Where to invest $200,000 to generate income

[aclarridge]

The most feasible plan I can come up with regarding that would be essentially: 200k down on a 670k apartment (70% LTV), 470k loan @ 6%.  Assume 2% and 50% rules for income and expenses (we're spitballing here).  13.4k gross monthly rents.  6.7k net rents - 2800 mortgage payment = 3900 monthly income.

Hah! I'm sure this could work in some areas if you say so, but it's just funny thinking about it in my area. 670k might buy 2 condos that rent for 3.5k/mo total if you're very lucky. Canada is the most overvalued country in the world at the moment though in terms of price/rent ratio, according to an Economist article I read last year.

[arebelspy]

The most feasible plan I can come up with regarding that would be essentially: 200k down on a 670k apartment (70% LTV), 470k loan @ 6%.  Assume 2% and 50% rules for income and expenses (we're spitballing here).  13.4k gross monthly rents.  6.7k net rents - 2800 mortgage payment = 3900 monthly income.

Hah! I'm sure this could work in some areas if you say so, but it's just funny thinking about it in my area. 670k might buy 2 condos that rent for 3.5k/mo total if you're very lucky. Canada is the most overvalued country in the world at the moment though in terms of price/rent ratio, according to an Economist article I read last year.

Yeah, naturally it would have to be in an area where the numbers work, meaning it'd involve a move for most people, or long distance investing (and since you need to eke out as high of a return as possible with this scenario, it's better to be able to manage it yourself).

[AlanStache]

Yeah, naturally it would have to be in an area where the numbers work, meaning it'd involve a move for most people, or long distance investing (and since you need to eke out as high of a return as possible with this scenario, it's better to be able to manage it yourself).

This gave me an inspiration!!!! We have all been looking at this in terms of making more money but why not follow the true path of MrM and cut the cost of living by REALLY moving!  Surly a standard 4% could be lived upon in some parts of the world!!  After some googling, parts of India have cost index ~3 times lower than parts of the US so, take $3,500 and cut it by 3 = 1166$/mon, then 200k * 0.04 = 8k/year or 666$/mon.... dang...

Ok so emerging market countries may not work, but Mongolia always sounded cool.  How many yak can be bought with 200k?

[Roland of Gilead]

It is pretty easy to live in parts of the USA for under $1000 a month according to my thread on cheapest budgets.  I think a young single motivated person could buy a used truck/van and small travel trailer and live on BLM land quite comfortably on a $500 a month budget.

$0 healthcare (Medicaid)
$150 food
$50 cellphone/internet
$200 gas/liability insurance
$100 fun money

$500 would be only $6,000 a year which is a 3% SWR on $200K, ie the money would likely last your whole life.

[KingCoin]

This isn't quite as difficult or perilous as others are making it out to be. You could do the following fairly easily:
1) Open an account at Interactive Brokers with portfolio margin.
2) Buy some low duration HY funds that are yielding 9%. Something like HIX would do. Poke around CEFConnect.com for some others.
3) Keep buying until you have ~500k invested (borrowing 300k from Interactive Brokers at around 1.25%).
4) Presto. You have a portfolio should yield about $3,500 month, no meth lab or crazy option strategy needed.

Of course, if these funds fall 40% (as they did in '08-'09), you'll be wiped out. Your best bet would be to use the income to delever for 2-4 years. At that point, you'll significantly reduce the risk of busting out in another crash. If you need all the income now (with none reinvested) it's probably only a matter of time before you lose it all. Though, realistically, you could easily have a 10-20 year run before that happens.

This is pretty much a guaranteed way to lose most or all of your money at some point.  The high yield market regularly blows up, sometimes for little fundamental reason.  The declines can often be fast and brutal.  Someone leveraged up the yin-yang would get blown out with monster losses.

I like high yield bonds as an asset class, but they are one of the easiest markets to time provided you are willing to be out of them for years at a time.  This is not a good time to lever up or even hold much.

