I am the trustee of my father's trust. He has $2 million available and I need it to make close to $20k per month to cover his monthly expenses. This must be fairly passive. My idea I am toying with is to invest in $2 million worth of turnkey rental properties, paying all cash. No leverage. Going on the idea that the 1% rule appears achievable in many of the successful turnkey markets, this seems like a workable plan. Is it? And while I don't need appreciation, am I fairly likely to get pretty much the same amount back as I started with when I sell them down the road if he passes away? I wouldn't have to sell them immediately.
Are there any far better ideas than this given my requirements, or is this a pretty good, safe way to get close to the monthly cashflow I'm looking for? By the way, I realize it is not entirely passive but I have several rental properties of my own and I will be able to monitor the investments properly. Would greatly appreciate anybody's feedback on my situation.
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
6y
@Alex Williams $20K/month on $2 million is a 12% cash-on-cash return. I think that achieving that is fairly unlikely, unfortunately.
Rental homes: Assuming you buy a $200,000 house that rents for $2,000 per month (not the easiest to find but perhaps not impossible), and your expenses are $700/month (vacancy, repairs and maintenance, property taxes, insurance, utilities, capital improvements—35% expense ratio), your cash flow is $1,300/ mo or $15,600 per year. That’s a 7.8% return.
Hard Money Loans: You can loan your money out at 12% to real estate investors flipping homes and those in need of bridge financing. This space is competitive, however. The best properties owned by the best borrowers can get bridge financing all day long for 5% to 8% depending on the project. 12% money most often goes to the lowest quality borrowers and/or properties. Certainly not always so there is a chance you can score a few borrowers that are high quality and willing to pay 12%. But you won’t be the only one looking for that borrower. $2 million is a lot to place so that’ll be tough. Let’s just say you find enough quality borrowers willing to pay 12%—their goal is to resell that property fast so the interest doesn’t kill them—so those loans will soon pay off and you’ll be back out there looking for more borrowers. Meanwhile whatever money isn’t placed in a 12% loan is probably placed in a bank account earning 0%. Your idle capital will result in your true total return being far below 12%. The constant drumbeat of payoffs will result in you spending a lot of time on paperwork to originate loans and facilitate releases, plus servicing costs (subtract that from your return too!), and you might run into licensing requirements as well.
Syndications: You can invest in syndications, but no matter what anyone says most syndications will throw off a cash flow in the neighborhood of 5% in the first year, and might get to 12% by year 5 or 6. Hitting 10% by year 3 is not impossible but pretty difficult. I have an institutional investor that will fund our deals if I can project a 10% return by year three. I haven’t shown them a single deal in three years—I just don’t see a 10% return by year 3 unless I alter my underwriting assumptions too far toward the aggressive side of the scale.
Finally, to your question about how to vet syndicators—there are many threads in the BP forum that can get you started. If you wait until spring, BP is publishing a book on this very topic, written by yours truly. Unfortunately, that won’t help you much today.
You’ll probably find that you need to adjust your expectations downward—perhaps you can balance that by streamlining your father’s living expenses by looking for areas to save costs. Otherwise I suspect you’ll be bleeding off some of the principal to subsidize the expenses that exceed the earnings.
Real Estate Agent · Wauconda, IL · Member since 2016 · 208 posts · 99 votes
6y
Welcome to BP, @Alex Williams! This is quite an ambitious goal and you're definitely in the right place. I would encourage you to be careful with posting sensitive info in a public forum, but if you do decide to go the turnkey route, be very careful when vetting the providers.
Have you considered investing in large multifamily apartments with a syndicator? Or in notes?
Seattle, WA · Member since 2019 · 7 posts · 8 votes
6y
2 Million should easily get you far more than 20K per month if you were to invest it wisely. Turnkey would be a good idea if you really aren't interested in the more active approaches to investing. My question is why not leverage your 2 million to 10 million dollars worth of properties? Hypothetically that could be dozens of properties of cash flow and dozens of properties with growing equity to utilize for even more properties.
