$4MM...Quit rat race and become an owner operator? WWYD?

Late-20's acquisitions associate in an HCOL city.

I just received a $4MM cash gift this year. I've been planning to quit the corporate job, lever up conservatively, and acquire a SME/income producing property to run as an owner-operator.

$4MM is a significant amount for someone my age but it is hardly FUCK YOU money. I could lever up and buy a Class B $10MM apartment/self storage site/golf course but would have to become a property manager and deal full-time with the Joe Schmoe tenants & customers. The deals I'm seeing would need an owner-operator to run instead of third-party management for the economics to make sense. 

I like the idea of working for myself and building up equity but am not sure if I want to trade in being surrounded by sharp people from ib/repe/big law backgrounds to deal with retail customers (collecting checks, coordinating plumbing maintenance, making sure the customers/tenants are happy)..but I guess that's how value is extracted in RE lol. 

Has anyone had similar thoughts? Would like to get the community's thoughts on this...would you keep grinding and just stash the extra dough in the VOO? 

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Comments (98)

Oct 12, 2021 - 4:56am

I would recommend doing both while you still have the energy to do so. You can always take a more chill job for the time being. Once the asset is stabilized and you got two years of proven income stream and are in the position to refi/acquire a second property, then you can decide to leave you current job.

  • Associate 1 in RE - Comm
Oct 12, 2021 - 4:05pm

I've thought about this before and think it may work with a non-resi, NNN commercial asset but not sure if it would work with a SME. Did you specifically refer to a two year period for future loan app purposes? 

For my regional lenders, passive income/dividends can count towards your application income if there is a two year history. 

Oct 12, 2021 - 7:10am

If it were me I would probably just throw the $4M in something like VOO (like you mentioned) and know in the back of my mind, that my retirement is fully paid for. I've always wanted to develop my own RE so I would pursue a job that would teach me how to do that and perhaps try and go do my own deals at some point knowing that I've got a nest egg/safety net of $4M compounding that I can fall back on. I'm also in acquisitions and around your age and I am still learning quite a bit so don't think I would hang it up just yet. It sounds like you don't really want to buy the type of property that's within reach so I would pass on that unless it's an absolute "f*ck yes" mentality 

Maybe I'd buy a primary residence (if I was ready to settle down) with some of the $ and keep the remaining in VOO. Like you said it isn't really "f*ck you" money but it is certainly enough for you to feel comfortable taking more risk and pursuing something you genuinely enjoy. So maybe my ideal scenario is $1M house/condo/whatever (I'd buy a nice 1 BR in NYC or something so give or take on that), $2.8M in a mix of equities, $20-50k on bullshit I want to buy, and then $150k or so in a high yield savings account to use as a guilt free travel and fun expense piggy bank for trips I want to take, etc. Just spit ballin here

Oct 12, 2021 - 10:27am

Depends on how this "gift" is structured tax wise.  It honestly makes sense to dump a big chunk of that cash into a real estate asset if the gift landed in an LLC or something similar to offset taxes.  You can always refiance it later to pull the cash out tax free.

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  • Associate 1 in RE - Comm
Oct 12, 2021 - 4:10pm

Good insights here...I already have equity in a starter pad already and have no intentions to move for years to come. Any future loans I seek may be constrained by my income (monthly debt/income ratio of ~30% already) so I'd most likely be seeking a VTB structure if I decide to go the owner operator route

Oct 12, 2021 - 10:02am

If you're looking at 10 MM properties, they can 100% be managed by third party PM firms so you don't need to deal with the tenants. However, since this is your first acquisition, don't blow the house on one. Start with a $250k-400k down payment and buy a small property. Actually deal with it. Learn. And than scale. If you do a 4MM equity check that goes bad, you just lost your whole gift. 

  • Associate 1 in RE - Comm
Oct 12, 2021 - 5:42pm

Good point. I have done smaller deals (value-add condos, $25-50k lp equity for syndicated deals) in the past and am familiar enough with the nuts-and-bolts of RE and the contracting processes to not get scammed by trades.

