What to do with 2 million

[Daniel Kim]

Our family is currently in another country and is moving to Los Angeles Ca in June~July. We will be selling our apartment here and after taxes will have about 2 million in USD. We want to invest in RE for CF but after some research found that CA isn't the best state for CF and have strict tenant laws. Regardless we lived in LA about 9years ago and don't feel comfortable going to another state. We want CF to be atleast net 10k a month and we are wondering just how we should invest our money. We don't feel comfortable about houseflipping because we have never done it and rather have a safer option. Open to loans but only if we net 10k a month after mortgage payments

[Jonathan Greene]

If you want to find people who will try to help you lose your money, telling them how much money you have and where you will be is a good way to start.

You are limiting yourself way too much by focusing on LA, but with $2 million to burn you could likely find some good cash flow if you are paying cash, but you don't sound like the management type just from this. So, what's your plan on management?

You are basically telling people you have X, want Y, and waiting for someone to provide it, but what do you want to invest in that you will be excited to have as an asset?

[Jon Schwartz]

@Daniel Kim, with that budget, and you can definitely get close to $10,000/month in net cashflow in LA.

The strategy to pursue is ADU conversion. Are you familiar with LA's ADU ordinances? An ADU is an Accessory Dwelling Unit -- specifically, a garage or other structure converted into a living space like a studio apartment.

Houses can have one ADU and small multifamily property can have two ADUs (and more under certain circumstances).

Here's an example deal, one I was exploring with a client recently:

https://www.redfin.com/CA/Los-Angeles/624-N-Evergreen-Ave-90...

This fourplex has two large garages, each of which can be converted into a studio apartment collecting $1600/month in rent (with plenty of off-street parking still available for tenants). In the fourplex, three units are rented for $5600 total and the fourth unit, after a renovation, can rent for $2500.

Let's do some very rough math. Let's assume you don't take a loan.

Purchase Price: $1,299,999
Closing Costs: $25,000
Renovate unit: $35,000
Build 2 ADUs: $250,000
TOTAL: $1,601,000

The cashflow calculation looks like this:

Gross existing rent: $5,600
Gross rent from 4th unit: $2,500
Gross rent from ADUs: $3,000
TOTAL GROSS RENT: $11,100

20% Expense Ratio: -$2,220
Property tax: -$1,354
TOTAL EXPENSES: -$3,574

NET CASHFLOW: $7,526

So, about 3/4 of your $2M budget gets you to about 3/4 of your $10,000/month goal. It's doable!

Best,

Jon

[Chris Seveney]

@Daniel Kim

Private lending could get you $14K+ a month.

[Edward Condon]

I'd be happy to show you a perfectly plausible path to 15%-ish annual IRR on $2MM. Approximately $25k per month, principal and interest. Or, I can show you a path to $20k per month, interest only. Principal to be returned in full at the end of the three-year term. Of course, if $10k is what you are after, you could take $10k & reinvest $10k and grow your future stream of income. Feel free to dm me. Best of luck!
PS Only T-Bills and FDIC Insured bank accounts are riskless.

[Mike Dymski]

[Tim Ryan]

Daniel, out of state investing will still be your best move.  The key is to know where to invest, and which property class. With your funds, for sure it needs to multifamily/commercial. I've done a lot of this and can attest to its success (when you know how). Also, there are methods to picking a market I can tell you more about. I'm in LA, so let's connect when you are in town and strategize.

[Henry T.]

That's crazy! Good luck!

[Dan H.]

Quote from @Jon Schwartz:

@Daniel Kim, with that budget, and you can definitely get close to $10,000/month in net cashflow in LA.

The strategy to pursue is ADU conversion. Are you familiar with LA's ADU ordinances? An ADU is an Accessory Dwelling Unit -- specifically, a garage or other structure converted into a living space like a studio apartment.

Houses can have one ADU and small multifamily property can have two ADUs (and more under certain circumstances).

