Best Way to Invest a Large Lump Sum of Money ($100-$300K)?

[Scott Trench]

Hi BiggerPockets - I am considering writing a lengthy discussion on how to invest a large lump sum of money effectively. This topic comes up for discussion a LOT here on BiggerPockets, as it seems there are many reasons that folks that otherwise save just a few hundred dollars per month suddenly come into tens or hundreds of thousands of dollars (inheritance, sale of a house, divorce, stock options, or good old fashioned luck). 

The goal is to create a resource for folks that receive a sudden infusion of cash. This intended audience earns a median to upper middle-class income. I also assume that a member of the target audience does have the financial capacity to accumulate said amount in a period of less than 5-10 years, meaning that an infusion of cash in the six figure range is a life-changing event.

I *think* I have a plan about what I, Scott Trench, would do if I suddenly came into a large sum of money (much greater than the amount of cash that I currently accumulate on an annual basis) and how I would deploy it in pursuit of financial freedom while working a full-time job. 

But, I'd really like to interview some folks that have done this successfully and hear their stories. I want to create the best resource out there for folks that come into this situation and have the goal of financial freedom at heart. 

So, if you've come into tens or hundreds of thousands of dollars suddenly, and then executed a well thought out plan in deploying that to acquire cash flowing assets that help you move towards financial freedom, I'd like to interview you! Please reply to this thread with your story, or email me at [email protected]. I would also really appreciate the chance to interview you on the phone or via Skype. 

Thanks!

Scott

[Steven Mitchell]

I am surprised at all the posts about syndication.  I just spoke with a large syndicator who tells me they are crap right now in this market as prices are too high.  

[Ash Patel]

@Steven Mitchell - Because the market is high, I think that leads to more money going into reputable syndications.  If I can make a 25% return by actively managing a property or an 18-20% return in a syndication, I am going the syndication route.  Because I haven't been able to find a great deal on my own and I believe the market is near a peak, I have been selling my commercial properties and reinvesting the money in MF syndications.  My thought is that when they pay out in five years, there may be more buying opportunities out there.

[Steven Mitchell]

Originally posted by @Andy Thoms:

I would consider 20% down on a $1m multi-family unit, in a good secondary, tertiary market. Class B, rent ready, leased up, if you can find it. Look for cap rate north of 10%. Then hire a solid property manager and collect passive income. Save 50k for reserves. Hold the remaining 50k and short the stock market. TVIX

    Good luck finding this consistently.  If you have a method, I will pay you 10k for it upon the purchase of my first property.  10% cap rates is going to get you in a D neighborhood with deferred maintenance.  I will also bring you the money while wearing a clown outfit and toting balloons.  

[Saeryon Park]

I'm also in process of cash-out refi of 150k to finance a short sale flip or a buy and hold if I can get a zone variance to change SFR to 2-Family. Thought this might be an education in itself. Anyone have experience on how to get zoning board to rule in favor? I'm attending a hearing next month for someone else trying to do this same thing.

[Par Attaran]

Originally posted by @Jessie Niu:

@Adam Robinson

@Paul B.

I am going to have $50~$100k cash from cash-out refi, what's the best way to find credible syndicators in my local market?

Your local REI meet up.

We found our first syndication deal 2 months ago at a local meet up. Went around and told people "I have 50k cash to invest in a syndication deal" and immediately found someone to talk to. Had a lunch meeting the next day and are now awaiting for the 2nd syndication deal :) 

[Paul B.]

Originally posted by @Steven Mitchell:

I am surprised at all the posts about syndication.  I just spoke with a large syndicator who tells me they are crap right now in this market as prices are too high.  

 If you're the syndicator, it is very hard to find a deal in most markets. It's just too competitive out there, and it's tough to compete with buyers who are simply overpaying and also (in the case non-syndicators) don't have investors to please. But, if you're investing in syndications, how many opportunities do you need? I get offered way more deals than I can possibly afford to invest. The fact that my sponsors are being conservative means they lose a lot of deals, but if I can trust them to stick to their underwriting, that's all the more reason I can feel confident investing with them. The very thing that frustrates them (a lot of offers that go nowhere) is the same thing that makes a deal relatively safe - they are underwriting conservatively with a margin of error. I wouldn't want to invest with a sponsor who wins a lot of deals - they might be overpaying. 

