$2 million to invest - need $20k per month

[Alex Williams]

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.

[Brian Burke]

@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.