If you had $1,000,000 how would you maximize passive income?

Question

To all you seasoned investors out there, if you had $1,000,000 in liquid capital and you wanted to create a passive income stream with real estate, what would you do to maximize your returns?  How much passive income per month could you generate and what would be your strategy?  Also, is there a specific US market, or markets, in which you feel your strategy would perform the best?

Haydn Zeis · Answer

@Dirk Gesink, I love this question.  I consider passive income to be totally hands off.  Some consider passive income to be actively managed rental income, but once you have a certain size portfolio, it's not hands off, even if you have a property manager.  Additionally, my answer is biased, because I syndicate deals as a sponsor with the co-founders of my company.  I can't answer the question as you, because investing is a personal experience; what's good for me isn't necessarily going to be good for you.  So this answer is from my perspective and based on what my needs would be as a passive investor.

I'd invest in a syndicated deal where the sponsor manages the investment and I receive a distribution check.

Cash-flow is the most important thing to me.  I'd want a sponsor that invests for cash flow, because appreciation can be unpredictable at times.

To maximize my returns (this is subjective based on your risk tolerance), I'd focus on offerings in a high growth area.  I personally invest in Central Ohio, but there are other markets that can produce stellar returns.  To me population and job growth is one of the key drivers of my investment decisions.  I'd invest in quality office space that has historically low vacancies in high income earning areas.  Tenant's don't necessarily have to be investment grade, but I do like when they are.  I want to see leases that have staggered expiration dates and long renewal notices; these factors mitigate vacancy loss.

I would want at least an 8% cash on cash return.  So at a million bucks, I'd be at or above $80,000.  I'd like this to be a preferred return too.  Meaning the sponsor doesn't get paid their management fee, until I get paid first.  This is important because a preferred return gives the sponsor an incentive to find quality investments.  No one wants to work for free.

There are a million different ways to invest each of those million dollars.  Like I've said before, investing is a personal experience.  To me, it comes down to how much time I would want to spend managing my investment, how much risk I'm willing to take, and what type of investment theory I believe in the most.  Good luck!

Account Closed · Answer

I'm not a big risk-taker, and this wouldn't be totally passive, but if it was me, I'd invest in what I know.  I'd buy an apartment building right next door to an accredited ABA law school with full-time 3 year program only (no part-time students), preferably full of tiny studio apartments and rent only to law students (by only advertising via the law school and offering incentives to current tenants to find me more.

I'd offer only month to month contracts with all utilities included, so they only have to deal with paying one bill, and I'd let them sublet over the summer to law students coming for summer internships, so my tenants could go to their summer internships somewhere else, and then come back, so I keep my great tenants.

I'd hire my own on-site property manager who was my employee, pay her well with lovely bonuses, and an accountant, and I'd have weekly meetings via Skype at least, and I'd have my nose in the books at least quarterly to make sure they're doing a good job.  And if they were, they'd love me as a boss, because I'd be very generous.

This would be my perfect world :-)

Evan Polaski · Answer

@Dirk Gesink, I want to add to what @Haydn Zeis expressed.  Buying a bunch of turnkey properties makes you either a property manager or an asset manager.  No tenant is going to stay indefinitely and no property is going to stay maintenance free forever.  Not to say this would be "full time" work, but would be some level of management.

Then you get into syndications.  There are syndicators in essentially every asset class.  Most have reasonably small buy-ins, so you can spread your money out, and let someone else handle the operations.  Personally, I see more value in this, both from lifestyle and actual financials, then I do holding onto property long term.  You still achieve similar tax benefits to buying your own properties and upon exit, can 1031 your investment into the next one and keep the ball rolling.

Another option to be more passive would be hunting NNN deals.  Here you are buying a stand alone building leased, likely, to a credit tenant who not only pays rent, but pays all of the real estate taxes, property insurance and maintenance to the building.  Joel Owens with NNN Invest seems to be the go to guy on BP when it comes to these, but I can't seem to link him directly.

Tom Ott · Answer

Purchase a whole bunch of Turnkey properties in the Midwest. I may be a bit bias though.

Account Closed · Answer

With that amount, If I was just starting out I would look into two things.

1. Becoming part of a syndication on multi-family (they just don't come along often enough to be timely is the problem) and you have to consider the exit strategy. If it is a 5 year run, as most multis are, then you have to be pretty confident 5 years from now won't be a down market or you could lose your shirt.

2. Buy Turnkeys that are cash flowing, in a growing market like Phoenix & Mesa, that are bought off market to maximize equity. Something like this:

https://www.biggerpockets.com/forums/311/topics/780022-3-ways-to-wealth-in-real-estate-cashflow-flip-hold-here-s-how

Joe Villeneuve · Answer

Loan it to me, at 15% interest (simple), with interest only payments for 20-30 years...then the balloon payment...and I'd gladly take it.  To me, that's free money.  To you, that's $150k/year passive income, for 20-30 years,...with no tenants, toilets or termites.

Michael P. · Answer

Buy new cars and hold. They go up in value over time. Sell once they double in price.

Remington Lyman · Answer

Open a high-interest savings account.

John Fortes · Answer

@Haydn Zeis brought the thunder.

With my network right now I'll speak on what I may look into doing. I'd look to get into smaller deals that the $1MM you mentioned above by way of key principal on the loans as I'd have that in liquidity to help proven smaller syndicators. After a handful of those, I'd start moving it into syndications passively and continue to add to my personal portfolio that I am growing with my family to one day train up my children on and show them the business with first hand experience. Just what I would do but that might not work for you and your goals. Great question and I'm loving the responses thus far. I don't know if this is you just asking or really considering, just make sure the path you take fits your investing criteria, tolerance and style.

Happy Investing!

Haydn Zeis · Answer

@Mark S., I can't speak for all sponsors, but that's not how our deals are structured.  We don't consider the asset management fee an expense and only accept it after the preferred return hurdle is met.

We use a waterfall structure where 100% of the distributable cash is given to the investor first.  Once the preferred return hurdle is met, we then take our asset management fee.  Whatever cash is leftover, is split between our investors and us.  The equity split varies from deal to deal, but is typically somewhere between 50 and 80% going to the investor and the rest to us, the sponsor.

If you had $1,000,000 how would you maximize passive income?

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