What to do with $3 million?

[Tom Sylvester]

Quick question: If you had $3 million to invest in real estate, what you would do?

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Back Story:

So I've been in the residential buy and hold market for several years, mainly focused on duplexes.  We've started working on growing buy purchasing a few mixed use resdiential/commercial 4-plexes.  Our long term goal is to 1031 exchange our duplexes and keep moving up in size to apartment complexes and commercial spaces.

Recently a friend came across some (very) good fortune and won the lottery.  He approach us about investing with us.  He has several million that he is looking to invest.  He wants his money to work for him, and doesn't want to be involved in the actual business.

As I have not done much in the larger complex and commercial space, I'm just looking for some general thoughts/guidance on how people would go about investing this money.  The guy has the money in CDs right now and is in retirement, so he is just looking for a modest return so he can live off the interest.

 Thanks in advance.

[Jonathan Twombly]

@Tom Sylvester Your friend's a lucky guy!

I think that the instinct to put the money into one or more larger properties is a good one.  The issue here is the banks.  He is going to be limited in the amount of loans he can take out on commercial properties by his net worth.  In other words, if his net worth is $3mm because of the lottery proceeds, that is the outer limit of a mortgage that a bank will let him take on.  In addition, they will require about 10% of his net worth to be liquid.

So, he should plan to keep $300,000 in some liquid investment, be it CDs, stocks, bonds, etc.

He should then find a series of properties to buy where the mortgage will be no more than $2.7mm.  The $2.7mm is not the total amount of debt he will be allowed to take on, but he will find it hard to get a mortgage on any given property for more than that amount, given his net worth.

A conservative strategy would be to buy a series of properties for about $3mm each, taking on debt of only about 70% LTV.

He should be sure that the properties he invests in are professionally managed, and he definitely needs to have an asset manager like you watching over the property manager.

Those are my two cents.

Jonathan