Investing with a lot of equity.

[Frank S.]

Hi everyone. This is my first post here and I’d like to hear some of your opinions on how to invest in real estate when someone is on a situation like mine.

My dad was a developer and investor. He passed away several years ago. At the age of 21 I inherited his portfolio of properties both commercial and residential. They are all paid off, there are no mortgages, just cash flow.

The portfolio value of properties that are currently rented is around 11.5 million dollars, of which I make 612K a year before taxes and after property taxes and management fees which are taken care by the management company.

Anyways, due to covid 19 I saw that reliable stream of income falter for the very first time. At the beginning of the lockdowns my income went down to 10%. Now it’s back at 100% but it really made me think about the future of my portfolio. It’s heavy on commercial rentals and has very few residential properties.

I just need to diversify it with more residential properties but I don’t know where to start since all the residential properties in my portfolio aren’t as good as the commercial ones. Maybe that’s because there are far fewer residential properties than commercial ones on my portfolio.

I spent the last 10 years investing in properties for my own use, vacation properties in California, Nevada, France, Portugal and South America. Those are also paid for but most of them are vacant for family use or for me to use. I’ve grown emotionally attached to a couple of those properties too.

Since I’m not mortgaging anything, I am just thinking of the buying potential I would have if I did decide to leverage some of those properties and start diversifying.

But I don’t know where to start. I looked into apartment buildings to buy or build (using prefab technology), or should I go with buying residential homes in different markets?

I’m also not so comfortable in taking a 5 million dollars loan and going on a buying spree. Because I don’t want to jeopardize something that has proven to work for decades over something that I’m not sure of. So maybe I should just buy one or 2 properties at a time and pay them off like in a year and then get more, that’s a strategy I’m considering.

I know I wasted 10 years not doing my research or buying what I should have bought to diversify but I guess I thought I would never have to worry about living without the security of those sources of income. Until the lockdowns came along and showed me that I’m not as safe as I thought I was.

I fired 3 financial advisors over the last 10 years for their incompetence that has cost me money. The last one I fired was less than a month ago. So this time I want to do it on my own.

In the last 10 years I also wasted too much money on silly things like cars, golden visas and fake friends.

What would be the safest route, market, strategy to leverage what I’ve got with the smallest risk possible to what I already have?

If it ain’t broke don’t fix it, but the lights just flickered.

Kind regards

[Mike Lambert]

@Frank S.

First of all, kudos to you to decide to take action when many in a similar situation would probably remain comfortable and do nothing.

I don't like to give advice when I'm not sure I have enough knowledge of the situation at hand. Therefore, let me just tell you what I'd personally do if I was in your situation, according for what you wrote.

First and foremost, diversification is always a good idea to avoid any potential "catastrophic" outcomes. You can diversify into the real estate market but I'd go one step further and would diversify into the stock market.

Real estate and the stock market are the main sources of passive income, along with buying a business but the latter one is riskier and less passive, certainly at the beginning. If you compare real estate with the stock market on an unleveraged basis, the stock market winds hand down instead of return. The return on your portfolio is 5%. The average long term return on the stock market, at 10% is double that. While you can use leverage in both the stock market and real estate, I'd agree that using leverage in the stock market can be too risky for most people (and especially if you don't know what your doing). When you compare leveraged real estate returns with stock market returns, that's when real estate can equal or even beat the stock market in terms of return. In that situation, real estate is more risky than the stock market contrary to popular belief. This is because you took on debt in real estate and none in the stock market and the fact that real estate prices fluctuate less than stock market prices doesn't compensate for the additional risk arising from the debt

Even though I'm a stock market investor coach, I consider myself neutral and invest both in real estate and the stock market. This is widely recognized as the best thing to do from a diversification viewpoint.

While many people love the potential capital gains of the stock market, some prefer to invest in real estate only because they want or need income. What they often ignore is that they can get as much income if not more by investing in dividend paying stocks, especially the ones that either pay a high dividend or rapidly grow their dividend. They can even relatively safely increase their income in a significant manner by selling covered call options against their stocks. This is one of the main strategies that I teach.

