How would BP invest 1.5 million?

Question

I am a new investor in St. Louis and that will have about 1.5 million in cash to put into real estate by the end of 2016 early 2017.  My question for BP is how would you invest the cash?

We currently have 3 rental properties in the St. Louis area that we paid cash for.  These are signal family homes.  The first one we paid 79k and are getting $950/month.  The second we paid 60k and we are currently flipping to add to our rentals and we should get about $950 for.  Construction on that property is going to be about 30k in the end.  The third we paid 86k and we are getting $1250/month.  The two leases where signed in Q1 of 2016.  We are using Worth-Clark to manage our rentals.

We are in the early stages of planning but have come up with some rough ideas on how to invest.

Plan 1

Take 1 million and invest in signal families for rentals.  Take 300k to invest in flips using the 70% rule and sell for profit and then use the profits from the flips to invest into more rentals.  Save 200k as working capital.

Plan 2

Take 1.3 million and invest in signal families for rentals.  Leverage some of the rentals to buy flips and sell for profit and reinvest profits into more rentals.  Save 200k as working capital.

We would like to pay dividends with the rental income so by doing the flips that would give us cash to reinvest into more rentals.

Thanks for the advice.

Thomas S. · Answer

Investing in single families is beginner territory, it's the minor leagues for chump change. They have exorbitant expenses due to having to maintain a roof and "systems" for every separate tenant.

With the kind of money you have I would buy the largest apartment my money could afford with minimum down, possibly even partner and go bigger still, or maybe 2 or 3 smaller apartments but I would not waste my time playing around in the minor leagues of SFHs.

You are working way to hard for your money it's time to make your money work harder and smarter for you.

Jay Hinrichs · Answer

@Brett Keller  Caution the last place you want to make a proclamation like that is on a site like this.. you will get inundated with   pick me pick me type of folks.

really depends on if you want to be passive or if you want to start a business.

there is more to life than RE rentals and flipping you could get into many business's that would do as well or far better... just a thought.

David Thompson · Answer

Brett,

I'd put some thought into what you want to do w/your life.  Are you wanting to become a full time investor and willing to do the hard work to get good at one of these niches you are mentioning?  Do you want some active and some passive activity.  Do you want all passive?  By all means, BP is a great place to learn, read, explore and ask questions.  If its burning a hole in your pocket there are some thoughts below.

Assuming you have some SFRs and seem to like buy n hold (LT)  and flipping (ST income), then you could allocate some money and time to both of those activities.  I also think that it makes sense to put a nice chunk of that into some passive syndication deals like apartments (great theme next 10yrs) where you have experienced operators that can provide you some current income from cash flow but nice upside appreciation through the re-positioning of the asset.  Think flipping on a bigger scale when you think of apt re-positioning.  Income flows thru w/solid tax advantages which you'll need.

With re-positioning you get forced appreciation unlike any SFR property.  Typical holds are 5yrs then sell.

Leslie Pappas · Answer

I agree with all the advice you've been given in this thread.  Regarding syndications, if you are an accredited investor, you can buy into $50-125M projects with as little as $100,000 and diversify for some added safety.  Professionals with decades of experience and very impressive track records do all the heavy lifting for you.  You get potential cash flow and appreciation.  Loans are non-recourse.  This is the world of Delaware Statutory Trusts.

Peter MacKercher · Answer

@Brett Keller That's a sizable chunk of change, as I'm sure you're aware, so my primary advice is cautionary. You mention partners so I'm not sure where your funding is from or how it's structured, and that's the first real advice to give you: get structuring advice to be sure your operation is tax efficient. I personally recommend talking to the good folks at UHY Advisors for locals with your resources. 1.5 million is right around the point where getting the level of tax advice they offer makes sense, at least for a personal portfolio, and with leverage you'll be able to have assets well in excess of that amount to where expert tax advising is both advantageous and profitable.

If you haven't yet, start getting your team together: vendors, tax advisors, accountant, lawyer, and you already seem to have a PM company and agent already established. The more pieces you have in place now the smoother things will be down the line. Think about establishing systems now, too, so you have some idea of how the workflow will be handled.

The next bits of advice really depend on what asset class you're after. That amount can get you a lot of SFH, multis or maybe one 40+ unit complex. In each case ignore the prepared pro forma statements you'll see and always, always dig through the actual financial statements to be sure they make sense. If you and your partners are just starting out it'll be harder to know what to look for, so get experienced eyes on each deal you're looking at.

The meat of how to spend your capital depends on what you're after, really, and what you believe your strengths are. You can leverage all of your money, some of it, none of it, but the answers really depend on your risk tolerance and goals. Leverage is hugely powerful, so a hybrid of option 1 and 2 I see as being preferable to either.

It's hard to give you anything specific with the info you've provided...

Jose R. · Answer

Agree 100% with Greg S.

Jade Atwood · Answer

I think it really depends on your goals, exit strategy, and risk tolerance. Personally I would prefer buying discounted apartment buildings, with about 50% financed to get a mostly passive cash flow with leveraged growth, and minimal risk of losing my investment. I would be looking to keep it for a few years, and then 1031 up to a bigger property.  The risk being that I would overpay for a property based on the current low cap rates available in my area; I could be stuck holding the property for a long time.

You should really talk with an accountant and an attorney. You may get better advice.

Bryan Hancock · Answer

How much do you need to live on?  With 25X expenses you can simply invest your money in a blended portfolio of passive index funds and bonds and live comfortably with a safe withdrawal rate of 30+ years.

If you choose to invest in real estate you can get higher returns with higher amounts of effort.  Some projects will also carry higher amounts of risk as well.

How would BP invest 1.5 million?

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