You receive $ 1 million in cash. What do you do with it in 2022?
We have all at least once wondered what we would do if we win the lottery.
Well, today is the day. Let’s imagine that it really won.
After tax, you will receive exactly $ 1 million.
What are you doing with it?
It’s a surprisingly difficult question to answer in 2022.
Treasury bills (IEF) and corporate bonds (VCLT) have a negative yield after you deduct taxes and inflation.
Shares (SPY) are also quoted at a valuation multiple twice as high as usual.
Homes (HOMZ) have enjoyed significant appreciation over the past 2 years and the most sought after properties are now selling for substantial premiums over the asking price.
Cryptocurrencies like Bitcoin (BTC-USD) have seen a huge rise over the past year and reached levels never seen before.
Finally, if you thought that holding cash was the answer, you have to remember that inflation is currently hitting close to 7%.
Most of the time, $ 1,000,000 would be a lot of money, but since everything has gotten so expensive, the million won’t go that far in 2022.
But don’t give up hope.
T-bills, bonds, stocks, houses and cryptocurrencies may have become crowded and expensive, but the universe of investment options is actually much larger than that, and the opportunities remain abundant. in some neglected areas of the market.
Below I outline what I would do with the million dollars. Please keep in mind that this relates to my personal situation and therefore what I am doing may not be suitable for you.
I am still quite young, I have a long term horizon, a high tolerance for risk, and most importantly, I have a strong affinity for real estate investing because it is what I know best as a former real estate investor in private equity.
Undervalued real estate through listed REITs: $ 400,000
Real estate is expensive, and rightly so.
We live in a world of ultra low interest rates and high inflation, and this combination is particularly beneficial for real estate investors. On the one hand, your property is gaining substantial value, and on the other hand, your cheap mortgage is slowly inflated.
To give you a real life example, at the end of 2020 I bought a property for ~ $ 500,000, put ~ $ 100,000 down, and since then the property’s value has increased by almost $ 100,000. , thus doubling my net worth, and because inflation is running close to 7%, the value of my mortgage, which is fixed, has lost its real value. Later this year, I plan to refinance the mortgage to take some of that equity out of the deal and reinvest elsewhere.
Unfortunately, these insane returns are now well known to investors, and the competition for the purchase of private property has become so intense that deals typically close with large premiums over asking prices.
But there is still a hidden opportunity in the real estate market:
Enter the REITs (VNQ).
REITs are publicly traded companies that invest only in income producing real estate. Considering the current environment, you would expect these companies to be very popular and trading at high valuations, but contrary to all logic many of them are sold at high discounts due to temporary fears of the pandemic.
As a result, it is not uncommon to find REITs that trade at large discounts compared to the underlying value of their properties.
Just to give you a quick example: Clipper Real Estate (CLPR) has an extensive portfolio of apartment communities primarily located in Brooklyn and Manhattan. It is well managed, has a good balance sheet, its rents are increasing and despite all this, equities are now valued at an estimated discount of 30% compared to the value of the properties.
There are many similar opportunities. Macerich (MAC) has the highest quality shopping malls in the United States and is estimated to be priced at 50% off.
Why are REITs so cheap?
They collapsed at the start of the pandemic due to the false perception that most of them invest in low-end offices, hotels and malls. In fact, 90% of REITs invest in more defensive types of properties like apartment communities, cell phone towers, farmland, warehouses, etc.
Since REITs are hybrids of stocks and real estate, they often end up being badly priced because most equity investors have little understanding of real estate and most real estate investors have little understanding of the stock market.
Sometimes they become overvalued (before 2008) and at other times they become undervalued (after 2020). I think buying REITs below NAV is very appealing because you are basically getting real estate at pennies on the dollar that is professionally managed, diversified, and liquid. You don’t need to deal with any of the tenants, you don’t have to sign any of the loans, and your liability is limited. This results in an exceptionally high risk / reward ratio and for this reason I would allocate a large portion of my lottery winnings to discounted REITs.