[Mike Dymski]

Originally posted by @Andy Thoms:

I would consider 20% down on a $1m multi-family unit, in a good secondary, tertiary market. Class B, rent ready, leased up, if you can find it. Look for cap rate north of 10%. Then hire a solid property manager and collect passive income. Save 50k for reserves. Hold the remaining 50k and short the stock market. TVIX

 and then you wake up...

[Robert Acevedo]

great topic. Not a qualified investor but my personal view is

30% in Crypto but this is still too speculative for most but I understand the underlying infrastructure (I build them)  and would set up my own RE ico

15% as prudent reserves

55% into Multifamily but something easy without too many repairs like a b or B+ market which I know isn't high cash flow but as a start it would be good  

[Zach Stillman]

I am in a section 15 sale in Illinois and am in this exact quandary.  I am looking into syndication or smaller town duplexes in any of the I states (Illinois, Indiana, Iowa...).

[Sebastien Hitier]

Option 1: cash

Option 2: buy syndication

Option 3: buy sfh and learn real estate slowly

Option 4: buy larger MF and get seriously involved

Option 4 has most upside but represent most effort/risk. Only option 1 is low risk.

[Dean Weltman]

Originally posted by @Saeryon Park:

I'm also in process of cash-out refi of 150k to finance a short sale flip or a buy and hold if I can get a zone variance to change SFR to 2-Family. Thought this might be an education in itself. Anyone have experience on how to get zoning board to rule in favor? I'm attending a hearing next month for someone else trying to do this same thing.

 Off topic, but please post about your experience, after you go through the process. 

I'm in a similar position - trying to rezone 7500 sqft SFR to 5000 sqft SFR. I recommend you start with the city council member for that area - if that applies to your situation...

[Leah M.]

I don't find syndications to be that great an option, although I've invested with them.  While they may have some superiority in investing skills to me, the fees that they collect wipe that out, and I do better on what I buy myself.  The main problem with a syndication is that it is usually a buy and hold for a fixed time, say 7-10 years, followed by a sale, and a big capital gains tax bill at the end, since you can't really do a 1031. Much better to buy and hold on your own so that you can defer taxes.

[Michael Le]

@Leah M., for sure you and plenty of people can probably do better than a syndication's 15-20% return. But the point is, can you do it with someone else doing all the work? And can you find enough deals to scale? My problem when I was doing SFR was that it took me a long time to find the right deals such that I had too much capital sitting on the sidelines waiting for me to find that deal. When I'd find the right deal they were fantastic but just took forever.

[Leah M.]

I am not opposed to a syndication.  Obviously, the time savings is a big factor.  I'm just saying that the tax implications of investing with a syndication vs. buying onesself are huge, and one should be aware of that major compromise.  I found that between the fees of the syndication and the tax implications, I was better off just moving the money without it being the "best" deal.  At the end of the day, it of course depends on the quality of the syndication. 

[Ash Patel]

Originally posted by @Leah M.:

I don't find syndications to be that great an option, although I've invested with them.  While they may have some superiority in investing skills to me, the fees that they collect wipe that out, and I do better on what I buy myself.  The main problem with a syndication is that it is usually a buy and hold for a fixed time, say 7-10 years, followed by a sale, and a big capital gains tax bill at the end, since you can't really do a 1031. Much better to buy and hold on your own so that you can defer taxes.

 You certainly can do a 1031.  

[Ash Patel]

@Michael Le is on point.  It comes down to how hard you want to work for those extra returns.  If you are content passively making 18% vs working your a$$ off for 30% then syndication is the way to go.  If this was 2014, I doubt we would be talking much about syndication.

[Leah M.]

How can you 1031? The syndications Ive seen use LLC structures?

[Leah M.]

Originally posted by @Ash Patel:

Originally posted by @Leah M.:

I don't find syndications to be that great an option, although I've invested with them.  While they may have some superiority in investing skills to me, the fees that they collect wipe that out, and I do better on what I buy myself.  The main problem with a syndication is that it is usually a buy and hold for a fixed time, say 7-10 years, followed by a sale, and a big capital gains tax bill at the end, since you can't really do a 1031. Much better to buy and hold on your own so that you can defer taxes.

 You certainly can do a 1031.  

