My father died 2 years ago and left everything to my wonderful step mother. My step mother has made it very clear that the balance of her estate is to be divided 3 ways between my sister, my sisters daughter/my niece, and myself. Part of the estate includes a 401K worth at this time just over $3,000,000. Because the stock market is a scam and I know that IRA's and 401K's are a rip off I am going to take the up front tax hit and cash out and after taxes I could maybe get around $600,000. My question is... when that very sad day comes and my wonderful step mother passes... what would you do with $600,000? I have read "7 Years to 7 Figures" and I like the idea of taking a bit of a short cut and buying the 75 unit apartment, or should I just bite the bullet and go with buying 20 single family homes, or should I think about all the garbage dealing with so many property managers and just take the middle road of "7 Years to 7 Figures" and buy two 20 to 30 unit apartment buildings and just use the cash flow until I can flip them for the 75 to 100 unit apartment building.
My wonderful step mother beat cancer 4 months ago, but now she has no lymph nodes and her doctor told her if she gets sick it might kill her. Right now she isn't feeling well, and if I had hair I would be pulling it out (I shave my head) but she says she is fine (she is a really tough woman and never wants us kids to worry)
I am ALL ABOUT THE CASH FLOW I don't care about the take the money and party, go on vacation, or any of that other nonsense... I just want to do the right thing with the money, and then hid until my grief passes. And I want to make that happen as soon as I can so that my grief does not get in the way and I do something stupid like buying a condo in Costa Rica and thinking I can start a coffee farm, or even worse a hard wood farm. (20 years for cash flow... are you kidding me?)
Any advice you can give I would love a heads up, think about this, you need to worry about that, kind of stuff.
Whatever you do, review your decisions with someone you trust and vet whoever you work with
I would diversify the $ and put a mix in stocks, bonds, and real estate.
I second @Chris Seveney you don't want to be getting this type of advice from the interenet half of what you get are going to be guys and gals wanting you to invest in THEIR deals...
also check the portfolio it may be best to take the stepped up basis and leave the dough were it is..
take a little out and if absoultly want to deal with tenants then go buy a rental or two and see how you like it first without jumping in all the way.. not every one likes being a landlord and some don't like it.
@Wade Alderson I wouldn't advertise how much money you have or will be getting on a public forum. You will get "pitched" by everyone and their dog.
Furthermore, don't know where you got the notion that the stock market is a scam. Long-term, the S&P 500 index has beaten real estate investing hands down. This is a testament to the genius of American entrepreneurship and exceptionalism.
As @Chris Seveney and @Jay Hinrichs have pointed out, I would invest in a combination of stocks, bonds and alternatives (real estate being one of them). Also you don't advice from the internet. Half of the people don't have the first clue about portfolio management.
What advantage is there to taking the tax hit? Why not roll that money into your own self directed IRA or 401K and invest the larger sum of money. Some great resources to learn about this are Assets101.com and CashflowDepot.com
Whatever you decide, I would talk to a reputable tax attorney before taking a large tax hit.
Put it all in Bitcoin.
Take Jay's advice and try landlording. Property management is a frustrating business to be a part of, and you will likely be frustrated with your property manager if you hire one. Cash flow is marvelous stuff. You can actually find it in the stock and bond market, but good real estate is always good real estate.
I guess I should have said this better... DO NOT TELL me to invest in the stock market. I was working at Franklin Templeton Investments when the 2003 stock market crashed.
A few points about the stock market... and one about housing.
1st... how many of you have been fully invested in the stock market before a down turn of 30% and experienced that sense of dread?
2nd do you know how long it takes for the stock market to recover from a loss of 30% (even with quantitative easing)
3rd.. with the drops in the stock market of 30% taking from 2 to 25 years to recover... how many cash flow investors do you know went 2 to 25 years with out positive cash flow?
4th... do rents go up or down during a housing crash?
One extra tip for free.... google John Bogle's Morning star interview from June 13th of 2013 on the problems with 401K's and you will understand why 401K directors do not tell you to (just like real estate) take your ending balance and divide it by your starting ballace to get your real return on your 401K.