Yes, as I stated, you will eventually blow up. However, you only have 1.5 turns of leverage ( a little more if you count the leverage in the funds themselves), so you're not really "levered up the ying-yang". You need a 40% decline in HY bond funds to get wiped out. That's typically a once-in-a-generation event. High risk? Sure. But much more viable than any other strategy posted (with the possible exception of highly levered real estate in dodgy neighborhoods - which is going to be very management intensive).

I generally agree that HY is priced to perfection at the moment and that it's an inopportune time to get levered long.

[KingCoin]

Buying in $10,000 increments in high quality dividend growth stocks each month is another strategy, especially with money you already paid taxes on. When you know they are undervalued from your fundamental research, then you can buy shares and hold for life. That 3% dividend will grow more then inflation each year as long as earnings are stable (common in dividend growth big companies of 10% growth per year). 3% becomes 3.3%, 3.63%, 3.99%, 4.39% [5 years], 4.83%, 5.31%, 5.85%, 6.43%, 7.07%[10 years], 7.78%..... 123.43% [40 years]...

Each seed is planted when initially invested..

Diversification is important, and every increment of investing is like planting a new seed at 3%, but when you become financially secure in 10 years with the income of 50 companies paying a growing income in CASH each year, you will be smiling to the bank.

And this is regardless of the ups or downs of the market swings. Just based on the quality and stability of the big company.

Maybe a viable investment strategy, but I'm not sure how it has any bearing on the OP's query; how to generate 21% income now?

[KingCoin]

It is pretty easy to live in parts of the USA for under $1000 a month according to my thread on cheapest budgets.  I think a young single motivated person could buy a used truck/van and small travel trailer and live on BLM land quite comfortably on a $500 a month budget.

[Roland of Gilead]

LOL KingCoin.  Or you could post a link to a real life person living quite happily on BLM land:

http://rvsueandcrew.net/

and her budget:

http://rvsueandcrew.net/money-2013/january-2013/

[George_PA]

lol KingCoin, that is so classic, nice artwork

This still is funny no matter how many times I watch it:

https://www.youtube.com/watch?v=3nhgfjrKi0o

[Mr Mark]

Still, a great alternative pov.

A super frugal person, with no income to declare, single, with a US ( or equiv. YMMV) passport and zero debt..

if you invested the money, assume an average rate of return like firecalc over a 30 year inflation adjusted, yet just take say 1000k per month,  then it still lasts a long time. Like, a 50% chance of more than 30 years, starting with 200k, and taking 1k a month.

If you can arrange free, or almost free accommodation,  that should be totally doable. And if you are say 35 or 40, hey, 30 more years and still alive? Ill take my chances!

[MikeConley]

Spend a couple hundred for a plane ticket to Las Vegas. Fly there with your lump sum of roughly $199,700. Take it to the closest casino. Bet it on black. Send me 25% of the profits. Then invest it all in Apple. Thank me when it reaches $200 a share. Then don't forget good financial advice is not free and mail me a check for a good portion of those profits too.

[forummm]

You could do it but you would need to use margin and tools like stock options.

In order to generate 21% from $200,000 you would need to be willing to risk a big loss of principal (like 50+%).

If someone put a gun to my head and made me pick a way, I would probably go with Apple options right now.

With $200K you could buy Jan 2016 $400 call contracts for $145.  You would then sell Jan 2015 $520 call options for $49.  Your maximum return would be $24 for every $96 invested, which is a 25% return.  You would get this return if Apple went to $600, made no gains at all, or even dropped 4% from the current price.  Your break even point would be if Apple was trading about $480 in Jan 2015 (because of the year of time value remaining on the $400 calls).

This is not one I would do right now, I like a bit more of a sure thing, like if Apple dropped to $400 because sales were only increasing 20% yoy or something.  Then I would buy $300 calls and sell $420.

Wow, what a call. Looks like this would have increased your $200k to something around $700k today. Even with this amazing (and risky) investment, $42k/year is still a pretty risky 6% withdrawal rate for 40 years.