Here's an example deal, one I was exploring with a client recently:

https://www.redfin.com/CA/Los-Angeles/624-N-Evergreen-Ave-90...

This fourplex has two large garages, each of which can be converted into a studio apartment collecting $1600/month in rent (with plenty of off-street parking still available for tenants). In the fourplex, three units are rented for $5600 total and the fourth unit, after a renovation, can rent for $2500.

Let's do some very rough math. Let's assume you don't take a loan.

Purchase Price: $1,299,999
Closing Costs: $25,000
Renovate unit: $35,000
Build 2 ADUs: $250,000
TOTAL: $1,601,000

The cashflow calculation looks like this:

Gross existing rent: $5,600
Gross rent from 4th unit: $2,500
Gross rent from ADUs: $3,000
TOTAL GROSS RENT: $11,100

20% Expense Ratio: -$2,220
Property tax: -$1,354
TOTAL EXPENSES: -$3,574

NET CASHFLOW: $7,526

So, about 3/4 of your $2M budget gets you to about 3/4 of your $10,000/month goal. It's doable!

Best,

Jon

Property tax at 1.1% on $1.3m purchase and $250k ADU is $1420.

$2,200 for 6 units will likely not even cover maintenance/cap ex but we will say it does.  7% PM is $770.  5% vacancy is $550.   Insurance will vary significantly depending attached or detached.   Maybe $4500/year if all attached.  At least double if all detached.  let’s assume a mix and use $6k or $500/month.

Expenses: $2200 + 770 + 550 + 500 = 4020

$11k - $4020 = $6980 cash flow/month is $83760

$83760/$1550000 is 5.4% return from cash flow.  Because of the low leverage the appreciation return is not compounded.   Over the long term I am comfortable at 4%.  9.4% not bad return but …

Residential RE is not passive even with the use of a PM.  My preferred money market is currently at virtually that same percentage as the cash flow.  S&P historically has returned ~10%.  There are many investment options that are passive and returned better than 9.4%..

More than 4 units will make commercial. At first refi the owner will have this issue. It is not catastrophic but is a hit. The property will be valued on NOI not comps. There are times when this is advantageous, but this is not one of those times as commercial residential has taken a beating in values.

Best wishes

[Karan Singh]

Just buy a 18 month CD from Fidelity. They give 5.35%. That'll get you 10k right there without having to do any work. Then think about the advice given and take your time making the right decision. 

[Samuel Diouf]

With 2 million USD, there are some great opportunities in the Ohio markets. Many investors from California are choosing to invest in the Midwest because of the low barrier to entry and yearly cash returns making more sense in these lower priced markets. Ohio markets show up 3 times in Zillow’s 2024 hottest markets, with Columbus and Cincinnati taking the top 2 and 3 spots. I moved from Florida to start investing in Columbus due to the same reason.

https://www.zillow.com/learn/hottest-housing-markets-2024/

[Evan Hopple]

@Daniel Kim

Buy and hold in Columbus, OH - much higher rent to price ratio than LA 

I invest in Columbus RE, huge growth to come from recent additions to the tech sector (google, intel, amazon, honda, and many start ups). Plans to were announced last month to invest $2B into the cities airport in anticipation of the population/business travel growth. 

[Andrew Schmitt]

You are only looking for a 6% return...you can almost hit that with current High Yield Savings accounts or CD's.  You don't have to do any investing or listen to any salespeople. 

Or you can give it to me and I'll give you a 10% guaranteed return.  $16,666.67/month.