Mind you, you can invest in real estate through the stock market by buying shares of REITS (real estate investment trusts). It's a completely passive way to invest and I read a few days ago an article demonstrating that you'd make higher returns while taking less risks compared with the average investment in rentals that you could do directly. This isn't surprising given that you're basically giving your money to the best and largest real estate investors out there to manage. And you'd make a higher return than you currently do, especially today.

Today is probably one of best times to invest in REITS but if you know what you're doing, given the Covid-related risks. Indeed, people love to invest in REITs for the reasons mentioned above. Because of that, investors normally have to pay a premium to buy REIT stocks, which means that they have to pay more than the net asset value of the properties owned by the REITs. They're happy to do so because, in so doing, they're basically paying for having the best investors manage their money.

However, because of the Covid crisis, we are in one of the right times when we have the opposite situation, in which the REITs are selling at a discount to the net asset value of the property assets they hold and many of these discounts are huge. The best (as in least risky) REITs have managed to maintain their dividends throughout the crisis. As a result to the (oftentimes unwarranted or at least exaggerated) fall inn their stock prices, their current dividend yields are abnormally high and sometimes very big so it might be a great time to lock these in. To recap, by investing in REITs today, you can indirectly buy property at a discount (sometimes as high as 50%) and get a very high income while having your money passively managed by the best real estate investors out there. The icing on the cake it's a less risky way too invest because you don't have to take a single dollar of debt!

While I have the knowledge to tell you what you could do if you decide to purchase real estate and use leverage (mortgages), I don't like to give advice on things I'm not doing myself. I'm Canadian and I invest in international real estate but I currently only invest in US through REITs. Therefore, there are many investors out here that are more qualified than me to give you advice on the best way to use leverage when investing in the US real estate.

I know a lot about and have experience in international real estate though. Investing in international real estate is another nice way to diversify and not have all your assets invested in the same countries and currency, which isn't very prudent. I see that you already own international real estate properties but not generating income from them. If you wish to do so, feel free to read my hundreds of replies on international real estate posts in the forums. And, if you don't find what you're looking for in there or if you have questions about it, feel free to reach out to me.

Hope this helps!

[John Bonhomme]

Congrats on the inheritance.

I'd diversify as much as possible. 1031 exchange some of your lower performance commercial. Reinvest those profits into large multifamily Class B complexes. 

Maybe throw some profits into REITs/money markets. Use this money as your reserves so you never have that same feeling in your stomach as you had during the worst of the pandemic. 

Good Luck! 

John

[Alex Olson]

Originally posted by @Frank S.:

Hi everyone. This is my first post here and I’d like to hear some of your opinions on how to invest in real estate when someone is on a situation like mine.

My dad was a developer and investor. He passed away several years ago. At the age of 21 I inherited his portfolio of properties both commercial and residential. They are all paid off, there are no mortgages, just cash flow.

The portfolio value of properties that are currently rented is around 11.5 million dollars, of which I make 612K a year before taxes and after property taxes and management fees which are taken care by the management company.

Anyways, due to covid 19 I saw that reliable stream of income falter for the very first time. At the beginning of the lockdowns my income went down to 10%. Now it’s back at 100% but it really made me think about the future of my portfolio. It’s heavy on commercial rentals and has very few residential properties.

I just need to diversify it with more residential properties but I don’t know where to start since all the residential properties in my portfolio aren’t as good as the commercial ones. Maybe that’s because there are far fewer residential properties than commercial ones on my portfolio.

I spent the last 10 years investing in properties for my own use, vacation properties in California, Nevada, France, Portugal and South America. Those are also paid for but most of them are vacant for family use or for me to use. I’ve grown emotionally attached to a couple of those properties too.

Since I’m not mortgaging anything, I am just thinking of the buying potential I would have if I did decide to leverage some of those properties and start diversifying.

But I don’t know where to start. I looked into apartment buildings to buy or build (using prefab technology), or should I go with buying residential homes in different markets?

I’m also not so comfortable in taking a 5 million dollars loan and going on a buying spree. Because I don’t want to jeopardize something that has proven to work for decades over something that I’m not sure of. So maybe I should just buy one or 2 properties at a time and pay them off like in a year and then get more, that’s a strategy I’m considering.

