Hypothetical 5 Million Dollar Question! Assignment/Discussion

Hi To All,

Long time reader, first time poster!


Had an assignment/discussion through a course I was doing in finance/financial planning on how to best invest $5 Million cash in todays economy (stocks, bonds, cash, RE, and so on)

You are still working your current 9-5 job and have no debt elsewhere. The one rule was the portfolio could not be negatively geared. (zero was ok)

So thought I'd change the question a little and relate it to property as it was an interesting topic and brought upon many different opinions (obviously each individuals risk tolerance gave many different views)

5 Million cash to inv in property. You can only spend it on property/RE.

What do you do?

Buy all your properties outright in cash, and sit on the yield…..gear it heavily positive? Less stress? Good income. Pay Tax...... No Loans!

Buy a bigger portfolio with the help of the banks at say a 50% LVR and be geared in the positive an acceptable amount? A safer level of stress? More bang for buck?

Go super aggressive with the help of the banks to say 60-75% LVR and be close to zero as possible?

STRESS! Swing for the fences.....

What would you do?

 

Firstly - whatever else you do, purchase your PPOR outright, so that whatever else happens, you have a roof over your head for life.

Beyond that, invest for a combination of growth and income.

Your taxable income and borrowing capacity would play a major role in determining what you were able to do.

Lets say you spent $2 Million on your PPOR ( Sydney ) or $1 Million elsewhere, you'd have $3 Million ( Sydney) or $4 million ( elsewhere) to invest, and lets assume you are a couple with a combined 200K taxable household income.

Borrowing capacity permitting, at an LVR of 55% you could invest in a 6-8 Million portfolio, which should yield neutral or possibly even slightly positive pre tax cash flow, and perhaps a little bit more coming back from the tax man for depreciation... That could be made up of 10 x 600-800K properties in more blue chip areas, or 20 x 300-400K properties in less blue chip areas, or a combination of both. You'd be borrowing @ 3-4 million in either case, and funding the deposits (45%) + stamp duty and costs (5%) yourself with 3 or 4 million in cash. That portfolio could simply sit and mature, and in 15 + years you'd likely be sitting on a very very very good wicket IF you get strong growth. That should allow you to sell of just a handful of the properties, clear all the debt and live on a passive income for life.

If NRAS was still readily available, I'd make more certain of the outcome and take advantage of the additional cash flow to gear to a higher LVR, say 80%. This would allow me to use much less of the 3-4 million in cash, but generate superior cash flow and improve my taxable income position, simultaneously. 10 or 12 x 400K properties would each generate @ 15K of deductible losses (150K -180K in total - more than enough to reduce the 200K household income to below the tax free threshold ) , and @ 10K CF+ tax free each , adding an additional 100-120K of untaxed income to the 200K tax free household. Thats 300K tax free, with a $4 million portfolio, an unencumbered PPOR and sveral million in the bank, as my contribution would only be 25% per property for deposit, stamps and costs. ie @ 100K per property. So I'd only use @ 1-1.2 Million of the $4 million. The combined @ $3 million of tax free cash flow over 10 years, plus the several million I had not spent, could easily pay off the debt at the end of 10 years, and I'd be left with large portfolio generating a large passive income, without ever having to sell anything.

Or, you could simply ask yourself... with $5million , why do any of that? Why not just invest in something generating 5% franked returns and enjoy the 250K income for life?

 

What is the goal and what is the timeframe to achieve it?
I would say investing without a clear objective will not bring you anywhere.

 

Buy as many value adding real estate deals as I could around Australia, leaving enough money left over to fund all the projects and some for contingency.

But I wouldnt talk too much about property in your assignment, they might fail you..considering its a FP course.

 

No.3 in the 5th at Randwick - 10 to1

 

I think with 5 million I would buy Mt Druitt .

 

It was directed @ each individuals current situation. So in YOUR current situation today, what would you do.

I had suggested weekend in Vegas and end with it all on Red!

 

Provided serviceability it would be

Take 4-4.5M leverage it out at 80% = 20-22.5M, then go buy 25-30 properties at 600-700k in Melbourne and Brisbane. Using the 1M for buying costs and to service the loans until they become all neutral/positive.

Assets would be land rich and targeted for growth (e.g. 7-8% growth with about 4% yield).

Keep working during this 10 years and if I got the numbers right I would have 20M-22.5M in 10 years and I can either scale back work or quit depending on what I wanted to do.

 

$5M at my stage in life would give me a very comfortable income for life, so I would very much uncomplicate my investments to be very passive, maybe just in a term deposit. Live happily ever after, maybe on a beach somewhere. Tahiti sounds nice, James, Tahiti.

 

It's Simon

 

I'd rent a million dollar mansion in Adelaide for about 30k a year and never buy a PPOR. For the capital I'd go a nice mix of ETFs, term deposits, individual stocks (goldies are doing well) and cash flow positive properties.

 

You have to know what the purpose is in investing for this hyperthetical person and what there attitude is to risk.

If it was me i would probably pay cash for a main residence and then borrow against it and then buy several lower end properties spread out across australia under different entities. Ideally using 100% finance but this may not be possible for this example so i would keep a sum of cash in the offset of each property so there is no negative gearing yet can maintain 100% borrowings which will help living off rents as they grow.

 

I'd do this too.

It's a bit depressing that 5 million in cash wouldn't allow me to retire. Argh!

 

Use it as a 10% deposit on 50mil worth of houses in Adelaide and then control the rent market

 

Buy a McDonalds franchise.

 

I'd use it to finance a development then either call it a day or pull equity and repeat a few times depending on whether I wanted financial freedom or total abundance.

 

Do what Keith did about 15yrs ago. Many would have the equity to do this, but pulling the trigger is another story. Share market in a few years will be interesting, and probably look cheap.

How I got from just a PPOR to multi millionaire retiree in 5 years using only OPM. - Somersoft Property Investment Forums

 

Interesting read. Thanks for sharing @keithj. How are you placed 9 years since you made that post?

 

If the number one rule of your assignment is NOT to be negatively geared, surely you wouldn't pay cash for your PPOR - instead borrow against your investment portfolio to fund your PPOR and use your $5M to invest in a combination of the above to kept it at zero.

 

Step 1 - Buy PPOR in favorite suburb for 2mil in cash.
Step 2 - Quit Work (I'll keep working until I find something nice to live in).
Step 3 - Purchase 2.5mil in blue chip, almost non existent vacancy suburbs across Australia with cash. Ideally 5 properties at 500k each at $500 per week rent. Allow 20% for costs $2000 per week net. $104,000 gross income per year.
Step 4 - Stick the remaining 500k in bank for property apocolypse.
Step 5 - Travel and generally do whatever the heck I want!

Is this the best use of the money. Very much not! Is this the easiest use of the money that basically means a stress free life. YEP! Sure someone will argue boredom but I'll just offset that with another week away on a tropical island.
If I really want to live life on the edge I'll chuck my place on AirBNB for the extended months I'm overseas.