One more thing... I can not recommend the book "Where Are The Customers Yachts" by Fred Schwed enough.
if i inherited a large sum of money, I wouldn't post about it here
@Brandon Turner can you chime in on this please? I LOVE your books and I think you are one of the best with @Joshua Dorkin for this kind of question to put people on track. From my point of view. Any unintelligent person can take a chuck of money and waste it buying a big house, fast car, and marrying a trophy partner. If I wanted to waste my inheritance I would move to France and FINALLY learn to speak French! But I don't want to waste my money... I want to move to Disney World and eat with Mickey Mouse once a week! (I don't want Mickey to think I am a stalker... so once a week is all I get)
@Wade Alderson Great book , i read that one! Im not an advocate of the stock market myself. Im sure if i spent the last decade really honing it, i could be tearing it up but its not for me nor do i have any desire. I don't do IRAs which might be stupid but just not a fit for me at this time but have given it a lot of thought.
Take the time to get educated! Read, podcasts, network , watch out for wolves in sheeps clothing. If you are thinking into getting into the RE game , is there anything you are able to do now ( even a small deal ) given your position to see if its something you want to move forward with ?
@Jack Baczek I have read around 100 books and I don't know how many podcast I have listened to, or how many website articles I have read over the years. I LOVE the idea of investing in small apartments because the idea of covering your vacancy with more than one tenant really turns me on, but the podcast by Jason Hartman makes a really great point that by investing in single family homes when you want to sell you have a MUCH bigger audience of buyers, for multi family you only have investors, for single family you can have home owners as well as investors. So the idea of buying 20 single family homes in class B or C neighborhoods appeals to me so if I want to sell a few with enough equity in a like 7 to 10 years to try the "7 Figures in 7 Years" thing just to prove it can be done to all my friends on Facebook who LOVE their 401K with it's employee match up to 3% I can.
@Wade Alderson couple points when the stock market crashed in 08 so did real estate and many landlords had their properties go vacant and the banks foreclosed.. so don't think for a minute that cant happen.. some areas were really hit others not so much.. depended.. but one set of my clients had 4 plexs in Phoenix that went 100% vacant and they gave them back to the bank. they paid 350k each 4 plex in 04 ish and those were traded in 09 to 2010 for under 100k per 4 plex.
Do realize though most areas that have SFRs that are being sold today to investors the neighborhoods are changing to all investor and the exit in 5 to 7 years simply will not be there to homeowners..
sell to other investors yes but they will only sell for whatever the current crop of investors are willing to pay for cash flow be it the 1% rule is kind of the metric.. so if you buy at 1% today and your rents stay static your going to sell for 1% you will actually lose money if you exit..
So choose wisely.. its not that simple.
Talk to an inheritance attorney,
Single family homes are the most historically proven asset class in the world. :-)
It is a mistake to believe that the stock market is a scam. It has its challenges, but historically, it has done well for those who have had the patience to invest consistently in good and bad times. Advertising how much money one has in a public forum is definitely not a great idea, as many have pointed out.
I would definitely sit with retirement professionals and understand/discuss the various options carefully and with open mind. Real Estate should remain one of the options on the table.
Good luck !!!
If you inherit a large sum, you should speak to an attorney, and cpa about tax consequences. To pay 400k in unnecessary taxes is likely a bad idea.
The stock market is not a scam. A 401k is not the same as the stock market. It is merely a way to invest in the stock market. You can easily put money in a brokerage account that you can withdraw at anytime, penalty free.
With respect to every one who says the stock market is not a scam. I worked in the stock market up until the 2002 to 2003 slide... it was my job to tell investors "I have your best interest at heart, put your hard earned money in a diversified fund of equity, dividend ect... ect... ect." Any one who has read the "Armchair Millionaire" by Lewis Schiff knows that no fund manager has ever beaten a stock index for longer than 5 years, and that all you really need to do is to invest in the S&P 500, the Russel 2000, An Asian and a Latin Index... the reason why is so simple. When America is doing good the S&P goes up, when America is doing bad Latin America and Asia do well, when America is recovering the Russel 2000 does great... and all while that is going on the brokers are charging them to buy, and charging them to sell. So if you know all that great... if not have you at least read "Where Are The Customers Yachts" by Fred Schwed. It's easy to say something is not true when you don't know the facts... just like people believe Dave Ramsey's "You can save your way to wealth" is the best strategy The educated people know there is a Good Debt and a Bad Debt... to Dave all debt is bad. Just as the educated know that Quantitative Easing has ruined the stock market for the long term. @Jason Hartman if you could comment about the areas where the rents fell I would much appreciate it. It's my understanding it was really only the Super Hot Markets that got hosed and that MOST of America had foreclosures going on but that displaced home owners made rents go up. If I am wrong about that and someone can correct me I would love the education. I have only been reading about real estate investing since 1987 so maybe I was too focused on what I was reading and missed the big picture and that flipping homes only works for a short time, and that investing for Cash Flow is the key to long term wealth and maybe a "Refi Til You Die!" mentality is all wrong. But I really don't think so, and if you can educate me why I am mistaking I am willing to learn.
