Advice for investing a big war chest?

Question

Hi all, rookie here. My wife and I want to move out of stocks and in to cash-flowing assets once we hit 59.5. Our goal is to produce robust cash flow to help fund the golden years and eventually pass the properties to our kids. I've been reading books and listening to various BP podcasts nonstop for the past couple months, but I'd love to hear thoughts about the right strategy for turning our war chest into a sound real estate portfolio (preferably before I'm too old to enjoy the fruits of our labor!). Thanks!

Max Gallagher · Answer

Hi Trevor! Great question and I completely get the appeal of wanting to prioritize portfolio cashflow once your paychecks stop. That said, it would be hard to determine if this is a move that will help or hurt you with such little information.

While a more robust conversation around your entire financial picture would be required, here are a few questions that I'd want to double click on first:

Where is Your War Chest? - The type of account(s) that hold your life savings is important in this decision (ie. savings, brokerage, pre-tax retirement, Roth retirement). I assume that since you're waiting until 59.5 that at least a decent bit is held in retirement accounts and you're hoping to avoid early withdrawal penalties. Either way, there are a wide range of tax consequences associated with big withdrawals from any of these accounts that can't be ignored.What is Your Current Plan? - Say you decided not to go all in on real estate, do you have confidence that your current nest egg would be enough to protect your retirement spend? If not, is this decision an attempt to step away from work sooner than you would otherwise be able to? Do you have clarity around different options there are to create cashflow besides pure yield/interest/rental income?

What is Your Real Estate Experience? - Are you considering using your war chest for your first real estate investment or are you experienced in this space? Make no mistake, shifting a "big war chest" from liquid investments and cash into a cash flowing real estate portfolio is not a passive endeavor. Assuming you're getting into deals that can perform above what the market will deliver (the only reason you would do this), there is still going to be a lot of work involved. Granted, this may be what you're looking for in your ideal "retirement" but worth noting!

My personal opinion is that, while shifting investments into real estate may be the right move for your situation, there is likely a lot of work to be done before you get to that step to avoid a potentially costly mistake. Retirement income can be created in many different ways and the tax implications of all options should be carefully thought through. You only get one shot at retirement so I'd highly advise at least having a conversation with a financial planner. Feel free to message me if you want to talk more details.

Trevor Thrall · Answer

@Alecia Loveless thanks for those thoughts. Definitely thinking about how to diversify within RE - was just listening to the BP pod #1085 where Dave interviewed Dion McNeeley and he talked about that. It's an interesting balance because you don't necessarily want to have to understand too many markets but you also don't want to suffer a big setback if any one market takes a hit.

Alecia Loveless · Answer

@Trevor Thrall I would also consider a diversified real estate portfolio. I’ve got multiple properties in several areas all of which are still fairly local which means if something happens in one community I’ve got locations elsewhere to help compensate.

I also have invested in less expensive properties as opposed to just one big property. I’ve tried to maximize locations that will appreciate in value as well as cash flow. Not that you can ever know this for sure given the fluidity of real estate markets.

I’m primarily in relatively upscale buildings which helps minimize my repairs and maintenance. Obviously if you have NNN most of the repairs will fall to the tenants and not to you.

Henry Clark · Answer

OP.  Still working with little info.

Taking the current cash flow out of the way.  That you will continue your business for a while.  Again, it gets back to your overall view of the economy and the near future.

I would sit out investing near term (12months).  Identify a market and type of REI I want to invest in.  Start getting to know realtors in that area and give them a Buy Box you're looking for.  Start running deal analysis on properties during this time.  Decide on what your financial targets are.  To what degree do you want to Scale or not, that will help determine the type of investment.

With your situation I would skip trying to scale up in housing or MFH. Go with CRE.  Contact one of the CRE broker/investors on BP and converse with them about NNN commercial industrial properties.  By doing this approach you are not competing with the Millions of other investors in SFH or MFH.  Plus, you're not adding headaches to your life, unless you want to be hands on, even with property managers.

Use the magnifying lookup or post over in the Commercial section.  Looking for NNN commercial industrial investing.

We do Self Storage and Country Subdivision lots.  Pick something that fits your style and investment of both time and money.  Then decide if you want to Scale later and this fits.

Trevor Thrall · Answer

Thanks, guys. I appreciate the difficulty in answering given the many possibilities and my lack of specifics. In our case, the war chest is less than half of our savings, and we don't intend to stop making money in our current businesses for at least another decade, so we don't need to start living on cash flow right away (or ever, potentially). We will certainly manage the drawdown from those funds to account for tax consequences as best we can.

I appreciate the calls for diversification and I get that cash flow is a tougher to secure with interest rates where they are. That said, because we're going to have plenty of capital and because I don't need to live off this cash flow alone, I feel like we may have some options that make sense in the current environment.

I remain big on real estate because I love it and I'm taking a long view that our kids and theirs will benefit if we can lay a solid foundation.

Henry Clark · Answer

OP.  As mentioned above, far too little info and data.

With that said I’m going to make a bunch of assumptions about you and your life.  The following is a potential path but maybe not yours or your outlook on the world.

1.  Stock market will crash 50%.  Your position won’t recover for 15 years.  Only have enough in stocks for Longterm investing beyond a 15 year horizon.  Rest in money equivalents.

2.  Sell your house if you have lived there 2 out of 5 years as a primary.  Take the $500,000 capital gain avoidance.  Then rent until the housing market crashes and you know your retirement plan.  Florida and DFW markets are already switching to a buyers market.

3.  Inflation will skyrocket in the 4th quarter. Don’t hold on to cash to long.  Keep cash in hand to cover your period of concern.  1 year up to 5 years.

4.  Your original question.  Housing will not be your answer for cashflow and a retirement lifestyle.  5.  Reach out to some of the CRE brokers on BP and look at commercial and industrial.

6.  Kids- don’t fund their college or weddings.  Tell them to join the military and buy a keg and shredded pork sandwiches for the wedding.  Your focus is retirement.

7.  Move to a lower property tax, insurance, cost of living, income tax area.

Advice for investing a big war chest?

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