Another idea would be to look for syndication into larger multi-families. If you're really looking for a passive investment into real estate then maybe look into that.
Real Estate Agent · Kansas City · Member since 2018 · 4k+ posts · 3k+ votes
6y
Be very selective, I wouldn't say the exact amount you want to spend because you could get scammed. Turn key is hands off but if you are able to go more hands on you can purchase multi-family you could leverage up to 10 million.
Investor · Tampa, FL · Member since 2011 · 2k+ posts · 3k+ votes
6y
If you want it to be fairly passive, don't buy real estate. If you own 2M or 10M in property as suggested above, it will be anything but passive. The more property you own the more issues you will have to deal with.
Try buying hard money notes, that's fairly passive and you potentially can get 12%. If you originate the loan it's a little more hands on, but with fees you will certainly be at least at 12%.
Nashville TN · Member since 2016 · 24 posts · 6 votes
6y
wow, you guys here are all like Buffet. He will be happy to get consistent 10% return yoy. I would say there is no way that can give you 10% return consistently, especially not passive. just buy index funds and hope there is no recession is what I will do with that amount of money. I seriouly doubt if anyway will sell a good investment that has 10%+ return. If they are for sale, usually they have some problem with making profits
Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
6y
The problem I see with your plan is the 50% rule. The 1% rule will indicate that you can achieve $20K in rents. the 50% rule indicates that will be ~$10K in profit which is only half of your goal. The reason the return is poor is due to no leverage.
Turnkey will depreciate when tenant is placed. The initial cash flow will be at least partially negated by this initial depreciation. In general, I am not a fan of turnkey, maybe it is just my prejudice.
A second problem I see is no diversification. No diversification equates to higher risk.
As to the person who believes 10% is difficult, it is not. The issue is achieving greater than that return minimizing the risk. Risk can be minimized by diversification.
I therefore would invest no more than 50% of the money in RE. For passive, I would consider NNN or going with a syndicator (I am not a syndicator) with long track record and conservative projections (even if the conservative projections were not top return).
@Account Closed I'm not a kid and I'm not an idiot. 1% per month of the purchase price on an unlevaraged rental property does not seem so extraordinary - but that's why I was asking here. You don't seem so immediately negative regarding the 1% rule in your other posts. If you read my post you'll also see I realize it's not entirely passive and I point out that I own multiple rental properties, have done for 20 years, and will be able to monitor my investments. Thanks for your useful input though.
Thanks everyone (mostly) for the feedback. @Dan H. In your experience, with no leverage involved you lose as much as 50% of monthly rent? I haven't experienced that myself, but perhaps in markets where the 1% rule is attainable, which is not the case where I live, that holds true. Also, you wouldn't consider diversification through multiple markets diversification enough?
I have made very successful use of index funds, but at this point I want regular monthly cashflow for my father and certainly can't rely on the market not going to hell any time soon. Will consider the syndication and hard note suggestions as well.
Wheras I may be a newbie to the RE game, I have spent the last 8 months reading and learning and one thing that has stuck out from all the books and YT videos and forum posts is you need multiple streams of income(Rich Dad Poor Dad the 4 quadrants). In RE, if your goal is CashFlow, your best bet is to Buy as many 'Doors' as you can to 'Diversify' your risk - Vacancy, CAPEX, the Unknown. So if you have 100 'Doors' and 10 are non-performing you still have 90 that are.
@Alex Williams take the time to learn from someone who has done what you want to do - take $10k (threw out a number there) and pay a mentor (who has actually done it and has the battle scars to prove it). Partner (syndicate) with a small group who have skin in the game and who's own capital is on the line, and know this - THERE IS NO SHORTCUT - whether you have $2M or $20M
Keep the BP fam updated with your journey and findings, so we can all be a little wiser, and good karma will come around to serve you well!
@Account Closed Thanks CJ. But I feel I should reiterate...I am looking for fairly, not necessarily totally passive. But the most important criterion is highest cashflow, not passivity.