The syndications I've seen use LLC structures. How can you 1031, unless the entire group wants to?

[Ash Patel]

@Leah M. - There is a fair amount of info on BP about 1031's and syndications.  It seems to depend on how the structures were setup.  I haven't gotten to that point but the company that I use has stated, when they sell a property, they will attempt to line up another so investors can 1031 their winnings.  

[Leah M.]

@Ash Patel   Would you be willing to share the name of the Company that you use? This was the main point that bothered me about the syndication that I invested with. 

[Ash Patel]

Yes.  I have invested in five different deals with Ashcroft Capital.  I have no affiliation with them but because of my level of investment, I have met both founding partners, one of whom is @Joe Fairless.  I have also visited our investments in Dallas, toured each property and interviewed the management company's/onsite managers.  What was most impressive is that they can do complete unit renovations for $5-7k/apt depending on the level of finish.  They also use mostly in house staff for renovations/management.  It may sound like I rep them but I assure you I am simply an investor.  You do have to be an accredited investor with this company.  I would love to hear who other people are using.

@Leah M.

[Leah M.]

@Ash Patel Thanks! I will check them out.  What fee structure do they use? 

[David Veeder]

After receiving money when my grandmother passed away.  I was able to become financially free from a $50K a year job in one year, by investing the money in single and small multi family rentals in DFW in 2009-2010. I purchased three single family homes, one duplex, and 2 four unit buildings with a total cash flow of about $ 4,500 to 5,000 per month.  I slowly acquired a total of 18 doors of my own, last one being purchased in

When I first started in 2009/2010 the fastest way for me to become financially free was to purchase my own smaller rentals.  From my calculations at the time participating in syndications would not have produced enough income to make me financially free.  

Seeing that I have a stable base now I am now more interested in Syndications.  The will grow my balance sheet (net worth) at a greater rate.  Here a couple examples of why I investing in more multi family syndications.

I participated in my 1st multi family property in June of 2014 (41 units),  We just sold it in August 2017.  I put $ 50K into the deal, received $ 19K in distributions while we held the deal (average of 12.7% return).  The most amazing part of this is I received $ 145 to my 1031 agent at the closing.  A total of a $ 114K gain in 3 years and 2 months.  

On the second multi family investment (38 units, in July of 2015) I also put $50K into the deal.  The first year we made a 12% cash on cash return, from the second year on it has been paying at 15%.  We are on the brink of selling it when the syndicators can return double our money.  Looks like this will happen in the next 6 months, according to current trends.

We closed on the third syndication in May of 2017.  I am expecting my first distribution in October.  According to the reports that I receive, it looks like we are on track to do that October distribution.

Either way real estate investing is super powerful, and I am glad that I found it.  Although I think that Multi Family syndications will actually start to build actual wealth for me, quicker than single family.

[Brian Adams]

@Ash Patel so you aren't surprised about potential cap gains and application of 1031 treatment, you might want to check your paperwork now versus waiting until a potential sale and being surprised.

I agree with you about how the syndicate is structured could offer 1031 treatment, you may have invested as a TIC (tenants in common).

Most syndcations however, and how I setup mine are through an LLC.

Partnership and LLC interests are specifically excluded from 1031 Exchange treatment under Section 1031 of the Internal Revenue Code.

Reason - Partnership interests are personal property, and are not considered to be like kind to the acquisition of real estate, even though the underlying assets held within the partnership are in fact real property.

Don't mean to be to tax technical, just want to give you a heads-up.

[Dave Foster]

@Brian Adams, appreciate what your saying and it's right on. Unless a syndication is set up with a TIC structure it will not allow an investor to sell a property and 1031 into it. If that investor wants to enter the syndicate they have to sell, incur the tax and then use residual gain for the syndication.

But I think what @Ash Patel, is talking about is the end strategy for a syndication that is set up as an LLC or LP. In that event the LLC or LP may indeed do a 1031 exchange (the members of that LP or LLC may not do their own). However, if the syndicator has found a suitable replacement property then it's a slam dunk that the LP or LLC do an exchange since any tax paying entity is allowed that tool.

At that point in time the individual participants of the syndication are often given the option of continuing with their membership interest and reaping the tax deferral benefits via the activity of the LP or LLC. If not then they are routinely bought out of their membership interests at the end.