What to do with $5 million?

Question

I have a client that I will be relinquishing a $5 million property in the next month. It is under threat of condemnation so it falls under IRC 1033 and therefore she has three years to find replacement properties and does not require in intermediary.  My questions relate to investment ideas for the $5 million. If she fails to acquire replacement properties she'll owe roughly $1.5 million in taxes.  Her goals are two fold, 1) expand her portfolio on a yearly basis and 2) income producing properties that she can live off the returns ($250,000 annually).  I am aiding her with the relquishment transaction and would love to give her some strategy options.  I am NOT looking for people telling her to invest in their specific properties, but for strategies or investing plans.  If you had $5 million dollars you were required to invest in real estate what would you do?  Commercial? Multi-Family? REITs? Short-Term Rentals? Debt? Combination of everything?  Open to all ideas!

Jay Hinrichs · Answer

pretty much what you mention.. either invest with others and let them do the heavy lifting or she can buy her own assets and hire PM to manage...   but suffice it to say.. buy quality assets in a very stable market..

Syed H. · Answer

We are talking about 2 different worlds. Your experience of mobile homes and SFHs are small scale. For mom & pop investors.

"class A" SFH's are not investment properties. Thats why they cash flow like crap. Those are homes for Owner occupiers.

Apartment buildings in Class A/B areas are middle market/institutional investments. With $5m in equity she can go buy a $20m apartment building with a COC returns around 6-10% with an institutional PM. These are a lot more passive than the types of properties you're talking about.

Also I never said self storage was bad. But there are pitfalls in self storage as well. Bad operators/PMs can mess up returns on both MF & self storage.

Yonah Weiss · Answer

@Jake Anderson it's a good problem to have. :)

You said it yourself, she is looking to live off the returns (i.e. cashflow) I think her best option with that amount of money, is to diversify. NNN properties, Large MF cash-flowing properties (or passiely investing in syndications), and debt. Those are probably the lowest risk/highest positive cash-flow investments.

Alina Trigub · Answer

@Jake Anderson

While there're plenty of strategies and asset classes your client may potentially invest in, someone (either your client, or you, or another third party) must take the time to educate themselves on such strategies to avoid blindly dumping the funds in NNN lease or syndication or something else.

Here're the steps I suggest taking:

1) educate yourself on various passive investing strategies. It doesn't sound like your client is interested to be an active investor. If you think you client is still undecided as to whether to go active or passive, here's an article to help guide them further:

https://www.biggerpockets.com/member-blogs/10850/84064-what-type-of-investor-to-be-when-i-grow-up-active-or-passiv2) pick several asset classes from #1 to invest in and diversify your portfolio. While I personally like syndications as a passive investing strategy, it is certainly one of several other options.

Here's my take on syndications: https://www.biggerpockets.com/member-blogs/10850/86626-the-pros-and-cons-of-investing-via-real-estate-syndication3) work closely with a CPA to ensure each and every transaction is qualified based on 1033 exchange rulings.

There're plenty here on BP in case your client doesn't have one yet. You'd want to have a CPA that is well versed in real estate, ideally a real estate investor themselves.

Best of luck!

John Fortes · Answer

Loaded question here but the need in which you stated is for tax purposes and cash flow. Either she is to remain active or passive which is first decision. What end of the spectrum does she want to be on? Also, would you break it up into multiple assets and opportunities? Does it need to be the whole $5MM as a total or the value of $5MM? Too many questions to provide a simple solution but it starts with her position in life, age and goals at this point of her life. What we can suggest here might not be relevant to her at this point of her life or vice versa, it might suit very well. Plus the differences of opinions being offered here might contradict because most are answering through the lens of their current situation.

Good luck, happy investing and Merry Christmas!

Dennis M. · Answer

Invest in lotto tickets ! Think how many he can buy with 5 million bucks .might even hit it big

Paul Moore · Answer

Hi @Jake Anderson and Happy New Year!  I would recommend the same strategy that I use: Find 2-3 trustworthy commercial real estate syndicators with long track records of deals that went full cycle and hundreds of happy investors. Invest passively with them.

Your client will get the benefit of debt, asset management, professional property management, and the ongoing tax benefits, recession-resistance, and risk mitigation that come from commercial real estate. But she won't have to do the heavy lifting.

Ivan Barratt · Answer

5% yield (250k on 5m) is too low for my money.  I only eat my own cooking since I own my own management infrastructure.

IF I only wanted a 5% yield I'd sell all my apartments and acquire national credit NNN real estate in "main and main" locations in steady growth/mature suburbs/edge cities (example Carmel, IN).

Personally I'd want at least 12% levered yield. Debt is extremely cheap and apartments are the ONE asset class that can access 35 year amort and rate lock.

Allan Smith · Answer

Put it all in gold in a hole in her backyard.

Danny Redding · Answer

@Syed H.

Agreed!

What to do with $5 million?

Most Popular Reply