[Robert Ellis]

Quote from @Daniel Kim:

Our family is currently in another country and is moving to Los Angeles Ca in June~July. We will be selling our apartment here and after taxes will have about 2 million in USD. We want to invest in RE for CF but after some research found that CA isn't the best state for CF and have strict tenant laws. Regardless we lived in LA about 9years ago and don't feel comfortable going to another state. We want CF to be atleast net 10k a month and we are wondering just how we should invest our money. We don't feel comfortable about houseflipping because we have never done it and rather have a safer option. Open to loans but only if we net 10k a month after mortgage payments

 With 2 million dollars you could solely fund one of our ground up development deals at 15% down on a 50,000 sq ft building which we put about 70 units in on non recourse debt for land we already have locked up and entitled. don't buy and hold, don't listen to any of the 20 agents from columbus here who try to sell deals that are garbage. if buy and hold was the answer you'd see massive capital pools in columbus buying deals up. that was the model in 2014. all of the value creation is from ground up development partnerships. we can build with land cost below 65% of finished asset value on lease up and you can have no risk into the deal. the deal I'm talking about is a 12 story deal that we are working on. in columbus you can get downtown land for $400k that is about 0.22 acres right now with unlimited height and unlimited floor area ratios and build massive equity from joint partnerships. I travel every month to Los Angeles, New York, miami, and other capital markets looking for guys like you. would love to chat further 

[Rick Albert]

Quote from @Dan H.:

Quote from @Jon Schwartz:

@Daniel Kim, with that budget, and you can definitely get close to $10,000/month in net cashflow in LA.

The strategy to pursue is ADU conversion. Are you familiar with LA's ADU ordinances? An ADU is an Accessory Dwelling Unit -- specifically, a garage or other structure converted into a living space like a studio apartment.

Houses can have one ADU and small multifamily property can have two ADUs (and more under certain circumstances).

Here's an example deal, one I was exploring with a client recently:

https://www.redfin.com/CA/Los-Angeles/624-N-Evergreen-Ave-90...

This fourplex has two large garages, each of which can be converted into a studio apartment collecting $1600/month in rent (with plenty of off-street parking still available for tenants). In the fourplex, three units are rented for $5600 total and the fourth unit, after a renovation, can rent for $2500.

Let's do some very rough math. Let's assume you don't take a loan.

Purchase Price: $1,299,999
Closing Costs: $25,000
Renovate unit: $35,000
Build 2 ADUs: $250,000
TOTAL: $1,601,000

The cashflow calculation looks like this:

Gross existing rent: $5,600
Gross rent from 4th unit: $2,500
Gross rent from ADUs: $3,000
TOTAL GROSS RENT: $11,100

20% Expense Ratio: -$2,220
Property tax: -$1,354
TOTAL EXPENSES: -$3,574

NET CASHFLOW: $7,526

So, about 3/4 of your $2M budget gets you to about 3/4 of your $10,000/month goal. It's doable!

Best,

Jon

Property tax at 1.1% on $1.3m purchase and $250k ADU is $1420.

$2,200 for 6 units will likely not even cover maintenance/cap ex but we will say it does.  7% PM is $770.  5% vacancy is $550.   Insurance will vary significantly depending attached or detached.   Maybe $4500/year if all attached.  At least double if all detached.  let’s assume a mix and use $6k or $500/month.

Expenses: $2200 + 770 + 550 + 500 = 4020

$11k - $4020 = $6980 cash flow/month is $83760

$83760/$1550000 is 5.4% return from cash flow.  Because of the low leverage the appreciation return is not compounded.   Over the long term I am comfortable at 4%.  9.4% not bad return but …

Residential RE is not passive even with the use of a PM.  My preferred money market is currently at virtually that same percentage as the cash flow.  S&P historically has returned ~10%.  There are many investment options that are passive and returned better than 9.4%..

More than 4 units will make commercial. At first refi the owner will have this issue. It is not catastrophic but is a hit. The property will be valued on NOI not comps. There are times when this is advantageous, but this is not one of those times as commercial residential has taken a beating in values.