Of course, as a real estate investor myself, I feel comfortable investing in what I know best. You might want to be more diverse.
High Conviction Concentrated Equity Positions: $ 400,000
As stated before, I have a long term horizon and a high tolerance for risk.
This is reflected in the way I invest in common stocks.
Instead of building a well-diversified portfolio, which is probably best for most people, I look to make concentrated investments in my best ideas.
In my opinion, a great equity investment is one that:
- i can really understand
- Has a strong ditch
- An ability to reinvest capital at high rates of return
- User-friendly management for shareholders
- And an updated valuation with a potential for repricing
In other words, it’s a business that has a predictable trajectory toward above-market rates of return over the long term. Finding these opportunities is extremely difficult because for one I can only understand a limited number of companies, and for two most of the market today is quite expensive.
A good example of such a concentrated investment is my biggest stake, RCI Hotels (RICK), owner and operator of a strip club. I am very optimistic about the company because, as we explain in a recent report, it has a clear path to over 20% annual growth in free cash flow per share, but today it is only priced at around 12 times free cash flow, providing exceptional value for a fast growing, high quality business.
Source: RCI Hospitality
As its valuation multiple increases and meets our growth expectations, we expect it to generate 20-25% annual total returns over the next 5-10 years.
These superior returns are of course accompanied by high volatility. But since I have a long-term horizon, that’s fine with me, and because my investments are concentrated, I also know them very well and have the courage to buy more when prices fall.
If I won the lottery, a lot of the proceeds would go into those concentrated equity investments. This is the riskiest part, but also the most rewarding part of my portfolio.
Deposit for real estate investment: $ 200,000
Earlier I mentioned that it is getting harder and harder to buy private properties in today’s market. Competition is intense and prices are rising sharply.
But that doesn’t mean you should ignore real estate altogether. It just means that you have to become more creative and selective in the way you invest.
The real estate market is large and versatile. While one location or type of property can be expensive, others are still emerging and at a reduced price.
An example in which I invest in Estonia. I believe that the country’s capital, Tallinn, offers exceptional real estate opportunities for people who have an investment horizon of decades. This is because today they are still a small emerging country, but over the next few decades I expect them to become one of the richest and most expensive countries on the planet. .
Source: Tallinna Sadam (OTCPK: TSMTF)
Why is that?
I have covered this topic at length with members of High Yield Landlord, but in short Estonia is fast becoming the “Silicon Valley of Northern Europe” where ambitious young entrepreneurs move to profit from the company. the most user-friendly and the most digitally advanced. of the EU and the euro area.
At the same time, it also became the “Switzerland or Luxembourg of Northern Europe”, where wealthy and retired business leaders settled to reduce their taxes and improve their quality of life.
Today Estonia already has the most start-ups per capita in the EU and the most unicorns per capita (tech start-ups valued at over $ 1 billion) worldwide. Massive companies like Wise (OTCPK: WPLCF), Bolt, Pipedrive and Skype are emerging from this small country of 1.3 million people and these successes are leading to rapid economic growth and real estate appreciation.
Today, Tallinn’s highest quality properties are still almost 3 times cheaper than in Helsinki, just 30 miles north, but over time we expect Tallinn to become more expensive, resulting in substantial price appreciation.
Essentially, Estonia is another small country positioned to replicate the past successes of Luxembourg, Switzerland, Monaco and Lichtenstein. All of these small European countries have one thing in common: They are great for business, attract talent and capital, and have notoriously expensive real estate.
It is still a good time to buy quality assets in Estonia and that is why I would put part of the proceeds as a down payment to buy another property. With $ 200,000, I would probably target a property worth around $ 600,000-800,000, adding cheap leverage to my lottery wins and diversification of the entire portfolio.
As you can see, my heavy real estate investment plan is quite unique and probably wouldn’t be right for you.
This is why this question is so interesting. Tell us in the comments section below what you would do if you won $ 1,000,000 in the lottery. Thanks for reading!