I know I wasted 10 years not doing my research or buying what I should have bought to diversify but I guess I thought I would never have to worry about living without the security of those sources of income. Until the lockdowns came along and showed me that I’m not as safe as I thought I was.

I fired 3 financial advisors over the last 10 years for their incompetence that has cost me money. The last one I fired was less than a month ago. So this time I want to do it on my own.

In the last 10 years I also wasted too much money on silly things like cars, golden visas and fake friends.

What would be the safest route, market, strategy to leverage what I’ve got with the smallest risk possible to what I already have?

If it ain’t broke don’t fix it, but the lights just flickered.

Kind regards

 Hey Frank - I would look at 1031 exchanging your worst performers, and reinvest in the Midwest into a b/c property. Develop a team in the area you invest in with a great lenders, PM, and broker. I can only speak for KC but have had clients with success stories if you want to hear more. 

[Noah Chappell]

@Frank S. Thanks for sharing your compelling story. Try to keep it simple. Focus on the 80/20 principle and maximizing your return on equity. Keep the best performing part of your portfolio, which seems to be triple net commercials, and cash out refi/ 1031 exchange the poorly performing/ annoying part, which seems to be the residential. Transfer that equity into a nice stable C or B class multi family in a decent midwestern city. Could take 5 million and buy a 50-55 unit C class section 8 building in Cleveland managed by and experienced PM. The vacation rentals you could keep or sell, at your level don't know if it would be worth your time to make them short term rentals.. 

[Matt B.]

I'm just curious what makes you think you need to diversify with residential? I'm not opposed to residential, but with the cash flow you have you could diversify in a number of ways, some more active and some more passive than others. Things like Mortgage notes, Tax liens, Commercial properties, investing outside of the US, etc.

If I were in your position right now, I'd probably focus on 2 things:
1. Educating yourself before you make any rash investment decisions. If you are set on diversifying, choose a style that helps you reach your own goals. Compare the pros and cons of each style and do what makes sense for you.
2. Maintaining the portfolio you inherited (visiting these properties and learning why they've lost value and how you can improve them will teach you so much more than just reading a book. Not only that, but you will be making new relationships that may be able to assist in future ventures)

[James Wise]

Originally posted by @Frank S.:

Hi everyone. This is my first post here and I’d like to hear some of your opinions on how to invest in real estate when someone is on a situation like mine.

My dad was a developer and investor. He passed away several years ago. At the age of 21 I inherited his portfolio of properties both commercial and residential. They are all paid off, there are no mortgages, just cash flow.

The portfolio value of properties that are currently rented is around 11.5 million dollars, of which I make 612K a year before taxes and after property taxes and management fees which are taken care by the management company.

Anyways, due to covid 19 I saw that reliable stream of income falter for the very first time. At the beginning of the lockdowns my income went down to 10%. Now it’s back at 100% but it really made me think about the future of my portfolio. It’s heavy on commercial rentals and has very few residential properties.

I just need to diversify it with more residential properties but I don’t know where to start since all the residential properties in my portfolio aren’t as good as the commercial ones. Maybe that’s because there are far fewer residential properties than commercial ones on my portfolio.

I spent the last 10 years investing in properties for my own use, vacation properties in California, Nevada, France, Portugal and South America. Those are also paid for but most of them are vacant for family use or for me to use. I’ve grown emotionally attached to a couple of those properties too.

Since I’m not mortgaging anything, I am just thinking of the buying potential I would have if I did decide to leverage some of those properties and start diversifying.

But I don’t know where to start. I looked into apartment buildings to buy or build (using prefab technology), or should I go with buying residential homes in different markets?

I’m also not so comfortable in taking a 5 million dollars loan and going on a buying spree. Because I don’t want to jeopardize something that has proven to work for decades over something that I’m not sure of. So maybe I should just buy one or 2 properties at a time and pay them off like in a year and then get more, that’s a strategy I’m considering.

I know I wasted 10 years not doing my research or buying what I should have bought to diversify but I guess I thought I would never have to worry about living without the security of those sources of income. Until the lockdowns came along and showed me that I’m not as safe as I thought I was.

