What would you do? Investment strategy

Question

Mark Robertson · Answer

Diversify, be patient and do not respond to any request in your BP  inbox. Thee are many trolls are BP looking for post like yours..They want what you have...Money. (Ignore the word DST..a post about will come any hour now)  Its very late in the real estate cycle and the stock market is at an all time high.  I'm about 50% in stocks and bonds and 50% in real estate syndications (crowdfunding).. Do you want active or passive income? That is the most important question you need to answer.

Clayton Mobley · Answer

@Josh July You've already gotten some awesome advice here from @David Carte  and @Mark Robertson

• Don't respond to any PMs - people WILL see the number $1million and just try to sell you on anything under the sun.
• Diversify
• Be Patient

Like David, I'll assume this friend doesn't have a ton of REI or investing experience, so more complicated things like syndicates, crowdfunding, hard money lending etc that take some knowledge and experience may be a little tricky for just starting out.

• The first thing I'd recommend is to obliterate all their debt. Student debt, car loans, credit cards, anything except maybe mortgage (depending on the interest rate). 
• If they rent, look at buying to reap the tax benefits of owning RE and start building a portfolio of appreciable assets. 
• Establish a good emergency fund to ensure that if all their investments fail and they have no income (worst case) they can survive for six months minimum. 
• Now that your friend's house is in order, find a financial advisor that is a FIDUCIARY. This means they are legally required to work in your friend's best interest, instead of just recommending investments that earn them a commission, for example. Not all advisors are fiduciaries. Do research, ask around for recs. Meet them face to face. It is possible to invest this money without professional help, but when it comes to taxes, retirement accounts, and all that nitty gritty that comes with having a lot of money, you want a pro. Look for a good CPA as well.
• I also agree they want to diversify, but avoid things like hedge funds or even most mutual funds which tie up capital and assign lots of fees. For stock market exposure, consider going the passive indexed ETF route, which carries the same diversification benefits as mutual funds but trades like a stock (maintaining liquidity) and has MUCH lower fees. An easy option here is something  like the Vanguard S&P 500 ETF which tracks the S&P 500 and has exposure to the market at large. This is a long-term investment, of course, but I believe the annual growth, even after-tax is good:

http://performance.morningstar.com/fund/tax-analys...https://advisors.vanguard.com/VGApp/iip/site/advis...
• http://performance.morningstar.com/fund/tax-analys...
• https://advisors.vanguard.com/VGApp/iip/site/advis...
• If your friend has more experience in stock investing or has a trusted financial advisor, they could pursue a more active approach, but generally speaking passive investing wins out over time anyway, and I'm going with the simplest passive options here. If they don't want full market exposure, Sin Stocks and addictive substances (like booze, cigarettes, casinos, coffee etc) are almost always a good bet because people will spend money on them even when they shouldn't. Sad but true, and lucrative. If investment income is important, look at Dividend Aristocrat stocks that pay healthy dividends consistently every year (DA stocks have paid consistent increasing dividends for 25+ years). There are ETFs that invest solely in dividend stocks as well, so your friend can get diversification without having to individually curate the entire portfolio.
• If they don't want full market exposure, Sin Stocks and addictive substances (like booze, cigarettes, casinos, coffee etc) are almost always a good bet because people will spend money on them even when they shouldn't. Sad but true, and lucrative. 
• If investment income is important, look at Dividend Aristocrat stocks that pay healthy dividends consistently every year (DA stocks have paid consistent increasing dividends for 25+ years). There are ETFs that invest solely in dividend stocks as well, so your friend can get diversification without having to individually curate the entire portfolio.
• As for REI, the simplest passive option is turnkey (I may be biased, but it's still true), because once your friend determines the company they want to invest with (which should require a lot of research and effort, don't skimp on research) they shouldn't have to do anything but collect their net rents every month. There are a lots of great markets for turnkey, but focusing on the team they work with is primary. Here's a link to a thread with a list of questions to ask when vetting a turnkey company:

https://www.biggerpockets.com/forums/55/topics/361999-new-investor-from-glendale-ca
• https://www.biggerpockets.com/forums/55/topics/361999-new-investor-from-glendale-ca
• Using financing, your friend could take a few hundred thousand dollars and get a nice little portfolio going in multiple markets. Say using $250k and financing, they could get 8-12 solid B/B+ doors with tenants paying off their mortgages. If investment income isn't needed at the moment, they could devote all their cash flow to paying off each loan more quickly (ensure there's no early pay-off penalties of course) and end up with a portfolio of tenant-paid-for cash flow props that you paid about 25% for. 

