn more about the residential  market.  My original thought was to buy and hold SFHs until I had the  quantity I need to make 10-15k/month.  My only concern is that it could become  unwieldy to manage (especially if we moved away from here).

I  have wondered if Multi family units (apartments specifically) would present an easier  situation to manage a management company with.  Also,  maybe having an onsite manager is an option if the apartment is large enough.  But, that is a whole  new ballgame to me that I feel much less knowledgeable about.  Maybe  it's just a bit more scary because all the numbers become larger.

@J Scott, I'll give a bit more info to clear up the goals.  They are actually clear, just very very simple.

My goals aren't defined as far as numbers go because that isn't my highest objective.  My goals in order are this. 1. free up time to spend on non-profit "things", 2. reduce stress, 3. take 1/3 of stock portfolio and increase its ROI through real estate without hindering #1 & #2

How to invest a large sum of money in R.E.

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