I fired 3 financial advisors over the last 10 years for their incompetence that has cost me money. The last one I fired was less than a month ago. So this time I want to do it on my own.

In the last 10 years I also wasted too much money on silly things like cars, golden visas and fake friends.

What would be the safest route, market, strategy to leverage what I’ve got with the smallest risk possible to what I already have?

If it ain’t broke don’t fix it, but the lights just flickered.

Kind regards

 If it ain't broke don't fix it. Sounds like you've got extremely limited knowledge and skills in this business and are already profiting off of a massively profitable business. Why tinker? Juice doesn't seem worth the squeeze here.

If it ain't broke don't fix it.

[Jay Hinrichs]

Originally posted by @James Wise:

Originally posted by @Frank S.:

Hi everyone. This is my first post here and I’d like to hear some of your opinions on how to invest in real estate when someone is on a situation like mine.

My dad was a developer and investor. He passed away several years ago. At the age of 21 I inherited his portfolio of properties both commercial and residential. They are all paid off, there are no mortgages, just cash flow.

The portfolio value of properties that are currently rented is around 11.5 million dollars, of which I make 612K a year before taxes and after property taxes and management fees which are taken care by the management company.

Anyways, due to covid 19 I saw that reliable stream of income falter for the very first time. At the beginning of the lockdowns my income went down to 10%. Now it’s back at 100% but it really made me think about the future of my portfolio. It’s heavy on commercial rentals and has very few residential properties.

I just need to diversify it with more residential properties but I don’t know where to start since all the residential properties in my portfolio aren’t as good as the commercial ones. Maybe that’s because there are far fewer residential properties than commercial ones on my portfolio.

I spent the last 10 years investing in properties for my own use, vacation properties in California, Nevada, France, Portugal and South America. Those are also paid for but most of them are vacant for family use or for me to use. I’ve grown emotionally attached to a couple of those properties too.

Since I’m not mortgaging anything, I am just thinking of the buying potential I would have if I did decide to leverage some of those properties and start diversifying.

But I don’t know where to start. I looked into apartment buildings to buy or build (using prefab technology), or should I go with buying residential homes in different markets?

I’m also not so comfortable in taking a 5 million dollars loan and going on a buying spree. Because I don’t want to jeopardize something that has proven to work for decades over something that I’m not sure of. So maybe I should just buy one or 2 properties at a time and pay them off like in a year and then get more, that’s a strategy I’m considering.

I know I wasted 10 years not doing my research or buying what I should have bought to diversify but I guess I thought I would never have to worry about living without the security of those sources of income. Until the lockdowns came along and showed me that I’m not as safe as I thought I was.

I fired 3 financial advisors over the last 10 years for their incompetence that has cost me money. The last one I fired was less than a month ago. So this time I want to do it on my own.

In the last 10 years I also wasted too much money on silly things like cars, golden visas and fake friends.

What would be the safest route, market, strategy to leverage what I’ve got with the smallest risk possible to what I already have?

If it ain’t broke don’t fix it, but the lights just flickered.

Kind regards

 If it ain't broke don't fix it. Sounds like you've got extremely limited knowledge and skills in this business and are already profiting off of a massively profitable business. Why tinker? Juice doesn't seem worth the squeeze here.

If it ain't broke don't fix it.

totally agree.. and or if this inheritance just happened and you got a stepped up basis.. sell it all move to cash.. hire a FEE based top notch money manager.. enjoy your vacation properties..   this happened a ton when i was in the land and timber business heavy.. family inherit 300 acres of timber worth millions upon millions.. timber sky rocketed but had zero basis.. get new valuations and stepped basis log it or sell it to someone like us.. grab the cash and off you go.    OR like Jim says do nothing and listen to nobody your Dad set you up for life feel blessed 

[Mike Dymski]

You have $11.5 million worth of paid off real estate.  Rest assured, you are secure.  Although, the sharks will be swimming around this post...

Most of us waste money on cars, friends, and the like; so, no worries there.  With that kind of money, it would be impossible not to.

There is no shortcut to figuring out a strategy or running your real estate business.  You have to source and analyze a lot of properties...just like your dad did to build his portfolio.

On a side note, you could get some incremental cash flow from renting the vacation properties while not in use.