Again, there are other options in REI - so so many, but I'm going with the simplest options under the assumption that they don't have any REI experience and aren't looking to make REI their new job.
• Again, there are other options in REI - so so many, but I'm going with the simplest options under the assumption that they don't have any REI experience and aren't looking to make REI their new job.
• Keep some in cash, in an interest bearing account, as a reserve for any unexpected expenses for their REI investments - this should not be the same money as their emergency fund. About $3-5k per door is typically sufficient. If they've invested with a reputable turnkey company, they shouldn't need to dip into this for a while, because the TK's company's rehab process should include high end upgrades to things like HVACs, roofs, etc. But your friend should have the reserve just in case, for peace of mind - because sometimes life happens. 
• If/when some or all of the investment props look ripe for sale (not soon, but later if the market starts to peak and your friend wants to lock in appreciation or move capital to other markets) use a 1031 Exchange to leapfrog into better props elsewhere, diversify markets, expand their portfolio, move into MFRs, whatever makes the most sense. This defers taxation on the sale, which means their capital keeps working without giving away earnings to the IRS. Your friend should keep doing this until they die (don't sell any props outside of a 1031 or alllll their gains from previous sales become taxable) and leave the props to their heirs so they receive a stepped-up basis, avoiding all the taxes your friend normally would have paid during their lifetime. Alternatively, they can use a Charitable Remainder Trust to get a big tax deduction, pull out annual income, benefit a charity of their choice. Using some income to purchase a life insurance policy can replace the value of donated assets for your friend's heirs (again this is loooooonng term strategy stuff). Given the size of your friend's estate by the time they die (if they play their cards right) they should get educated about irrevocable trusts and estate management.
• Your friend should keep doing this until they die (don't sell any props outside of a 1031 or alllll their gains from previous sales become taxable) and leave the props to their heirs so they receive a stepped-up basis, avoiding all the taxes your friend normally would have paid during their lifetime. Alternatively, they can use a Charitable Remainder Trust to get a big tax deduction, pull out annual income, benefit a charity of their choice. Using some income to purchase a life insurance policy can replace the value of donated assets for your friend's heirs (again this is loooooonng term strategy stuff). Given the size of your friend's estate by the time they die (if they play their cards right) they should get educated about irrevocable trusts and estate management.
• Depending on your friend's current finances and whether they want to continue working or live off  their investment income right now, they may want to some or all of their investing through a self-directed IRA (SDIRA) or other tax-benefited retirement account to defer taxation on the income and build retirement savings. However, this option will depend in part on what type of retirement account balance they have currently, etc, as there are limits to annual retirement contributions. They should talk with a pro about all the options here, as well as the taxable impact of using a mortgage to finance a property bought through a retirement account (as opposed to paying cash for the prop). 
• If friends or family have debts weighing them down, maybe your friend could let their rising tide lift all boats and help them out a bit, within reason. I wouldn't let anyone pressure them into this, but using good fortune to benefit those that you love is very rewarding. Don't blow it all on new cars for everyone you know, but consider what worthy causes (either personal or charitable) might be worth a donation. Remember that charitable donations are also tax deductible.

• http://performance.morningstar.com/fund/tax-analys...
• https://advisors.vanguard.com/VGApp/iip/site/advis...

• If they don't want full market exposure, Sin Stocks and addictive substances (like booze, cigarettes, casinos, coffee etc) are almost always a good bet because people will spend money on them even when they shouldn't. Sad but true, and lucrative. 
• If investment income is important, look at Dividend Aristocrat stocks that pay healthy dividends consistently every year (DA stocks have paid consistent increasing dividends for 25+ years). There are ETFs that invest solely in dividend stocks as well, so your friend can get diversification without having to individually curate the entire portfolio.