Numerically, I am still hesitant because a good manager is expensive in my market. Good on-site multifamily/marina/golf course property managers for a $10MM asset would cost ~$70k+ and reduced rent. My discretionary earnings off $4MM (general assumption is a 6% asset yielding a ~10% cash-on-cash) would be around $400k pre-tax. Hiring a PM would shrink that by almost $100k and I'm generally pretty cheap.

Oct 12, 2021 - 7:27pm

Are you looking to continue working? Or jump in full time? The route to take is value add in your capital range.  If you can fluff that rent by say 40 - 50K per year at the current cap rates you can add significant value and recapture principal.   I am sure you are aware of this but it is the best way to get in the game at this stage.  If you put say 3M in a levered acquisition and another 1M in value add for that asset you can likely suck about 2.5M out at a refinance.   Just makes sense. 

Oct 12, 2021 - 10:30pm

Can't really tell you about holes in your analysis. If you don't want to pay someone $70K to manage the asset because you feel it costs too much, than you are buying yourself a new job and saying your time each year is worth $70K. So sure, you're keeping $400k instead of $330K, but you're working a new full time job. You should at least underwrite the deal with the budget for paying someone, because in three years you may not want to manage the deal. But if you didn't budget for the cost, it's going to wreck your returns. Budget for it even if you manage it yourself. 

Oct 13, 2021 - 8:59pm

How did you start with those syndicated deals? That's something I'd definitely like to do with some people.

Quant (ˈkwänt) n: An expert, someone who knows more and more about less and less until they know everything about nothing.

Oct 12, 2021 - 10:06am

I've always told people that the best day to buy real estate is yesterday, the second best day is today.  There are a number of ways to do this you just have to figure out what strategy is best for you.  For example the highest rewards come from entitlements, then followed by development, then value add, then stabilized.  Everyone knows each has different levels of risks, but they also have very different levels of required work output.  

The thing no one will tell you about real estate is it doesn't matter how much work you do in the industry be it acquisitions, development, property management, etc. there is an entirely different reality when you are primary sponsor on a deal.  The emotions are different, the demands are different, it just feels different.  Some people are advising starting small, others say to keep working and put the money in the stock market, others say go travel.  The reality is if you want to do this, you gotta go for it.  Half and halfing it can "work" but it isn't for those who want to create destines and dynasties.  

Figure out what it is you want, then go for it.  There isn't a wrong answer either, you just have to know what you want and what your capacity for output and risk is.

Oct 12, 2021 - 10:31am

4% of 4 million is 160k annually, which outside of New York, San Francisco, and a handful of other tier 1 cities globally is absolutely fuck you money.

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Oct 12, 2021 - 11:57am

CuriousCharacter

4% of 4 million is 160k annually, which outside of New York, San Francisco, and a handful of other tier 1 cities globally is absolutely fuck you money.

Which gets taxed.

Lets say you clear $100,000 net of taxes, and never have to touch the principal.  Hell, double it, lets say it's $200,000.  Guaranteed income stream.  How is that "fuck you" money?  That's a great passive income and you could live quite comfortably on that.  But the reason it's referred to as "fuck you" money is because you can do almost anything you want.  And with $200,000/yr... even leaving out a family, you're not buying a new exotic car every year, or vacationing in the Swiss Alps, or anything else that the term "fuck you money" implies.

Oct 12, 2021 - 12:04pm

"Fuck You Money" means you can walk into your bosses office and say "Fuck You," quit, and then not need to work another job.

160k annually is more than enough to do this, even after you pay your (efficiently structured) taxes.

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Oct 12, 2021 - 12:57pm

CuriousCharacter

"Fuck You Money" means you can walk into your bosses office and say "Fuck You," quit, and then not need to work another job.

160k annually is more than enough to do this, even after you pay your (efficiently structured) taxes.

