Rich uncle gives you $5 million, says...

“Invest this in real estate (or real estate loans) for the next five years, at which time I’ll want my money back, along with 80% of the profit. You can keep 20% of the profit for yourself.”

You’re not under any pressure for a current return, and you don’t need to make the fast buck (although you can go that route, if you like).

You may not use debt.

How would you invest the $5 million?

personally, I would go into commercial properties, or land if not in a rush for a return

I would buy 1.5 million shares of F, at 3.25 right now
Sell it all in a week or tow for 4.25 for a 1.5 million in profit
I don’t know how much taxes you have to pay, but I am pretty sure you can give 80% of the profits to your uncle, pay the taxes and pocket 200k.
If things go south it is your money. Can you imagine the stress of loosing money from a family member?
Having your money may save you and your uncle from an anxiety attack

I would buy 20 million$ worth of commercial real estate in year 1 and 2 in emerging markets.

By year 5, I’ll sell or refinance enough to to cover the 5 million + extra profit.

Then I’d still keep that 20 million $ worth of real estate and continue to profit.

I don’t recall shares of Ford Motor Company being classified as a real estate investment, but thanks for the idea.

How does one buy $20 million worth of real estate with $5 million and no debt?

Inquiring minds want to know.

I would take that money and SLOWLY buy rental properties at a HUGE DISCOUNT TO TODAY’S MARKET VALUE. I have absolutely no confidence that property values or stock values will be higher in 5 years, so I would tell your uncle that you can not guarantee that his $5 million will be safe and that he is COMPLETELY RESPONSIBLE if his money is lost. Then, I would get that in writing!!!

By buying at a huge discount (of at least 50% to today’s market value), you should be able to more than double that $5 million in equity as you buy and you will have a very significant cash flow for the 5 years. Perhaps, once your uncle sees the cash flow and the equity, he won’t want to sell in 5 years! I would never sell the goose that lays the golden egg.

Mike

Mike -

I am glad that you replied. I was going to “page” you in a thread, but I can just pick your brain here, if that’s OK.

First, I agree with your assessment. It’s actually what I’m thinking about doing: buying rental properties on the cheap with all cash, watching them cash flow, and then (and only if my “uncle” wants his capital back) selling them off in five years.

Do you prefer SFHs or multi-family? If multi-family, are you interested in 2-4 units (maybe as many as 6-8), or larger properties with 20+ or even 100+ units?

Also, I have long wondered what kinds of properties you buy that (1) you collect 2% of the value of the property in rent each month and (2) you expect to spend upwards of 50% of the rent each month in operating expenses.

I live in the Atlanta suburbs, and I just don’t see properties that generate this kind of rent relative to their value. A $50,000 property that generates $1,000 per month in rent? I just don’t see these.

Also, if you are collecting 2% per month in rent, and half of that is going to operating expenses, then that means that operating expenses can be up to 1% of the property’s value each month.

I know that insurance, taxes, repairs, etc., add up fast, but are they really going to be $500 per month, or $6,000 per year, on a $50,000 property?

Are these properties generally in need of tons of ongoing maintenance? I am just trying to get a feel for what they “look” like.

I buy into the idea that, the cheaper a property, the greater the percentage of your rent that you might have to put into expenses, but I’m having a hard time with the “2% of cost for rent” and “50% of rent for expenses” model.

Maybe I just need a better understanding of your market.

I appreciate your tremendous contribution to the forum.

  • Paul
Do you prefer SFHs or multi-family? If multi-family, are you interested in 2-4 units (maybe as many as 6-8), or larger properties with 20+ or even 100+ units?

I don’t prefer one over the other. SFHs are usually easier to manage and have better appreciation. Multi-family offers some economies of scale and can have excellent cash flow. I also don’t have a preference as to number of units. I am only concerned with the numbers. Having said that, I’ve never seen a large complex that will cash flow. In my experience, these are usually bought by people who have become rich in other businesses and are looking for tax benefits.

Also, I have long wondered what kinds of properties you buy that (1) you collect 2% of the value of the property in rent each month and (2) you expect to spend upwards of 50% of the rent each month in operating expenses.

My rentals are lower and lower-middle income properties, both SFHs, and multis.

I know that insurance, taxes, repairs, etc., add up fast, but are they really going to be $500 per month, or $6,000 per year, on a $50,000 property?

It’s insurance, taxes, maintenance, vacancies, management (even if you do it yourself), advertising, utilities (even if only during vacancies), legal expenses, evictions, damage done by tenants in excess of the security deposit, office supplies, entity maintenance, lawsuits, capital expenses (not technically an operating expense), etc, etc, etc that make up the 50% expenses. Can you really expect to spend that much on expenses - YOU BET (and that’s if you do everything right).

Are these properties generally in need of tons of ongoing maintenance? I am just trying to get a feel for what they "look" like.

No. In my experience, they need relatively little ongoing maintenance (due to age and normal wear and tear). The real issue is damage done by tenants and the expense of turning the property after a tenant leaves.

The 50% rule comes from data from hundreds of thousands of rental units in the United States and is accurate over time. It is not accurate for any one unit in any one year. Any unit in any year can have expenses MUCH higher or much lower than this number. However, the expense number for any given unit in any given year is totally irrelevant to the long term success of a rental property business. What IS important is the average expense over all your units and over the life of the business.