[Roland of Gilead]

You could do it but you would need to use margin and tools like stock options.

In order to generate 21% from $200,000 you would need to be willing to risk a big loss of principal (like 50+%).

If someone put a gun to my head and made me pick a way, I would probably go with Apple options right now.

With $200K you could buy Jan 2016 $400 call contracts for $145.  You would then sell Jan 2015 $520 call options for $49.  Your maximum return would be $24 for every $96 invested, which is a 25% return.  You would get this return if Apple went to $600, made no gains at all, or even dropped 4% from the current price.  Your break even point would be if Apple was trading about $480 in Jan 2015 (because of the year of time value remaining on the $400 calls).

This is not one I would do right now, I like a bit more of a sure thing, like if Apple dropped to $400 because sales were only increasing 20% yoy or something.  Then I would buy $300 calls and sell $420.

Wow, what a call. Looks like this would have increased your $200k to something around $700k today. Even with this amazing (and risky) investment, $42k/year is still a pretty risky 6% withdrawal rate for 40 years.

Yeah, that one worked out well, huh?   I actually did it with a small amount of money but exiting the trade before the split.   I still made good money but not obscene money.

This year if you put a gun to my head and said earn me 21%, I would probably devise something with Gilead.   Maybe just buying the stock around $100 and waiting for it to get to $125 by end of year.

[Money Badger]

ROFL with the variety of real and funny ideas in this thread...   

FWIW, As for a sincere, reliable way,  DrTesla nailed it...   I have buy and hold positions of blue chip stocks bought from the late 90s/00s that are closing in on 20+% returns annually on principle and reinvested divys...  Its hard to both pay the divy annual tax bill AND reinvest the net this long though...   2009/2010 were hard as hell and i didnt hold all i should have but the bluest of the blue chips i held pay on the nose every month today.

My next semi serious suggestion is to move to a college town (ie, reduce your COL) and put the downsize equity into college rental condos with at least 3 bedrooms...  Rent only to girls (less damage hopefully).   Figure 200k would buy at least 2 condos depending on leverage...  have an average of 4 girls pay $350/mo each plus hefty deposits to protect on damages and voila, $2800/month income plus hopefully some real estate appreciation...   Maybe get lucky about half the kids stay for summer school...   Et voila!   Good money!!    Why else do you think the universities want the room and board business!

[arebelspy]

I have buy and hold positions of blue chip stocks bought from the late 90s/00s that are closing in on 20+% returns annually on principle and reinvested divys...

I'm quite skeptical, unless you're talking yield on cost (a useless metric, especially in the case, as OP presumably wouldn't want to wait nearly 20 years to access any of the returns), and not CAGR to date. 

[Money Badger]

Yep, I'm talking yield on original principal.   Saying it's useless though is a bit of a disservice as folks who get a 200K windfall tend to seek  "quick answers"...    My point was these assets I mentioned now yield high teens (soon low 20s) the rest of my days on the basis + plus appreciation plus  accumulated divys each year.    They've compounded to a good place that I can either "harvest" the income I farmed these years  or roll it back into more shares to compound further and no fund manager is skimming off them during these years either...  Granted my example took ~15 years to build the passive income, but it's steady income in the range the OP asked for.   It doesnt have to take 15 years either...  5 years of disciplined  reinvesting the divys in a tax advantaged account can more than double the yield if the cards are in your favor and double again in another 5.   But granted, its definitely not a quick fix...   folks can see the suggestions like rental  property income for quicker/more effort answers.   Or things like "cannabis farming" for even faster, even more exciting solutions.  ;-)

[arebelspy]

Yep, I'm talking yield on original principal.   Saying it's useless though is a bit of a disservice as folks who get a 200K windfall tend to seek  "quick answers"...    My point was these assets I mentioned now yield high teens (soon low 20s) the rest of my days on the basis + plus appreciation plus  accumulated divys each year.    They've compounded to a good place that I can either "harvest" the income I farmed these years  or roll it back into more shares to compound further and no fund manager is skimming off them during these years either...  Granted my example took ~15 years to build the passive income, but it's steady income in the range the OP asked for.   It doesnt have to take 15 years either...  5 years of disciplined  reinvesting the divys in a tax advantaged account can more than double the yield if the cards are in your favor and double again in another 5.   But granted, its definitely not a quick fix...   folks can see the suggestions like rental  property income for quicker/more effort answers.   Or things like "cannabis farming" for even faster, even more exciting solutions.  ;-)