So literally any amount of money?  I could pick up a quarter on the street, go tell my boss fuck you, and live in the wilderness?  

To me, "Fuck You Money" means you can tell the world to go fuck itself because you have the money to throw at any problem such that it will go away.  Besides, our friend making $160,000 a year certainly is going to have trouble retiring for his life.  What if he wants kids?  That's an expensive proposition right there.

Oct 12, 2021 - 1:12pm

Ozymandia

So literally any amount of money?  I could pick up a quarter on the street, go tell my boss fuck you, and live in the wilderness?  

Yes exactly, and the number is different for everyone. I have friends who banked just south of $1mm and retired before 30. They don't live large, but they do live life on their own terms.

Ozymandia
To me, "Fuck You Money" means you can tell the world to go fuck itself because you have the money to throw at any problem such that it will go away.  Besides, our friend making $160,000 a year certainly is going to have trouble retiring for his life.  What if he wants kids?  That's an expensive proposition right there.

Well your definition of "Fuck You Money" is something you just invented for yourself, and there are plenty of problems that money can't solve.

Also, I'm the VAST majority of people raise families on FAR less than 160k per year.

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Oct 12, 2021 - 1:21pm

CuriousCharacter

Yes exactly, and the number is different for everyone. I have friends who banked just south of $1mm and retired before 30. They don't live large, but they do live life on their own terms.

You are describing retirement.  That's not the same thing.

Well your definition of "Fuck You Money" is something you just invented for yourself, and there are plenty of problems that money can't solve.

No less than your definition is something you invented.  I actually googled it, for shits and giggles, and the first hit I got was "the amount of money you need in life to say 'fuck you' to any person that asks."  Which is a far sight closer to my definition than yours.  Your definition is basically "I'm quitting/retiring" which obviously isn't the implication of "fuck you money."

Also, I'm the VAST majority of people raise families on FAR less than 160k per year.

Sure.  Most people also keep working.  Most people's salaries adjust for inflation.  Most people get raises.  Forty years ago a dollar was worth three times what it is today.  If inflation keeps up, our friend with his nice $160k/yr nest egg (assuming it still exists) has a purchasing power in today's dollars of $53,000. Pre-tax!  Suddenly a lot less viable.

Again, your definition is essentially meaningless since it can be any dollar amount.  Tripping over a penny constitutes fuck you money, according to you, which strips any meaning from the phrase.

  • Intern in IB-M&A
Oct 12, 2021 - 2:02pm

Considering that the average person will make less than 4m over their ENTIRE life, I'm willing to bet 160k that if you polled every working person in the U.S. they'd say 4m is "fuck you" money.

This forum is a horrible proxy of actual reality/real life.

Oct 12, 2021 - 4:14pm

CuriousCharacter

"Fuck You Money" means you can walk into your bosses office and say "Fuck You," quit, and then not need to work another job.

160k annually is more than enough to do this, even after you pay your (efficiently structured) taxes.

Don't know why you're getting MS. $160K is very respectable in the majority of the country. Assuming the OP isn't living in HCOL (SF, NYC, etc.). He can live a very nice life on $160k in a decent place without lifting a finger. This also assumes he lives by himself. Now if he has kids, wife, and is the only earner, this obviously changes the dynamic drastically.

Array

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  • VP in IB - Gen
Oct 12, 2021 - 8:41pm

You can buy a new "exotic" vehicle every year. Just because you can doesn't mean you should though.

Even with a stay-at-home wife and 3 kids in private school, I buy a new $150,000 car every 3 years. Write-off the depreciation (which reduces tax bill substantially), trade in for the residual, rinse and repeat. My actual cost is probably $25,000 annually, not factoring the joy I get. If I didn't drive so much, I'd probably lease.

Point is, it can be done. Sure I make $300,000-$500,000, but don't have $4 million in liquid cash. We take one "grand" vacation per year typically. 