Mike

There are literally a ton of ways to make money in RE with a $5M cushion. The ways are really only limited by a) what exactly is your “uncle’s” defination of real estate and b) your knowledge and experience level in RE.

Some examples:

Buying rentals (as above)

Buying foreclosures/REOs and flipping (either retail or wholesale): In fact, with $5M, you could be a local banks best answer to their problems. You could simply go to some small locals and tell them, I’ll buy ALL your REO’s in a package up to $5M at a time. You’ll get a huge deal and have lots of properties to move. Rinse and repeat.

Buying non-performing notes: Kinda like above, but buying the note BEFORE it forecloses. Then you either restructure and resell the note, or foreclose and resale the properties.

Buy performing notes: Not as good of a potential profit, but still over the long term, good, and in the current economic climate, even performing notes will likely be discounted quite a bit.

Become a private/hard-money lender: No muss, no fuss investing. Not really, but easier than rehabbing. Private lending can even go more indepth, such as short-term lending (1 day to 30 days) or special project lending.

Raj

I thought about this. I went to one small bank that I knew had a ton of houses. (They were basically running a hard-money business without hard-money prices. You can see how that worked out.)

Here’s what their REO man wrote to me:

_______ Bank is only selling finished occupied properties generating rental income. We currently have 150 available. I do not currently have any asking prices or lists that I may distribute. You may submit inquiries and offers for specific properties directly to me if you like.

…and…

[i]We are renovating all of our REO properties personally and holding them as rental properties.

We are not selling them for any less than what we originally loaned on them. Most investors have no interest whatsoever in paying what our minimums are.

There is no list. We have signs in front of all of our properties and if you see one you can call about it.[/i]

So…in summation, they are throwing good money after bad, fixing up houses and renting them out, then trying to sell them turnkey. They are not willing to take a loss on any property, and they will not sell them for any price that investors have been offering. They have no formal method to market these properties.

Sounds great!

We are not selling them for any less than what we originally loaned on them. Most investors have no interest whatsoever in paying what our minimums are.

Consider that the vast majority of newbies pay retail for their rentals, these properties are likely all upside down and all have a negative cash flow. The bank’s failure to recognize the problem and sell the properties at a discount is absolutely typical. I think that it’s humorous that the bank is becoming a landlord. Good luck with that!!!

Mike

150 free and clear properties will probably generate a minimum of $300 cash flow per door per month for a total of $45K monthly income.

The problem is maintaining occupancy at a high enough level to make landlording profitable for the bank.

And I’m sure the bank isn’t going to have employees go over and fix things, mow the yard on the multi’s and vacant SFHs, etc. They’ll hire everything out and cut more into the bottom line.

I’d use the $5 million to pair my way into heavily discounted REITS with high yields…Quality stuff…500k a month so this way you are averaged in at all levels…Sit back and collect %10-%18 annual in dividends…And price appreciation is almost a guarantee considering how badly battered REITS are at this point…And its real estate related…So my advice stays on topic…Oh and lets not forget that REITS are liquid unlike a portfolio of properties that need to be sold in order to liquidate…

No tenants…No vacancies…No calls from crooked property managers…no water bills…no broken heat in the middle of the night…no leaky roof…no evictions…no looking for the rent…no song and dance from DSS or section 8…No showing the property 50x to losers who cant get the money…Simply hit the SELL button and you have your money back…And simply LOG IN to your account to collect your rent (dividend)…

I am with most of you on this one. Buy rental properties that make you money over the course of your life. I have been in this game for about 3 years and have learned a ton. Never assume you will be at full capacity all the time. The trick for me is to keep the expenses low, do my own repairs, and monitor the dollars very carefully. In the meantime, I look for another job to further my monthly income. I can honestly say the ones benefiting from this crisis with regards to real estate, are landlords who owned or bought properties at discount rates, cleaned them, and waited till the market collapsed. And boy did it. I get on average of 10 calls per week from folks looking for a place to rent. And I mostly focus on Section-8 and low income tenants.

What would I do with $5 million? Buy multi-family rentals at a discount and rent away. I am not really into the duplexes but then again, a rental is a rental.

fast food restaurant in an area that always has a large hungry crowd, like giant stadium in new york

Could be profitable on a current return basis, but this is not real estate (unless you’re talking about owning the building and leasing it to an operator).

Also, I would not take the time to establish a fast-food restaurant knowing that I’d have to see it in five years.

Lastly, there’s really no “buy it at a discount today, sell it at a profit” methodology here, which is what I was going after (although that was not clear).

I appreciate the reply, though.

How about buying a few Mcdonalds franchises and then saving the yearly profits and paying your uncle back. I heard they are pretty profitable to the tune of $150k+ per store a year. Buy 4 with $1.5 million of the funds. Save the profits in an interest bearing savings account. After 5 years pay him back the 5 million plus the interest and retire with the 4 stores generating you income. Then buy more.

I’d become a RE guru and sell MY " SECRET". My course would end in 5 yrs. at which time I’ll reveal the secret. I’m willing to bet there are enough people who want the easy way out to make about 15M. Then I’d sit on my yacht and drink my Pabst Blue Ribbon!!! :beer :beer :beer