• https://www.biggerpockets.com/forums/55/topics/361999-new-investor-from-glendale-ca

• Again, there are other options in REI - so so many, but I'm going with the simplest options under the assumption that they don't have any REI experience and aren't looking to make REI their new job.

• Your friend should keep doing this until they die (don't sell any props outside of a 1031 or alllll their gains from previous sales become taxable) and leave the props to their heirs so they receive a stepped-up basis, avoiding all the taxes your friend normally would have paid during their lifetime. Alternatively, they can use a Charitable Remainder Trust to get a big tax deduction, pull out annual income, benefit a charity of their choice. Using some income to purchase a life insurance policy can replace the value of donated assets for your friend's heirs (again this is loooooonng term strategy stuff). Given the size of your friend's estate by the time they die (if they play their cards right) they should get educated about irrevocable trusts and estate management.

I know that's a lot of info, but your friend has a lot of money to play with ;) I think this is where patience comes into play. Yes, your friend should focus on putting this windfall to work, but rushing into investing it all right away out of fear of 'missing out' is not the way to go. There will always be money to be made, investing out of desperation is almost always a bad idea.  My basic advice to your friend would be "Do the research, find reputable professionals to answer questions about taxes etc, and plan a strategy before jumping into anything. Be conservative, give yourself a safety net, and make sure your future is secure before you start taking big risks or splurging on toys."

Best of luck to your friend, what an exciting new adventure!

Clayton

David Carte · Answer

For your friend: I would diversify the investments across stock market and real estate. Unless they plan on making some really big deals off the bat (which assuming they don't have much real estate experience, I do not recommend), they will have a lot of cash that should be put to work. Therefore, put a portion of the cash they wouldn't be putting into real estate in the near term and stick that into some mutual funds so it can be making money.

Then use the remaining capital they feel comfortable investing in real estate to buy medium to high quality rental properties (no need to intentionally go through the hassle of dealing with crappy neighborhoods and tenants if you can afford better). Although it all depends on the level of real estate experience this person has and the level of involvement they want. But I agree with @Patrick O. in making low offers on a number of distressed properties to get a deal with all cash offers. While it's ok to leave a smaller portion of the cash sitting in the bank for the near term if you're waiting for an opportunity, do not just park all of your money in the bank because the interest rate returns are dismal.

Oh, and if they have any high-interest debt (which I doubt they do considering living expenses are only a couple hundred bucks per month), pay that off first.

Thomas Rutkowski · Answer

I am personally staying away from direct investments in real estate right now. And I wouldn't touch the stock market ever. In both cases we are many years into an economic rebound and the likelihood of continued growth like we've seen for the last five years is very unlikely. The stock market is no place to put your hard-earned savings. Why risk the volatility of the market when you can earn consistent double-digit returns in safe, protected positions? I have no idea how an advisor can, in good faith,  look someone straight in the eyes and tell them that now would be a good time to put money into an investment that could lose 35-40% tomorrow (2000-2001, 2007/8).

@Dave Ramirez has the right idea. Hard money lending is a way to earn double-digit returns and participate in real estate from a protected position. A lender, if they're doing their underwriting properly, will make money whether the borrow pays back the loan or defaults. A 65% Loan to Value ratio leaves a 35% buffer where the borrower's money is at risk before the lender's.

My money is going into safe, protected positions like this. Yours should too. You'll still make good returns and when the market turns you'll be in a position to snap up all the prizes from those who took the equity risk.

Don't fall for the "Fiduciary" trap. Its a great marketing tactic for those who are fiduciaries, but they are still all about making money for themselves. Its all about assets under management. And they take their fees whether the market goes up or down.

Dave Ramirez · Answer

@Mark Robertson good question about active or passive. I just assumed passive. If your going to own property please remember that slip and fall predators are looking for people with no mortgages to sue. Also bad tenants look for these types of properties as well in tenant friendly states. Investors also love sending absentee letters looking for a deal or money. I would lean towards passive because those issues above are the little headaches in active real estate.

What would you do? Investment strategy

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