I'm too lazy to google now, but a few years ago the Dallas Morning News reported a high level analysis that during the last market downturn SFR prices in DFW decreased about 20% while rents decreased 5% on average. In other words, people who could not afford to buy or keep a house, were forced to rent one, so rental demand did not tank after all. So keep that in mind. I can't speak for other markets though. My point is rentals in some markets can be relatively low risk in a recession, compared to both stocks and home prices.
I evicted Mickey last week.He owed 3 months rent.If you wish to eat with him so bad,you’d have to catch him at the nearby Salvation Army hostel.He’d be glad to share his cold Mac and cheese with baked beans with you.
I would do the following:
1. Talk to a good CPA and attorney, tell him your goals and follow their advice to shelter as much as possible
2. Use the money to get a mid size multi, to try it out (but think hard about if you’ll want to manage it yourself or not). My sweet spot would be rents between 800-1200 to be somehow “recession proof”
3. After a few years of cash flow and learning more, look for sweeter deals, cash in on the last one and start over
Best of luck
Definitely talk to a Cpa. Get your stepmother and others involved in estate planning to minimize the tax hit. It doesn’t make any sense for multiple levels of taxes to come out.
What type of real estate you buy will highly depend on the area. If you want to landlord buy a house and try that. Personally I have no interest in landlording so I’m heading as quickly as possible to multifamily so that I can own the management company. But a mix of single family and multi family would work just as well.
To me, the cash flow is paramount because Iy will allow me to buy more properties. If they have equity through pay down and appreciation then great, I can use that to buy more properties but that’s all I’m interested in.
One further thing: your location in Claymore is interesting. You are fairly close to Oklahoma City, Tulsa, and northwest Arkansas all of which are doing well in real estate at the moment.
@Wade Alderson I don't think anyone is predicting a 08 event in the next cycle.. there will be a cycle there always is.. and many times it more of a regional event.. like the deep recession in Northern CA in 1989 to 1992.. values fell in all asset class's and SFRs in many areas fell 30 to 50% I know I was a HML in the market at the time and was dealing with massive defaults.. LOL.
but that was caused by the earthquake and the war.. were you live in OK Oil prices effect real estate and rents.
places that got hammered on rent and prices were
FLA AZ NV ( Vegas particularly) Central CA and the inland empire.. and GA..
I had loans out in a few of those markets and the property values crashed especially ATL and FLA
Also Detroit metro crashed.. as did many other markets..
WEre you have to be careful with renters is figuring out where the jobs are.. what caused a lot of the above those states also led the nation in new construction.. building came to a halt.. where did all the labor go.. some stayed but many left to other markets.. so rents did crash and or vacancies went through the roof..
But again I think the only risk this go around to rents as the job market is very strong and getting stronger.. is the over saturation of rental units.. IE so many homes that were hereto for owner occ all of a sudden becoming rentals.. but in some markets.. take a Memphis its been that way for the last 20 to 30 years and the market has absorbed it..
Just buy quality properties and you will be fine.. stay out of the bad areas were the least desirable live and you will be fine.. do business with quality folks and you will be fine..
where people get hurt in this game you have to simply look at the Morris threads.. buy through higher powered sales pitch got to buy today... No you can't look at it.. No you cant put a loan on it.. No you cant have a home inspection.. and oh by the way people living in D class are easier to manage than B and A .. that to me defies logic but 100s of people went for it. Your far to smart to fall into that trap.