Rental Property Investor · Arlington, MA · Member since 2013 · 18 posts · 14 votes
6y
If you can seek out some business owners or high net worth folks near you, they may be good sounding board and mentors. Think small Private Equity fund owners, etc.
For stewardship of something like this, I would vote looking at triple-net (NNN) properties where you will only have the barest of responsibilities and the tenants will pay most of the variable costs should things shift over time. You still benefit from paydown of any leverage you use but they tend to be locked into 10, 20 or longer lease terms with larger stable tenants. The returns will be lower in the spectrum but risk and predictability is pretty good.
The next vote is for either full or partial ownership of a larger asset such as a mid-tier multi-family (5-10M). This will provide good passive income with formal management in place, equity paydown, etc. It also consolidates the CapEx/repair needs while diversifying vacancy issues with a unit of SFR here and there. One roof, one set of walls instead of dozens to manage over the years.
There are probably a dozen more ideas and options folks will toss out, but since this is your father's trust and there are some income needs from it, I would weigh the risk/reward very carefully and for me, given my personality, would likely give up a few pct in return for more stability/predictability/security in the longer term.
Good luck... You can also diversify with a mix of RE and other more traditional items but having something that has some leverage in a strong metro/market will provide long term appreciation/growth with the equity paydown which will help you hedge for inflation and/or changes in needs over time.
And equally important is not losing the money, since what it makes is what he has to live off from now on, and whatever is left will be an inheritance for myself and my brothers. So that's an extra incentive to keep the nest egg in tact. At that point I can pursue endeavors with a little more risk, use leverage, etc., but preferably not while I am the money's caretaker.
Thanks everyone (mostly) for the feedback. @Dan H. In your experience, with no leverage involved you lose as much as 50% of monthly rent? I haven't experienced that myself, but perhaps in markets where the 1% rule is attainable, which is not the case where I live, that holds true. Also, you wouldn't consider diversification through multiple markets diversification enough?
I have made very successful use of index funds, but at this point I want regular monthly cashflow for my father and certainly can't rely on the market not going to hell any time soon. Will consider the syndication and hard note suggestions as well.
This response is assuming low unit count RE. I have seen the numbers put out by the apartment association and due to volumes of scale, they can do better than the 50% rule.
Seeing the 50% rule excludes financing, the zero leverage has zero impact.
I am in a high rent market (my lowest market rent is ~$1.6K and my highest would be ~$4.5K (those are STR doing ~$8K)) and believe in high rent markets the 50% rule is conservative except in cases where there is an HOA. Also the 50% rule includes PM as in the case of the OP. If you are your own PM the 50% immediately becomes 40%.
I believe most LL have not actually put forth much effort to estimate maintenance/cap expenses and that maintenance/cap expense is, in general, under estimated. Example, a hot water heater installed by a licensed plumber (I sometimes use a handyman which is cheaper) is ~$1K in my market. If I forecast a water heater life expectancy at 12.5 year, the monthly allocation would be 1000/12.5/12 = $6.66/month just for a water heater (a cheaper item). Small kitchen at $10K with lifespan of 20 years is 10000/20/12=$41.66/month. Do the exercise on all the items (roof, windows, hardscape, fence, bathrooms, plumbing, electrical, etc.) and the numbers add up fast. I used to have a spreadsheet of estimated cap ex for each of my properties but I have not maintained them in a few years. What my spreadsheet told me is that maintenance/cap ex is a lot more costly than most people allocate. Most people see my allocation and think it is very conservative. I hope it is conservative, but I suspect it is no where near as conservative as most people are thinking.
In the cheap rent markets (rents under $1K), I suspect the 50% rule is too aggressive. In the class D markets for management not expert in that market, I suspect 50% rule is far too aggressive.
In no market do I think the 50% rule is at least 10% too conservative. Maybe the range for small unit count RE allocating for a PM should be 45% (high rent area with no HOA) to 75% (low rent area, low class area (class D) with manager not expert in this class of RE).