Oct 12, 2021 - 11:55am

Agreed with this.  $160k yearly is barely anything.  I live in Southern California, and this kind of money can provide a decent comfortable living, but not "FU" money.  

No pain no game.

Oct 12, 2021 - 11:58am

"Fuck You Money" means you can walk into your bosses office and say "Fuck You," quit, and then not need to work another job.

160k annually is more than enough to do this

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Oct 12, 2021 - 12:12pm

It's always hilarious to me that the people scoffing at *insert $X million* windfall and how it's "not that much" are the same people who do not have said money. Unless you have at least $4 million liquid, you are not in a position, nor are you qualified, to speak on the subject. That's more than enough to be considered "fuck you money", in that you are effectively liberated from needing to be a wage cuck to get by. If your idea of fuck you money is $20MM or $40MM, guess what, you can blow that all on a single property in Beverly Hills or Palm Springs. The key takeaway here is that what matters most is your expenditures and lifestyle, rather than the absolute number. You can blow through $50MM as fast as you can blow through $4MM. Stop with the clown takes folks. 

Oct 13, 2021 - 12:30am

These folks out here gatekeeping millionaires. "Heh well I know you have $4 million before 30 but that's really not much". Wtf kind of alternate reality is this

Oct 13, 2021 - 8:58am

It's reality.  The premise is that you quit your job and live off of the money.  $4M when you are 65, have an expected life span of 20 years or so is plenty when combined with conservative returns and principal draw down.   When one is 28 that number will never last, aside from inflation alone, market volitility will destroy the base because you are never building it.  If there is a single down turn in the market your base is cut down for good.  

  • VP in RE - Comm
Oct 12, 2021 - 12:15pm

I received an inheritance at 25 that was similarly sized. Agree that $4mm isn't "fuck you money", but instead gives considerable freedom to select your path.

When I received the money, I wasn't ready to settle down/walk away from the corporate world, so ended up putting most of it into index funds and kept working. Because I decided to keep working, I also was trying to avoid extra income/dividends because I live in a high tax state, so funds like VOO made sense. I never bought a house because I wanted the freedom to dictate my career without the tether to a place (I've lived in 4 states in the last 10 years).

10 years later my net worth is 2.3x the inheritance (including savings from working), I have a job I love even more than before, have visited over 65 countries and am financially set to be able to walk away anytime I want knowing that I was a good steward of the gift and didn't waste it (I have way too many friends that drank/gambled/smoked trust funds away). I'll probably retire in 9 years at 45 when the money is 5x and truly "fuck you money."

  • VP in RE - Comm
Oct 12, 2021 - 1:38pm

I'm at a debt fund. Some longer hours some weeks, but I have a good time and am paid well (plus if I didn't work, I would spend a whole lot more money on bullshit).

The money has given me confidence to move around and take opportunities when presented. Definitely different vs. some of my friends that are married/have families and are more defensive about work because they have so many responsibilities.

Oct 12, 2021 - 1:11pm

PM please?  Have a few questions!

No pain no game.

Oct 12, 2021 - 5:28pm

Congrats, sounds like you have a life changing opportunity. I would start by saying that you can still surround yourselves with these types of people outside of work but I would personally prioritize financial freedom over working with 'smart' people. You can still work while you deploy the money and once you reach cash flow that can sustain your lifestyle you can focus on investing full time.

If it were me I would start buying $2MM unrenovated Class C apartment buildings. I would figure out a value add strategy that works on first one and once I get all my ducks in a row from the underwriting, property management and construction side I would deploy the rest of the money then sit on them forever as my nest egg. If you hate it after the first deal you can throw your money in VOO and just stick to your day job. Luckily small multifamily in big cities is pretty liquid. You can get cheap agency financing and full term IO at prudent leverage which means you can have $250K of tax free cash flow each year + growth and double your equity every 10 years along with the ability to refi and pull money out at your discretion. You can get a property manager and be totally passive on the operations side and a good GC to manage construction. If you really enjoyed it and found a strategy that worked you could go get outside money and start cranking on more deals as a sponsor, otherwise you can deploy slowly in your spare time and just keep your day job.