If OP had asked "I have 200k and want a monthly income of $3500 (nominal, not even real) 20 years from now," your solution would be fine--as would a bunch of other ones.  The money would only need to compound at 8.64% (again, nominal) over that 20 years.

The scenario to me seems to be wanting that income now, and real, not nominal, whenever it is taken out.

So your way is a great way to build wealth over a long time period, but does't solve the OP's "problem."  There is no solution, short of risk and/or leverage, IMO, but some okay ideas generated in this thread to get as close as possible.

[KBecks2]

Gosh people are rough on a first time poster.  But the answers are right, you need a bigger 'stache.

Therefore,  start growing your stache!  Save, baby and learn to manage your investments so they grow, carefully.

I am trying to average 10% / 12% / year in stocks and options.  Look at what an index fund will give you, start there and take time to learn about investments and investing. It's a great skill set to develop.

Have fun.

[Check2400]

If you were able to find four properties at $200,000 each, putting 25% down, you would be earning roughly $1,500 a month on principal on a 20 year note on mortgage payments in total.

If you were able to get rent $500/mo over the mortgage of roughly 1,300/mo, then you would have an additional $2000 a month, meeting your goal of making $3,500 a month.  Factor in some depreciation and you're making some tax benefits on top of that. 

Ignore that the property will have repairs, vacancies, HOA, and potentially management fees, and you're set? 

Finding a 200,000 rental going at 1,800 a month isn't easy, though, and rentals are far from invest and forget. 

The other option is to invest it in a 7% return, wait 23 years, and voila, you've got a 4% SWR for eternity. 
(Just ignore inflation on that)

What about some realistic options-Rephrase the question to take out the "starting today."

If $3,500/mo is what you needed, and you had $200,000 drop in your lap, what would you do to achieve that number as expeditiously as possible?

I'd like to think I'd do the same as above, putting any overage towards a 6 month safety net on the properties, then put anything (including my savings) towards one house, then snowball those savings to the next one.  Once they're paid off, work one more year to save up some funds, do every long term repair imaginable with the savings(roof, a/c, etc.) and then I'd feel comfortable resting on those laurels.  I might even hire a property manager with all the extra cash from having paid off the mortgages and rent appreciation! 

[peterpatch]

If I had $200,000 cash to invest today, and I wanted it to generate a monthly income of $3,500 for the next 40 years starting today, where would I invest it?

The current risk free rate for a 30 year investment is around 2.6% per year (30 year treasuries). What you are asking for is 21% returns or 8x the risk free rate. Therefore you'll have to accept risks in order to earn the money. I would never shoot for this type of a return but if I had to here are the areas I would look at:

1. Real Estate.

Leverage is usually easier to obtain with real estate than other assets, and you'll probably need it to pull this off. If you can get a 30% downpayment with an ROA of 8% (53K in net income) you'll end up with an ROE of  27% giving you a small margin of safety. Assuming that the net income figure is after any and all repairs, interest, management and upkeep to keep the property at the same quality level you should be able to sell in 40 years and get at least 200K (although I would expect more like $440k with inflation). I also assume that the mortgage would be perpetually renewing and you would really never be paying down the principle which would eliminate the $3,500 cash flow you desire, that would be a difficult financing arrangement to make but I suppose it's possible. You would have to manage the property or manage the property manager so it wouldn't be totally passive but pretty close imho. The risky part would be constantly refinancing the mortgage to keep cash flow going instead of paying down the mortgage entirely. Interest rates might climb to a point where the refinancing (through notes, prosper, bank arrangement or some other exotic arrangement) might start to eat your $3.5K a month goal. TNSTAAFL!

