How would you invest $1M?

Many of us imagine this scene. We suddenly receive one million dollars….
What would we do with it? 

Generous recipients consider who they can help, which friends they can treat, and how they can all enjoy it.

But what would a pragmatic Property Investment Advisor like me do?

I’d model it out, combine it with considered leveraging and make it work optimally for my life stage, plans and desired retirement dates.

Boring, yes. Delivering a result immediately? No. But creating wealth long-term to then be able to share and make a bit of a difference? Definitely.

Whether the million dollars is prize-money, a hefty payout, an inheritance, or bundled earnings it’s serious money and it deserves serious treatment.

Depending on the age of the recipient, their ability to generate an income, the magnitude of their existing annual income and their home-status, there are many elements to factor in to the determination of how the million dollars is treated.

If spent incorrectly, the money could quickly be devalued.

What a retiree would benefit from, a younger professional could deem is a waste of opportunity. And what could be considered a high-income earner’s successful outcome could also be considered a modest-income earner’s fast pathway to distress and financial risk.

Take for example a salary earner in their mid-twenties who is deriving a gross income of $60,000, hasn’t entered into home ownership yet, and has plans to travel and further their study. If we contrast them to a middle-aged professional who is earning $150,000 and has no imminent plans to take a work-break, their decisions around how they invest their million dollars will be totally different. Pending the middle-aged professional’s existing financial commitments, (ie. mortgage(s), children’s school fees, etc), their ability to leverage the million dollars into a high capital growth asset with some degree of negative cashflow will stand them apart from the 25 year-old who wants to explore the world, further their study and is sensitive to negative cashflow implications. And if the younger recipient is not feeling the need to move into their own home yet, their options to either rent-vest or find a future home are abundant, but within reason.

The first consideration should be that of immediate need.

Does the recipient need  the money right now? Do they require an income derived from rent immediately? Do they have debts, commitments or troubles to solve with that money?

The second consideration needs to be a focus on time.

How much time remains for earning an income through paid work? Is retirement close or is it a long way away? If retirement is around the corner, there is little point in taking on a debt that will require a cashflow input from the borrower. 

The third relates to risk.

How does the recipient’s personal risk-profile match the plans they have for optimising their million dollars? Investing carries risk and leveraging, (borrowing more money to invest) multiplies that risk.

A high-income earner may elect to split their million dollars into three portions;

• $400K deposit including stamp duty for a $1.2M house in a growth suburb
• $500K deposit including stamp duty for a $1.5M house in a growth suburb
• $100K in buffer funds for maintenance and rainy days, offsetting their home mortgage.

Their negative cashflow shortfall won’t be extreme by their income standards, but it will be notable. They will need to service an approximate amount of $2,500 per month pending their loan terms.

After ten years at an average growth rate of 6% pa, their two properties would have a projected combined value of $4.83M.  At age 55, this would certainly give them choices to share their wealth, enjoy their financial freedom and make a bigger difference than what they could have experienced with the $1M at age 45.

With the combination of the $1M and a ten-year commitment to continue working towards their financial future, a $1M nest egg could result in a cashflow neutral duo of quality properties with a net value of around $3M.

The 25 year-old, however has a very different set of immediate options based on their inability to service a debt of the same magnitude as the above scenario. 

But their potent ingredient is time.

The necessity for a cashflow-neutral position at the commencement of the investing journey is essential, because they have plans and are not to in a position to service a negative shortfall. Importantly though, the time they have available means that in the future, they may well be able to service more investment debt. Selecting a property that will perform strongly is important, because it will provide the equity for them to continue to invest in their future. It will also enable them to enjoy their own home when the time comes, whether they use some equity to do so, live in the outperformance property they have bought, or sell it to facilitate their home-purchase.

Leveraging just enough borrowings to ensure that the property is cashflow-neutral is essential. If coordinated carefully, the high-capital growth property can be a ‘set and forget’ investment for the young investor.

For example, this superb period house in Prahran was purchased for $1.476M for a client last month. If the young recipient allocated their $1M as follows, they could enjoy a cashflow-neutral outcome for the first few years while their property like this one above exhibits out-performance growth;

• $800,000 deposit
• ~$75,000 stamp duty
• $125,000 for buffer, travel and study over the years before higher-income employment
• Rental return of circa $900 per week would ensure that the mortgage repayments on the borrowed funds and the property outgoings are more than adequately covered.

In contrast, what could a more mature-age recipient consider doing with their million dollars? If they are at the later end of their working life, they are not really in a position to start taking on new debt.

It should be their time to look forward to retirement.

Depending on their current balance sheet, they may elect to pay down debt, buy a home, or (for those who are already financially free), purchase that lifestyle property they have always dreamed of. But for those who would love to have some extra income in their retirement, they may opt for a handful of cashflow properties that can deliver them a rental income.

Diversification is important, so they shouldn’t just buy the first four sub ~$250K, high-yielding properties they find. But this property below is a good example of a higher yielding, moderate-growth asset.

We secured this property for $250,000 last week and it is likely to achieve a $270pw rental return. If the recipient had four unencumbered properties delivering $270pw, their gross rental income per year would be over $55,000. In tandem with superannuation or other existing returns, this amount would make a significant difference to any retiree’s lifestyle.

The point of this example is yield.

An investor who requires an immediate rental return to fund (or subsidise) their income must be prepared to focus on a higher-yielding property.

Every investor’s snapshot is different, and while an incredible parcel of $1,000,000 is life-changing, it still needs to be uniquely treated.

There is no “one size fits all” recommendation for anyone who holds a significant cash parcel.

A scenario like this is special, indeed.

The recipient needs careful and tailored advice.