What and where would you put $1m for passive income?

Question

Ok guys, what would you do with a fresh million bucks, no jetskis or escalades, I mean if your parents entrusted you with the money for passive income generation, and you had to put it to work. What strategy and where would you invest? How would you break it up? stocks, real estate, cash?

Mark Robertson · Answer

@Will Grabert If you have never invested in a real estate syndication or crowdfunding deal, I would take at least a month and learn about syndications and real estate sponsors.  Join CrowdStreet and RealCrowd and compare and contrast all of the investments they have up.  You will be amazed at the differences in fees, promote, preferred returns, sponsor's track record, experience etc..

You need to get comfortable with the investment itself and the structure.  However, at the end of the day the most important part is the sponsor. Invest with seasoned sponsors with long track records and ones with integrity that align their interest with the investors. A bad sponsor can mess up a good deal. A good sponsor can overcome the many unexpected issues that can and do arise in commercial real estate.

Adam Bontrager · Answer

Diversify, diversify. Do not put the full million into one thing.

Personally, I would put 15-25% in stocks. Index funds typically perform as well as actively managed funds in the end because they don't have expensive management fees. After that, I'd keep maybe 10-15% in marketable securities or CDs, something with relatively low returns but high liquidity in case you want to get access to that money quickly.

The remaining 60-75% I would spread across several different types of real estate assets. This could be hard money loans, private lending, crowdfunding, or some type of apartment syndication.

And I would just reiterate that the success of your investment will depend on the sponsor. Go with a sponsor that has a number of deals under their belt.

Marco Santarelli · Answer

@Will Grabert -- Welcome to BiggerPockets.

That's a great question, and one I get somewhat often.

Although you've gotten some great advice here, the biggest question that needs to be asked, and one you need to ask yourself, is what is it I'm trying to achieve?

We are building passive income streams with our clients all the time using turnkey real estate, private lending via Notes, and occasionally some syndications and business opportunities.  But those opportunities don't align with everyone's goals all the time.

What is your risk tolerance? What is your timeline? Are you leaning towards greater cash-flow or greater growth potential (capital gains)?

Therefore, don't blindly ask the question and follow other peoples advice without understanding the destination and the roadmap to get there. ;-)

Please let me know if you have any questions.

Continued success!

Mark Robertson · Answer

Diversify!  HML, syndications, crowdfunding, and a robo advisor for exposure to equities and bonds like Betterment or WealthFront.  Do not do DST's.  Before the day is out, it will get pitched by a saleswoman. Sell DST's for the commissions, but do not buy them.  I doing the above diversified strategy and averaging about 9% cash on cash with upside potential of 15-20%+ IRR.

Matt Schuberg · Answer

Hi Will,

I think it depends on what you're looking for. The suggestions above can all be great ways to generate passive income, but the returns will vary. I don't think there's any good investment that will be completely passive, though. To find good investment opportunities, you're going to need to do some research.

Leaving some in cash would be my first step. An emergency fund is important. I would keep this amount to a minimum, though. You want as much of your capital working for you as possible. Then, it comes down to your risk tolerance and what returns you're looking for. You can become a lender, get involved in syndications/crowdfunding, invest in stocks/mutual funds, etc. The choices are endless. Each choice has it's advantages, but each also has it's trade-offs.

Personally, I would focus most of my efforts on one strategy that I understood and felt comfortable with. As Warren Buffet says, diversification is protection against ignorance. I think the best choices involve direct ownership in real estate. You want to be able to take advantage of all of the benefits of real estate ownership (tax benefits, leverage, appreciation, etc.). When looking for passive income, I think syndications and crowdfunding are the best options available.

David Thompson · Answer

Will,

Syndication into MF apartments, self storage and Mobile home parks.  Diversify by niche, sponsor and geography.  You become a limited partner in the deal, creating passive income in the 10% CoC and 20% IRR range over 5 year holds and live your life doing something that you are passionate about and let the experts make you money.  If in taxable accounts, some wonderful tax efficiencies especially w/MF apts.  Just wrote a blog on diversifying w/syndication (below) and attaching a few other blogs on why I like MF and Self Storage.  I'll give you a bonus: 10 tips on vetting a deal sponsor which is located on my website under thought leadership tab you'll find this special report (BP is having a technical challenge w/their blog site so can't pull this one down today).

https://www.biggerpockets.com/blogs/9145/59865-div...

https://www.biggerpockets.com/blogs/9145/53820-why...

https://www.biggerpockets.com/blogs/9145/54155-sel...

Nick C. · Answer

I'd lend 100% of it to investors to fix and flip houses. Or buy an apartment complex.

Michael Bracken · Answer

Well cash is definitely out, inflation will eat it up. You can't get insurance on stocks like you can real estate but I do still have equity investments. You could leverage the 1mil on a multifamily purchase but if your not experienced it will be a disaster. You could start small 4 plexs and the like. If it were 1mil of Mom and Dad's money? Invest with other qualified investors in real estate. You might have money but you wouldn't have knowledge. Investing is more about knowledge than money!

Jay Hinrichs · Answer

@Mark Robertson  agreed... sponsor is as important if not more important that the deal

and of course so many are new to the game and have only been investing in the go go times of the last 3 to 5 years..  a sponsor that has been through the ups and downs brings value

and as we know with crowdfunding not all deals work.. so its good to see how some of the CF deal with their defaults ..

Bryan Hancock · Answer

This question is impossible to answer without knowing more about your goals, risk profile, etc.  Hard money loans are worth looking at for sure, but it would be hard to know the proper asset allocation without knowing your time horizon and tolerance for risk.  Note that your asset allocation and the degree to which you're willing to be active instead of passive will drive the bulk of your returns.