What is the best way to invest $1 million
My dad had purchased commercial real estate (Outback Steakhouse, not the franchise but the building and land) for $1.2 million in cash.
The rent is $5,000 a month in cash and he can pocket the full 5k every month. They pay for all repairs, maintenance and etc.
Thats $60,000 return on a 1.2 million dollar investment and he can get his money back if he sells the property and there is very little risk involved.
The contract is that the lease will be up in 20 years and the rent increases like 1-2% per year..
Since you guys are experts here what do you think about this investment? Can he get a higher return elsewhere or is this good.
Well, assuming rent increases 1.5% every year for 20 years and the property increases in value at 2% each year and he sells it at the end of the 20 year lease. He'll have an IRR of 6.61%. Not bad by any means if it's as safe as you say but still less than the historical stock market return.
If he reinvests the proceeds into the S&P every year he can bring the number up, but yeah.
....until he wipes out any and every gain made on the next crash.
Good rule of thumb: If you aren't making 10 percent returns you would be better off throwing the money at Asia.
@Magua
Thats fine, your point is valid.
But i would argue you will never truly be wiped in notional value - i.e. your building will still be standing and youll be collecting rent. Single family dwellings are of course more prone to certain factors as we've seen in the housing boom/bust but for-rent properties are a good store of value. And either way, you always collect the rent whether or not its going up y/o/y.
With equities, you can literally wake up to day after day of losses like in fall 08 where you don't know whats going on and are effectively watching your $ bleed to zero. And forget it if you've got a company in Ch11, no chance in recuperating anything there if youre long c/s.
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I don't know. A 5% cap rate is really low ($60K/$1.2M). You would typically only pay that much for an asset if it had a AAA/AA rated tenant. You won't be able to put that much debt on it either without running into DSCR covenant troubles (and using debt in RE up to prudent level is a good thing).
Right now 5% looks good compared to treasuries, but as soon as interest rates go up, and the spread narrows, that investment doesn't look as good - especially if you are fixed at 1-2% rental uplifts.
It's a slightly lower cap rate than I might expect from that kind of investment, but if it's in an excellent location and the restaurant historically does very well I wouldn't be too worried. If your father is using it as a means of diversification (ex: he already has 5+ million in U.S. equities + a few million in treasuries and cash), it's likely a fine decision. There could also be taxation issues playing to your father's advantage.
While I'm not "worried" about the investment... I'd say it's probably not "the best way to invest 1 million"
The only problem I see is the rent increasing by 1-2% per year. He should have waited until the inflation rate returns to the historical norm before making any 20 year agreement. Four years from today it is very likely the inflation rate will be 3-4%. Other than that, it is a safe, solid investment. I'd recommended selling the building and using the $1.2 million dollars as a down payment on a $6 million dollar commercial building. If real estate appreciates at 3% per year for 30 years you will be sitting on a $14.6 million dollar building that is paid off by that time. Or better yet leverage yourself as much as possible on volatile coastal markets in New York and California before you expect see a bull market. If you time things right, you can triple your money or more in as little as 5 years. And I don't want everyone to give me bullshit that the economy is dead forever and we will never see those gains again. Let's see how Silicon Valley real estate prices do when "next big thing" comes out.
Yeah, except his dad is probably a pensioner looking for steady returns. Leveraging to the max is not what I would consider a sound strategy, even in normal markets.
You are 100% correct, excuse me for being the risk junkie that I am. In that case the only flaw I see in the investment is what I stated before.
"The only problem I see is the rent increasing by 1-2% per year. He should have waited until the inflation rate returns to the historical norm before making any 20 year agreement. Four years from today it is very likely the inflation rate will be 3-4%."
No my dad is retired and he lives off that 60k now. He used to a strip mall worth $2.6? mil a couple years ago and put $800k down and got the rest of the money in loans.
The rent there was substiantially higher. I think the total was around $11k a month. However, he said there was always the chance of a tenant leaving and that was a headache.
He sold the property after owning it for 3 years and made a $200k profit
2% cap on rent increases for a 20 year contract seems incredibly low. 5% cap sounds like a pretty good deal.
If he bought apartment complex with 1.2 million he could make more than 60K per year so buying a single rental property and getting 5K/month from 1.2 million is a bad investment or he bought 15 houses and 1000/month rent he could get 15K/Month. Sid Iftikhar
If I had 1MM to invest, I would definitely start a business and enjoy it. Maybe a bacon factory.
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