The 50% rule is the rule I am most in favor of it being semi accurate in a wide range of uses. The 1% rule is dangerous because it could lead to purchases in the worst class of areas. The 70% rule is dangerous when applied to cheaper properties. When 70% rule applied to expensive RE, it will make it difficult to ever find a purchase.
Thanks again for the information @Dave W., @Dan H. and everyone else. Any suggestions on where to find out about hard money notes @Nick C.?
And if one wanted to go the syndication route, how does one properly vet sponsors? Say if one wanted to look more into people you come across here on BP, how would you do it? Track down past investors and ask them? I've come across threads here where people talk about their own syndications, and some sound quite attractive. But how to be sure?
Rental Property Investor · Arlington, MA · Member since 2013 · 18 posts · 14 votes
6y
Re: Syndicators - see who is operating locally and maybe you can meet in person. Things to think about is track record, experience, questions on how they evaluate a deal and stress test it. What is worst case and how would they handle it, how did they handle in past,etc.
Rental Property Investor · Portland OR · Member since 2018 · 2k+ posts · 3k+ votes
6y
@Alex Williams for the sake of your father, please.... get off of BP and get to a financial advisor and/or a commercial RE agent from a big reputable company and have them help you. You can also talk to some of the bigger syndication folks here....
No disrespect to BP, but most of the folks here dont have 2 million $$ and have zero idea how to invest it. please dont take advice from those that have not invested millions, over time and done what you propose.
Real Estate Broker · Detroit, MI · Member since 2014 · 384 posts · 149 votes
6y
@Alex Williams with that much capital I would diversify into multiple asset classes; apartments, self storage, private mortgages, etc. SFR turnkey would be last on my list. I also suggest working with seasoned syndicators and using the right leverage when possible.
You can be a passive investor in syndicated multifamily deals. This would be completely passive, all you do is collect checks every month/quarterly. I know many people who do exactly this in my area and average 10-15% cash on cash return. I would recommend investing in multiple deals though to diversify and reduce risk. Only invest with operators you know have a good track record and have an attorney review anything before you sign. Personally, with 2 mil, I would probably do 250k max per deal and try to get into at least 10 deals. Look for yield plays (class A apartments can be good for pure yield play) so you start getting paid as soon as possible rather than waiting for unit turns and rehabs.
Thats my advice and I know people who have millions invested in exactly this way. It is what I am building up my investments to eventually be able to do myself.
Investor · Santa Rosa, CA · Member since 2012 · 2k+ posts · 7k+ votes
6y
@Alex Williams $20K/month on $2 million is a 12% cash-on-cash return. I think that achieving that is fairly unlikely, unfortunately.
Rental homes: Assuming you buy a $200,000 house that rents for $2,000 per month (not the easiest to find but perhaps not impossible), and your expenses are $700/month (vacancy, repairs and maintenance, property taxes, insurance, utilities, capital improvements—35% expense ratio), your cash flow is $1,300/ mo or $15,600 per year. That’s a 7.8% return.
Hard Money Loans: You can loan your money out at 12% to real estate investors flipping homes and those in need of bridge financing. This space is competitive, however. The best properties owned by the best borrowers can get bridge financing all day long for 5% to 8% depending on the project. 12% money most often goes to the lowest quality borrowers and/or properties. Certainly not always so there is a chance you can score a few borrowers that are high quality and willing to pay 12%. But you won’t be the only one looking for that borrower. $2 million is a lot to place so that’ll be tough. Let’s just say you find enough quality borrowers willing to pay 12%—their goal is to resell that property fast so the interest doesn’t kill them—so those loans will soon pay off and you’ll be back out there looking for more borrowers. Meanwhile whatever money isn’t placed in a 12% loan is probably placed in a bank account earning 0%. Your idle capital will result in your true total return being far below 12%. The constant drumbeat of payoffs will result in you spending a lot of time on paperwork to originate loans and facilitate releases, plus servicing costs (subtract that from your return too!), and you might run into licensing requirements as well.
