Investor · Shakopee, MN · Member since 2014 · 219 posts · 88 votes
This is a question that's been bubbling around recently.
My thought is on this form, the majority would take the $1,000,000 to buy multiple homes or multi-family complexes in the hopes of doing better. Meanwhile, many of us are on here, trying to build the cash flow and security of having $5,000 cash flow a month.
Which would you choose and what factors or lifestyle choices would need to take place for you to choose the other option?
$5000 per month or 60K per year (essentially a perpetuity) is the same as $1,000,000 right now invested at 6%.
If you can beat 6% with other investments (which I imagine quite a few people here could), take the 1M and invest it. If you can't beat 6% or can't be bothered to do the work that would be required to beat 6%, take the annuity. (I would personally take the annuity and become a worthless, noncontributing member of society).
I would take the one million. The cash flow that could be obtained by putting that into investment properties will likely be more than the $5,000 a month and you are gaining appreciation of the properties.
I would take the $5,000/ month no question. I would set my fixed expenses to be easily covered, then work for as long as it's fun. Investing half in low risk stuff, and swing for the fences with the other half.
I'm pretty sure I could beat the $5000 but it'd be awesome to have a guaranteed income
@Joe Splitrock I'm a big fan of index funds, but part of the risk of investing the $1,000,000 in index funds is what if Murphy's Law takes over and the timing of your investment is sour, and the market tanks by 40% the first year after you invested?
You're not guaranteed the return, where with the $5,000 per month you are.
(Part of it depends on whether you need to be using the money from day one, or if you're still able to work / receive other income). If one could keep earning their regular income (and still want to keep working), the $1,000,000 seems like the only option because the additional cashflow probably isn't as needed.
It partially depends on your age and lifestyle choices I would assume.
That's why some people buy annuities. The piece of mind of seeing a check instead of managing money and "risking" things.
Even if put that $1,000,000 in the market in September 2007, the market rebounded so I don't think that is a good argument based on historic market trends. Even in real estate markets recovered and rents actually went up during the crash. Annuities are horrible. They are usually just a watered down stock market investment that pays low returns. I know insurance agents are good at selling them, but they are hardly risk free.
I think the $5000 option is the right choice for 95% of people, but I can guarantee I would do better with the $1,000,000.
happy to stumble into this thread... Im in a situation that mirrors this in a way. I have a tenant moving out in a couple months. I have the potential of getting a new tenant and raising rent and be able to cash flow $600 a month or should i sell it and get the 200k in equity to then reinvest in other property? I keep going back and forth. Any thoughts?
Sell & 1031 into something with greater cash flow. Your property I assume from what you shared is a single family home. Usually more doors equals more cash flow.
I'm not sure how far $200k goes in your market, but in many markets, that will get you into multi-units.
By the time I retire in a few years, this will likely be exactly the scenario I'm faced with. I work for one of those rare companies that still have traditional pensions, and when retirement comes around I'll have to decide whether to take the guaranteed monthly income or what is likely to be ~$1m lump sum. A few years ago, before really getting into investing in real estate, I no doubt would have taken the steady monthly income from the pension. We have an option to take a somewhat reduced pension amount and then have it continue for the life of our spouse in the event of our early passing, ensuring my wife would have had income for life too.
However, now the decision to take the money in a lump sum is an easy one. Moving the $1 million into a self directed IRA avoids tax payment, so even if I had no assets prior, I would then be an accredited investor, meeting the $1 million net worth criterion. I could begin investing in real estate syndications, which would generate an immediate return to live off of from the typical 8% preferred rate of return. To provide diversification, and not put all my eggs in one basket, I could spread the $1m out into 20 different deals at $50k each, with different lead investors in different real estate markets across the country. If I was bit more risk tolerant, I could invest $100k into each deal. This would generate ~$6,600 per month income, 1/3 greater than the pension option. It's a bit more work in the beginning, making connections with syndicators, reading the prospectuses and vetting them by talking with their previous investors, but for a 33% increase in your pension payment, wouldn't a bit of up front work be worth it? If something happens to you, the income would continue unreduced for your spouse.
Besides the higher income, many (most?) real estate syndications allow the passive investors in the deals to participate in the equity upside. That is, they receive a share in the appreciation when the underlying asset is sold at some point down the road, and the upside can be substantial. After 5 years, the original $1m could easily be $1.5, all the while earning much higher income than the $5,000 annuity or pension.
All of this involves dealing with no tenants, toilets, or termites, it just requires educating yourself on real estate syndications in general and then on the lead investors behind particular syndications.
When you and your spouse eventually go off to the pearly gates, if you've chosen the annuity / pension route, income ceases along with your pulse. With the self-directed IRA, your heirs or other beneficiaries in your will stand to inherit the balance of the IRA. If you gift it to a charity, there are no taxes due to the IRS, so the full amount in your account goes to the charity. If the next 20 years are anything like the past 20 years, you could end up donating millions to charity. Fancy having your name on a building at the local university or wing of the local hospital anyone?
I agree with most, here. Reasonable RE investments can easily deliver 10-15% cash on cash returns, which greatly outpace the 6% cash payments. Additionally, if done right, those returns can be taxed at almost nothing, which adds to the luster of a single payment (as long as the million isn't taxed to high-heaven, as Russell Brazil stated).