ONE MILLION DOLLARS! Hear it stated in your head as Dr. Evil from Austin Powers said those words. Mocking it like one million dollars is a joke. As if it is not a significant amount of money. Indeed one million dollars does not carry the cache it once did. In the sports world - you hear, "oh, he is only signing the veteran minimum of one million dollars." One million dollars doesn't even get you a decent home in Southern California. You can't retire on a million dollars. Remember when you were a kid, and you'd hear a person was a millionaire, and you would think, wow, a millionaire!
So yes, one million dollars has lost its luster, but let me tell you. If you have one million dollars to invest, the world is your oyster, so let's have a look at how one might invest and grow ONE MILLION DOLLARS! (in the Dr. Evil voice).
Disclaimer
I am not a financial advisor. Don’t take any of these hypothetical scenarios as financial advice. You want to seek professional financial and tax advice if you suddenly come upon a significant amount of money. Now a disclaimer on financial advisors. They want you to invest in the stock market because that is how they make their hay. They won't be clambering for you to invest in real estate because they are not involved in the transaction. If your financial advisor suggests some real estate in your portfolio, then you have a good one. A good tax professional who is savvy in all asset classes is worth their weight in gold.
Five ways to get your one million dollars working for you.
#1 - Savings Account
A basic savings account is the default go-to when people think of large sums of money. They can’t stick it into a mattress, so they put it in a savings account. I’ll tell you where you can stick it! A bit later.
Savings accounts are generally considered safe, and they usually do earn interest. However, at the time of this article, savings accounts are making a mere .010% interest. If you put all one million into a savings account and let it earn interest for five years, you would end up getting a total of $500 in interest.
Ouch. Not a hedge against inflation.
#2 - Certificate of Deposit
Since you are interested in earning more than a savings account can yield, CDs might be interesting. Certificates of Deposit offer a fixed interest rate in exchange for your investment over a set period. At the time of publication, a 5-year CD rate is .017%, resulting in your million becoming $850.
Don’t believe me? Try it yourself on an online interest rate calculator like Bankrate’s or Nerdwallet’s. Again, not a hedge against inflation.
#3 - Stocks
With higher risk comes higher reward, and you cannot mention the stock market without mentioning the work risk.
The average stock market return is about 10% per year for nearly the last century. The S&P 500 is often considered the benchmark measure for annual stock market returns, which means about $100,000 yearly return for your million. We can estimate that investing your $1M in the stock market could yield about $1,500,000 after five years.
They are up at 5 am, breaking out their software, keeping up with the financial news. Day Traders know puts, covers, the squeeze, and shorting. If you are not this type of investor, figure in volatility, brokerage fees, capital gains taxes, and inflation; your returns come closer to 3%.
Sources: www.macrotrends.net, www.investopedia.com, www.creditdonkey.com
Capital gains are tough to shelter from the IRS; unfortunately, the year you report those capital gains, you jump up into another income bracket as well. I guess you can say if you are beating inflation (currently projected at 2.5%), then I suppose you are hedging against inflation, but again, figure in volatility, fees, and capital gains taxes.
#4 - Rental Properties
One million dollars could go far in the rental property world. Consider this; you could buy real estate properties by putting 25% down. So you could purchase a $200,000 single-family residence for $50,000, which means you could invest in 20 properties of that value. Let us also assume the properties do not need much in the way of repairs.
If each home brought in $200 in cash flow per month (rent minus expenses), 20 properties would yield you $4,000 per month or $48,000 per year. At this rate, in five years, you could have $240,000. The average rate of appreciation in the US is 3.8% per year, multiplied by five years, which yields us a total return of 19%. That tacks on an additional $38,000 for each of your 20 homes, netting you an additional $760,000! Add that to your $240,000 in cash flow; you have doubled your money in five years!
But consider you may be getting late-night phone calls, dealing with clogged or leaking toilets, driving around the city, or searching around the country for deals. Don't fool yourself. While gratifying, owning and managing rental properties becomes a full-time job once you scale up to that many properties. This is not a passive investment. A hedge against inflation? Absolutely. Does it make as much money as our next option?
#5 - Real Estate Syndications
This last one you may not have heard about - investing passively into real estate syndications. Real estate syndications are group investments where, as a passive investor, you pool your money together with other investors and buy large commercial or residential property, like an apartment complex.
Investing passively relieves you of the landlord's responsibilities of managing rental properties and allows you to earn cash flow without having to find individual properties that match your price point.
The minimum investment on a syndication deal is typically $50,000, but you can invest more than that. For example, you can invest $100,000 into ten different deals with an 8% average annual return and earn $80,000 per year in cash flow distributions altogether.
Each of the ten assets you invested will sell after improvements to the - usually around the 5-year mark. Often, investors can expect to receive an additional 50-60% in returns at the sale of the real estate syndication deal.
With the cash flow distributions and the profits from the sale in consideration, you could potentially double your money from $1 million to $2 million in just five years. And this without any of the headaches of being a landlord.
Plus, with it being a tax-friendly investment, you can write off your distributions with the power of bonus depreciation and cost segregation. You more than likely will still have some depreciation to offset your capital gain as well.
Finally, some syndications will welcome in a 1031 exchange to further defer your tax burden. While these are not common, they do exist.
Investing in a real estate syndication is without a doubt a great hedge against inflation, as it provides double-digit returns. Rents (your revenue) also rise with inflation, thereby indexing with or beating inflation.
Conclusion
So it turns out Dr. Evil should have been impressed with One Million Dollars! Once you make that first million, that 2nd million comes to a lot quicker. As long as you invest wisely, and get that money working. Maybe Dr. Evil was a savvy investor and invested in a lot of syndications.
We touched on 5 different ways that money can make money - from savings accounts, CDs, stocks, rental properties, and real estate syndications. To learn more about real estate investing and syndications, reach out to have a conversation.