@Wade Alderson - I would spend time now getting to know markets and cycles. If I inherited money I would invest it in Chicago, why? because I know that market. Am I saying you should invest in Chicago too? No. But what I would do with the money in the market I know now may be different than how I invest it in 5 years.
I also have done well for myself by learning the market and doing what I feel is right, not listening to others on what is hot/trendy. I see it all the time now, something gets hot/trendy, everyone jumps on the bandwagon, and all the sudden everyone is doing it and saturating the market. Here is an example: in our north side neighborhoods 2-4 units used to make up 70% of the housing stock and 15% were SFH (15% condo). So a similar size/condition SFH would sell for $100k more than the 2 unit next door because there was a lack of supply in SFH. Someone smart figured out you can buy the cheap 2 unit, renovate it to a SFH and sell it for over $1.5 million in a matter of days because the supply of SFH was so tight. People started to notice these deconversations were selling for double the initial acquisition price and jumped on the bandwagon. Over the next few years every block had a few of these projects going on because people followed the trend. Now what has happened? There are plenty of these new SFH sitting on the market for 200+ days and are selling for a few hundred thousand dollars less than they were a few years ago.
On the flip side, when you take a block that used to be 70% apartments and is now 40% apartments we reduced the density. So now rents are going up because there are less apartments available and the value of these 2-4 units is going up because there is less supply. Now that we reduced the amount of family units that could live in that area, the people are moving to neighboring areas where rents are still affordable.
My point to tell you this is that if you don't know the market and take other people's advice, you are the guy who is going to get approached by this deconversion strategy a few years in when everyone has already jumped on the bandwagon, and I can tell you it does not turn out well.
Spend this time narrowing down your markets and educate yourself on what is going on. Make investment decisions for yourself and not based on what is hot/trendy
I am doing a VERY BAD way of explaining what I expect and that's all on me. I am sorry.
It is my best guess that with all my inheritance (the $600,000 is just a part of it) I can buy a small house in a place where the roads do not ice over. I am 50 (by the way, you know all the times you were told as a young person that you would regret the things you were doing to your body when your older... all those people were right...) I have aches and pains everywhere. I want to live somewhere warm.
My main focus for that $600,000 is to create cash flow. And I think real estate is the best passive way to do that (If I wanted Income from Stocks I would invest in High Yield Stocks. Yeah you need to watch them like a hawk and have lightning reflexis to get out of them when they get delisted or stop paying but with the understanding that most Bull markets only last 4 years. In the last 39 years there have been "Corrections" drops of 10% or more 12 times... so... you can see why I think leaving the money in an IRA (you can not keep an inherited 401K from a non spouse) and doing the 3% rule when there is a 1 in 3 chance I would be making a withdrawal when the market is down is a pretty stupid thing to do.
I worked in the industry, I know things that 90% of the people investing don't. Not because they are stupid it's just they never thought to ask. I had my series 6, my series 7, my series 63. I KNOW that IRA's and 401K's are popular but did you ever really take a look at what the returns are AFTER taxes? Let alone what inflation (read :Devaluation of The Dollar) does to your original investment. (Hand to GOD... 40 years ago I would buy a snickers bar (that is the size of the $1.00 snickers bar today) and a 16 ounce Pepsi for $0.35. Today (If I was not on almost zero carb) the Pepsi is smaller and cost $1.25 and the giant snickers bar (that was just a normal snickers bar when I was a kid) cost $1.00 so the increase in price is around 642%... how many 401K's do you know that increased in value 642% in 45 years?
The buzz on the financial pages is that just to make ends meet most 401K investors are going to need 1,5 million in their 401K JUST TO MAKE $3,000 a month after taxes! How Insane is it to tell people to work for 40 years just to make what first year collage students make after paying off their student loan?
To make this clear...
When I get the inheritance (and GOD willing that will be a long time from now) I don't need to "GROW My Wealth" I am 50!
I have more than enough money out side of the 401K to buy my place in the sun and the very economical car (I read the millionaire next door... I am not confused what I had to do) I want to take the 401K money and create predictable Cash Flow.
Again... I realize I am VERY BAD about saying what I want... so to be clear.
"What would you do with $600,000 to create cash flow?"
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