 2. Education

Spend 100K on getting an excellent high demand education in something like medicine or engineering. Get a great job when you graduate and save at least 50% of your money, invest it all in low cost index funds on a dollar cost averaging plan. Pretty much follow the standard MMM advice and you'll retire in about 10 years. This is really a deferred stock investing strategy

3. Small business

Really a risky proposition unless you have the traits and experience to pull it off but people have made millions starting from almost nothing in this realm so if you're entrepreneurial then go to it.

[FIRE4Science]

A diversified dividend (or Capital) growth portfolio of $200,000 may yield around $8,000/year min with averaging 4% dividend yield. Plus any long term capital gains you may make by deciding is a great time to sell high out a position and reinvest capital to some other dividend growth company. So +- % in Capital Gains (Loss) also.

Leveraging 2.5x $200,000 portfolio may get you $500,000 to invest at 6% interest or higher, but much higher risk of debts. So learn to know what you are doing first before borrowing any amount of money for any reason. But can be risky approach to getting the amount of return you seek, similar to starting a business, just investing on other people's businesses or funds.

[forummm]

A diversified dividend (or Capital) growth portfolio of $200,000 may yield around $8,000/year min with averaging 4% dividend yield. Plus any long term capital gains you may make by deciding is a great time to sell high out a position and reinvest capital to some other dividend growth company. So +- % in Capital Gains (Loss) also.

Leveraging 2.5x $200,000 portfolio may get you $500,000 to invest at 6% interest or higher, but much higher risk of debts. So learn to know what you are doing first before borrowing any amount of money for any reason. But can be risky approach to getting the amount of return you seek, similar to starting a business, just investing on other people's businesses or funds.

How can you leverage 2.5x on a dividend portfolio?

[Ghzbani]

Hmm...I guess if you have amazing insider information you could do it pretty easily. There have been ridiculously massive returns in a single day before (I think the famous example was Volkswagen in 2008 going up like 100% when Porsche announced they were taking over) so if you can manage to do that a few times you should be set.

That'd still be illegal though, and you'd need to do it a few times so you'd probably get caught.

Maybe a time-machine?

[Financial.Velociraptor]

How can you leverage 2.5x on a dividend portfolio?

Interactive Brokers will let you apply for "portfolio margin" at 110k account size.  That lets you go up to 5x leverage (with some exceptions).  A diversified dividend portfolio would easily qualify for 5x so 2.5x should be able to be maintained up to a 50% draw-down.

[SUP]

Too bad the dude left, this is a great discussion. My best plan:

Multi-unit real estate investment. Some numbers have already been shared and I'll say its possible. You might have to go outside your area. The best part about mulit-family is you can increase the value through better management. Increase revenue and cut costs and the value goes up. This is unlike home that are tied to the market.

Second place: Hard money lending real estate secured to builders and flippers. But this is not long term and I can't imagine doing it for 40 years.

[forummm]

How can you leverage 2.5x on a dividend portfolio?

Interactive Brokers will let you apply for "portfolio margin" at 110k account size.  That lets you go up to 5x leverage (with some exceptions).  A diversified dividend portfolio would easily qualify for 5x so 2.5x should be able to be maintained up to a 50% draw-down.

Wow, from their portfolio margin simulator, it looks like you can leverage about 10:1 with VTI and about 20:1 with e-minis. What are the leverage limits on IRAs for those 2 types of investments? I don't quite get all the lingo.
http://ibkb.interactivebrokers.com/node/188

[Captain_Burrito_Pants]

Wow, from their portfolio margin simulator, it looks like you can leverage about 10:1 with VTI and about 20:1 with e-minis. What are the leverage limits on IRAs for those 2 types of investments? I don't quite get all the lingo.
http://ibkb.interactivebrokers.com/node/188

You can't borrow in a margin IRA account, you just don't have to wait for your trades to settle before buying something else.
http://ibkb.interactivebrokers.com/node/1380