Sorry for posting a similar posting again. But no one seemed to have come up with this.
Why do I hear so little about lottery winners investing in real estate, especially income-generating commerical properties?
Investing in some income-generating property is the way to go for winners with medium-size winnings. Say I won 17 millions as the net. I'd put 11~13 millions for a multi-tenant property. I am a Korean. Most Koreans with a lot of money tend to invest in this way. Koreans, especially older ones, have some level of aversion to invest mostly in liquid assets. I don't know. If I won 17 millions then I would have little problem with 2~3 millions in funds. (not in hedge funds. Hedge funds are no more than glorified and overpriced mutual funds. I'd go with Fidelity AND Vanguard)
If I buy a property with the winning and if the cap rate is 6.5%, my annual income before tax should be $780,000. Not bad at all. (if the property value is 12 millions) I can give 1 mil to my parents and invest 2 mil in stock fund and another 2 mil in bond funds that generates tax-free incomes. So let's say the rent-income after tax is $500,000. (maybe I can donate to charity every year so that I can get some credit) Plus the tax-free income from the bond-funds can be 4% of the principal. so I get 80K, tax-free. I don't need to buy a house right now so let's say I get a two-bedroom apartment in Pasadena or Arcadia, CA. The rent will be about 2000 bucks. If I really decide to get a nice flat in Santa Monica, The rent will go up to 3000 bucks. Oh, then let's forget it.
80K tax-free income is equivalent to 120K with taxes. And I spend about 24000 bucks for rent. I can use remaining 56000 bucks for a nice life every year. What about the half a million bucks income from the rent? I don't touch it, mostly. I save the money for a couple of years and use the property I have as a collateral to get a loan from the bank so that I can buy another commercial property. You heard it right. I'd buy another property by using the first property as a collateral. You can do this if you win more than 15 million dollars as a net winning.
Imagine what you can do if you win 300 million dollars and receive 120 millions as the net. I'd put 10 million dollars in my retirement fund and use the rest of money to generate more incomes. I can give my parents 5 million dollars. Then I put 15 millions into income-generating bond funds, resulting tax-free incomes every month. The remaining 100 millions goes to buying properties. Let's say I buy 5 commercial properties with average value of 20 millions and the average cap rate of 6%. Then my income stream from the properties will be 6 million dollars. If the net income from the properties is 4 millions, then I can practically purchase a commercial property every year, by getting loans from the bank and using my properties as collateral. Know that each new property I buy also generates incomes. I can pay back the loan with the incomes generated by each properties. Maybe I can pay back the loan fast by not toching the rent incomes in any other purposes.
Then some of you will ask, what's the point? Yeah, instead of enjoying your newfound wealth, why are you obsessed with buying more properties?
I don't know...that's the way I am.