Best wishes

I got an even lower cash flow number, around $6200 assuming these rents are correct and my spreadsheet can be pretty liberal sometimes (meaning I'm overshooting it and likely less cash flow). The problem with property management right now is they charge for everything (upcharge for maintenance, finding tenants, etc.). So that 7% of gross rents might actually be closer to 15%. BP wrote an article addressing this (don't recall where). Plus there is opportunity costs like downtime to build the ADUs. This also doesn't factor in that you may have to reduce the rents of the existing tenants since they are paying based on certain circumstances (IE access to the garage or yard space). Based on the aerial shots of the property building 2 ADUs may not be easy because of set back requirements and to be honest I know that you don't need off street parking if close to transportation and it is a garage conversion on a single family home. I don't know about a four unit because then you are really limiting off street parking. That could hurt your rents in the long run if tenants have to park on the street. 

Based on what your goals are, there are a few options. One is invest in Ventura County. Great So Cal appreciation, more politically conservative, and you are still dealing with higher numbers. Keep in mind a 3% appreciation on $3K/month is higher cashflow than 3% appreciation out of state on a $1K/month rental. 

You could also do a hybrid. Assuming you don't own a home here, but buy a property, leverage it and recycle the money to invest out of state. I bought my first house hack, leveraged it to buy my second house hack, and then sold the first one, leveraged my current one and started investing out of state. Although this will soon change, but I haven't done a down payment of my own money since 2015 and I'm up to 9 doors (including primary) and gearing up to buy more through leverage. 

[Scott Allen]

@Daniel Kim

Look into markets in the midwest for cashflow. Ohio is a very landlord friendly state. If you're purely only interested in Cashflow - look into Cleveland. If you want both Cashflow and Appreciation - look into Columbus. Dayton is also a good market for Cashflow. 

Smaller tertiary markets in Central Ohio that you might also be interested in are Newark, Lancaster, Marysville, and Delaware.

[Drew Sygit]

@Daniel Kim how much risk are you okay with?

How much time are you willing to invest weekly, monthly?

Timelines?

You can buy top dollar Class A properties that get the highest relative appreciation, but the rents won't cashflow well. You'll also get the best relative tenants and the least amont of headaches.

As you go down the alphabet, from A, to B, to C, to D properties, the relative appreciation decreases, but the cashflow increases - along with tenant performance issues and thus performance risk.

What you want to pursue will dictate what areas to invest in.

Let us know if you'd like to know more about Metro Detroit options.

[Essa Rassool]

Whats not to do with 12 million is the real question, I'd say start with 1 fix and flip and see if that's to your liking.

I would get into a house in the 700k with Hardmoney preferably an ARV 950-1m


Also I would look into out of state section 8 properties that you can utilize the BRRR strategy.

[Manny Vasquez]

Daniel - There are many, many GREAT deals in California.  No other state can offer the appreciation AND increase in rents like California.  I personally own properties in the counties of Orange, Los Angeles, Riverside and Kern.  They are all cash flowing properties.   With the amount of cash that you have to invest, you can easily achieve net $10K per month.  The key is knowing where to look and what to look for.  Great deals won't be found on the first page of Zillow, rather, you may have to dig a little deeper, turn a few more stones or maybe look a little more into the properties.  If you need any help, feel free to reach out.

[Nesha Renucci]

Do not let the tenant laws in place scare you from investing in Los Angeles. If you plan on giving people a descent living environment while making your profits and appreciation, investing in Los Angeles could definitely be great for your family. Once you understand a little more about the legislation and laws in place the tenant laws will not be so scary.

For a 10k a month cap rate you are looking at inventory that would either be a luxury single family home or a multifam that would be 4 or more units. The great thing is you also know California and you have lived here. 

[Gene Hacker]

I have rentals in California.  Tenant law and the direction it is heading is very concerning.  It seems like yearly, there is some new law that favors tenants. A few years ago it was rent control, this summer it is dropping the deposit amount. And if there is a conflict the court system will bend over backwards for a dead beat tenant or squatter and hold landlords to a entirely different standard. It feels like a slippery slope.  If I was starting over, I would build my team in a different state that is more even keeled.  

[Jake Andronico]

@Daniel Kim

I'd buy 4 $500Kish properties that net $2,500 per month. Definitely achievable, at least here in Reno, NV.