If you have the stomach and want to be more active you can start buying future dev sites or assembling land in the path of progress in blighted areas of your city. This would likely require a more detailed understanding of retail and industrial in the short to mid term and development/land investing. You can always do a little bit of both as you get more confident.

I'm not going to argue on the definition of FU money like others but $250K of tax free cash flow + growth and appreciation sounds pretty good to me in your early 30s.

  • Associate 1 in RE - Comm
Oct 12, 2021 - 6:22pm

Thanks for the thoughtful answer. I have definitely thought through some of the options you listed above. I have done smaller deals (value-add condos, $25-50k lp equity for syndicated deals) in the past and am familiar enough with the nuts-and-bolts of RE and the contracting processes to not get scammed by trades so I'd feel comfortable tackling deals in the $5-10MM range, which I find to be operationally similar to smaller deals.

There are quite a few Class C multifam listings in my region but the valuations have been bid up to stupid amounts so the there is virtually no post debt cash flow unless a strong biz plan is implemented to increase rents...trying to kick out long term tenants subsidized by various gov & non-profit orgs is a headache and takes a long time. I am in a tenant friendly state and 20 unit Class C assets can trade for 3.5-4% caps.

I was telling another guy on this thread that I am hesitant to hire 3rd party because a good manager is expensive in my market. Good on-site multifamily/marina/golf course property managers for a $10MM asset would cost ~$70k+ and reduced on-site rent. My discretionary earnings off $4MM (general assumption is a 6% asset yielding a ~10% cash-on-cash) would be around $400k pre-tax. Hiring a PM would shrink that by almost $100k and I'm generally pretty cheap.

Oct 13, 2021 - 9:11pm

20 unit Class C assets can trade for 3.5-4% caps

Jesus

Quant (ˈkwänt) n: An expert, someone who knows more and more about less and less until they know everything about nothing.

Oct 12, 2021 - 5:29pm

I wouldn't quit. If my job allowed me to do so, I'd buy smaller properties to really learn how to operate a property plus keep working and building more wealth on top of the gift. After a few years, I'd partner up with others and buy into bigger deals. Everything I wrote is easier said than done but I'd try it. You can really turn that 4mm into 400mm or even more. You'll set your family up for generations to come.

Oct 12, 2021 - 5:43pm

Disclaimer:  I do not have $4mm and have never received $4mm as a gift.

If it were me, I would just keep living my life the same for a while.  Perhaps something *relatively* low risk could yield you 3% after taxes, or $120,000 per year.  Keep working your normal job, if you hate it, find something you like, compensation isn't as important now.  Maybe you even go work for a small private company that will trade equity for lower cash comp.

Anyways just keep plugging away, enjoying life, not stressing about money.  Buy yourself nice things that will last a long time.  Reinvest annual savings.

In 10 years see where you are, you'll be about 40 years old and who knows you just might be able to completely walk away and do whatever tf you want.

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Oct 12, 2021 - 10:18pm

Throw the MS but I would put all of it into money market funds that have like 270 day maturities. Think long & hard about what you want to do so that you don't make a hasty decision and then once you are able to take your money out, then make a decision. 

This may be the most influential decision of your life up until this point and I wouldn't rush into it. 

  • NA in RE - Other
Oct 13, 2021 - 11:40am

One piece of advice from having been in a similar situation, you might want to wait to time your exit from your current job with when you actually have a good first deal lined up and ready to close, otherwise you might be waiting around for a while with nothing to do in between. 

Oct 13, 2021 - 12:57pm

Here is my "safe" play if in NYC. buy a brownstone(multifamily) for $600-$850 a square foot, rent it out/ live in one of the units.  Vacant townhomes in the BK Heights, Carrol Gardens, Boreum Hill neighborhood sell at a PSF for $800-$1200. pay down the amortization overtime to build your nest egg slowly, but day one you are already a product that below what a sale price would be.  