Syndications: You can invest in syndications, but no matter what anyone says most syndications will throw off a cash flow in the neighborhood of 5% in the first year, and might get to 12% by year 5 or 6. Hitting 10% by year 3 is not impossible but pretty difficult. I have an institutional investor that will fund our deals if I can project a 10% return by year three. I haven’t shown them a single deal in three years—I just don’t see a 10% return by year 3 unless I alter my underwriting assumptions too far toward the aggressive side of the scale.
Finally, to your question about how to vet syndicators—there are many threads in the BP forum that can get you started. If you wait until spring, BP is publishing a book on this very topic, written by yours truly. Unfortunately, that won’t help you much today.
You’ll probably find that you need to adjust your expectations downward—perhaps you can balance that by streamlining your father’s living expenses by looking for areas to save costs. Otherwise I suspect you’ll be bleeding off some of the principal to subsidize the expenses that exceed the earnings.
Rental Property Investor · TN · Member since 2018 · 2k+ posts · 2k+ votes
6y
Obviously you have an income goal for the Trust money. But have you looked at the whole Trust responsibilities you have as Trustee?
Your obligation is to manage the money for the beneficiaries and the Trustor if still alive. Is the Trust still caring for your dad, is there anyone else the Trust is to support? Or have your dad/mom passed already? Are there beneficiaries besides you?
If you have parents that the Trust is to support, you need to talk with an elder care specialist or your parents medical care team. Their needs will NOT be linear. Some months or years they may have significant medical expenses, others much less. You can not put all the Trust money into real estate as it is not liquid. It is not fast or cost effective to sell real estate to pay for the bills. Cash income may not get to that level you want with expenses, liability, damage to the property, vacancies, maintenance and repairs, etc.
Does the Trust allow you as Trustee to take on debt, enter into contracts, etc.? Some Trusts allow the Trustee to do pretty much anything, others have strict limits to what the Trustee can do, lots do not allow the Trustee to take on debt or liability or enter into contracts.
Then you need to look at who the beneficiaries are. If its just you, after your parents are gone, do what you want, its your loss. But if there are other beneficiaries, it may not be prudent to tie up the Trust assets in real estate. IF the market has crashed when your dad passes, you have not managed the Trust for the beneficiaries, but yourself and they can have a claim against you. Also, depending on the life expectancy of your dad, real estate may not be a good investment because of the cost of selling. When one passes and the beneficiaries want their 'share' you need to liquidate if the Trust says to split the Trust assets with several beneficiaries.
Remember once dad passes the taxes for the Trust can not be ran through dad's tax return, but the Trust will need to file its own taxes. IF the Trust currently pays taxes through dad's return, then the capitol gains will reset on the houses when dad passes, but if the Trust currently pays its own taxes you do not get that capitol gains reset. Its real important for you to understand how the taxes and capitol gains works with the Trust before you go ahead.
I managed my mom's Trust and the beneficiaries got to split about $60k in losses, transferred on a K-2? or something like that form when the Trust closed. For some of us, we can use that on our taxes, but for others that was a major loss and they would much rather of had the money. BUT when you have to sell based on when someone dies, the market is what it is. In the case of my parent's Trust, all the property was purchased decades before I was managing to Trust. Property was just part of the Trust assets. Evicting renters after my mom's death was hard! Having the beneficiaries constantly asking why I had to give the renter's 60 days notice, why they did not have the property money yet when they already had the stock money was not fun. And dealing with renters who did not want to leave on top of that was horrid!
Have you discussed this with the Trustor, Trust attorney, the beneficiaries, and the Tax/CPA person for the Trust?
Personally I do not think that you should put all the Trust assets into something that is hard to liquidate, at most maybe half. And even putting all of it into real estate you will not make the gains you want unless you sell the asset, and then with taxes on that end of the deal, I do not think your net income will play out as well as you want.