Oct 13, 2021 - 2:18pm

Great topic for conversation and I love all the enthusiasm in some of these postings. So just to mix things up, I'm going to go the other way with this. To me, the thought of having to deal with tenants and things like that does nothing but give me a headache. In the words of Dave Ramsey, "Don't buy a building, but a mutual fund. I promise you that Charles Schwab is never going to call you at 2AM on a Thursday asking what you're going to do about his clogged toilet". 

Think about other things you can do like your own actively managed portfolio. With that kind of initial investment you could generate a pretty good salary for yourself with a very modest time investment and then go and do your own "fuck you" things for the rest of the day. In my mind that beats having to deal with the general public and rely on them for revenue any day of the week.

  • Prospect in RE - Comm
Oct 14, 2021 - 8:27pm

lease a couple gas stations and run them, then grow as you get more confident 

Oct 15, 2021 - 7:23am

I would suggest you invest 90% in a well diversified , passive index fund and don't touch it for as long as you want to continue to learn at your corporate job. Use the 10% for something fun - vacations , home improvement, an engagement ring (whatever!). I wouldn't let your coworkers/bosses know about your recent fortune as they may expect you to leave whenever something goes wrong and they may hold back opportunities.

When you see prices depress, find the right investment and get sick of your job - time to deploy the dry powder! Just my ten cents.

Oct 15, 2021 - 11:58am

Buddy of me retired from his trade job (electrician) at age 35, with $1.5 in savings and investments. He saved like crazy for 15 years, investing everything in index funds. 

Now it should be mentioned that he lives in a crazy LCOL area, so his house alone didn't cost more than around $50k.  

Will he afford a yach? No. Will he afford a Ferrari? No. Will he own 3 different homes? No. Does he need to show up to work 5 days a week? Nope. 

He now lives his life pursuing his hobbies, while doing consulting work on the side, when he feels like it. After retiring, he got a degree in Electrical Engineering, which opened up tons of consulting opportunities. He's a normal, modest guy - spending less than what his investments yield. 

Oct 17, 2021 - 11:40am

Personally, I'd stick at least 75% of the money in something like VOO or another index fund so I know my retirement is taken care of and just let that grow. The rest you can start building out a real estate portfolio with, have some as fun money, buy a house, etc.

Do NOT put the entire $4M down on a single apartment building. You have no experience in managing a property, why would you risk the entirety of this windfall on a single property? Diversify or put it in something safe.

Frankly, I'd be bored out of my skull if I just bought a couple apartments and retired at 30. Property management is dull, but at a big enough scale to comfortably retire it's also pretty much a full time job if you don't want to pay for third party management. You're young, take this opportunity to know your retirement is taken care of (before people start coming at me with "$4 miLliOn iSn'T eNouGh!!!", I'm not saying he's going to live like a rich man off of it, but he doesn't need to worry about struggling if it's managed correctly). Hell, take a year off and consider your options, then pursue what you REALLY want to do. If you are bored of your current job, well congrats, you can now go live in a trailer and become an artist.

Oct 17, 2021 - 4:22pm

I'd quit my job tomorrow morning, buy a nice home for ~0.5m in a LCOL location and invest the rest in a portfolio I rarely need to check and can take 4% p.a. from. Then, I'd go find something I'm genuinely passionate about, which right now would be something like scuba diving instructor or mountain guide. If you can't live on 140-160k p.a. with no outgoings such as a mortgage, even with 2-3 kids, you're either shit with money or are living well beyond your means.

Buying your own multifamily complex sounds nice in theory, but your entirely concentrated in one asset and need to either manage it yourself or hire someone to do so. I'd much prefer to have a portfolio I can rebalance once a quarter if I want to or otherwise just leave it working away and slowly appreciating while providing me with a stable income.

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