1-Million $ Question - Investing Inheritance

24 Replies

Hello,
I'm new to the investing game and I'm an big fan of BP. I'm going to give as much information as possible, but also cut a long story very short. 

My father will be given his pension when he turns 70 1/2 in a couple of years. He will be receiving over 1.2 million dollars.

He does NOT need it as he is getting income from varies sources (401k, Veteran's , SS, etc)

He wants to give it to us, 4 children (ages 44/40/34/32), when he passes away, but in the mean time invest in such a way that all of us (children) gets passive income. He asked for my help.

I suggested that he move the funds to Vanguard (Custodian), leave the account under his name, simple 60/40 split on some Index funds, and use maybe half $600K of those funds to buy a few multi-unit properties.

Do you think this is a good strategy?

I appreciate any and all suggestions. Thanks! 

A.

Since you are new to the investing game, I would consider passively investing with a more experience operator, like in a handful of apartment syndication deals. Then, once you've educated yourself more on real estate, you can use the profits to invest in your own deals!

@Aram V. first of all, congrats to your father on the successful career and a personal thank you for his service! That said, it's not a bad idea to do mostly index funds. If real estate is your asset of choice for the remaining funds, I would suggest doing what you know. If, however, you don't know real estate but still want to invest in it, I would second @Theo Hicks  and say to place your money with an experienced operator. Syndication is a great option (you can even diversify by asset class, geographical location, and/or Sponsor), but you can also lend your money to other folks doing flips and the like, note investing, etc., all of which are "passive" compared to some traditional real estate routes.

And best of luck!

Originally posted by @Steve B. :
@Aram V. If you actively manage any investment, whether it performs well or not, I can’t imagine it won’t cause perpetual family conflict and drama between 4 siblings

Hi Steve,

Thank you, Yes, I thought of that also. Dad said its not up to them to decide. However, I do have great relationships with my siblings.

Originally posted by @Thomas S. :

Actual real estate investing is hard work and high risk. It is about the farthest from passive you can get. Tell him to keep his investments in funds. 

 Good Point! I should have mentioned I would be the one managing any  and all real estate deals. 

One of my in-laws was in the exact same situation where the siblings inherited a bunch of money from his father. The entire family is very close-knit and tight and he was oldest so in charge of investing it, and he put a lot of it into real estate that he managed. Real estate is not like investing in the CD and there is risk. Everything was perfectly fine until it wasn't. The great recession hit and all of a sudden some of the deal started looking pretty bad. Some family members were okay with it, and some were not. Some family members really needed that income, and no longer were getting it. Some members were demanding that they sell, and others that they hold. Some family members had spouses that were not as tight as the siblings, and caused issues. If you decide to go ahead with the plan, just understand what you are potentially getting yourself into. Money is the number one cause of divorce, and in my opinion works the exact same way on any family…even a close one.

Anyway, to answer your question: $600,000 is not going to go very far purchasing a diversified portfolio multifamily properties if you do it all yourself. Plus you're going to have a lot of individual property risk (something goes wrong with that particular property), individual market risk (something goes wrong and that particular city), etc.. To eliminate those risks, you could invest it in a syndication/crowdfunding deal. If you put $25,000 into each deal, you can diversified into 12 different properties in completely different areas of the country (and potentially more if any one of those investments is actually in a fund to get even more protection).

The downside is that you do have to feel comfortable vetting a manager and turning over control. So if you have your mind set on managing yourself then perhaps this is not the option for you. On the other hand, if you vet well, you will end up hiring a manager that has years more experience than you can ever hope to acquire, which may save you from making very expensive mistakes. 

First of all, there is tax consequence. He will be paying say 25% in taxes (roughly Fed & State) that leaves for example just $900K.  He needs to withdraw a percentage of his fortune pension and 401K at age 70.5 and each subsequent year but he does not need to withdraw all of it.  

With $450K(half of 900K)  I am not even sure what you can do with the funds.  Know Vegas, Austin, Charleston and west coast prices MF are well over your allocation. Midwest is doable. The appreciation will be lower.  

If you all have children it is better to give each grandchild a tax free gift 529 Gift for 5 years as future education fund.  Frankly, if I was a grown up I would not mind receiving funds for my children but will decline any monetary gifts from my parents. 

Sam Shueh

Imagine you were 2nd oldest and one of your siblings was put in charge instead. And they were big on bitcoin investing. They were sure they could make money putting your dad’s $400k in to bitcoin. Your real estate is to them as someone else’s bitcoin would be to me. you’d love every check you got until you found out through no fault of your sibling it was suddenly worth $200k. 

Real estate is a black box to most people who aren’t involved in it. I would never want to invest more than my portion of the future inheritance in a real estate deal. There’s just not enough extra upside in it. 

Yep I agree with the others. Do not buy real estate with your/their inheritance. You don't have enough to diversify and you should be lower risk with this money. 

@Aram V. If there are multiple children involved that will be chopping up this money when he passes no way in heck I'd buy real estate with it. Stick it all in vanguard and let it chill until it's time to divide the estate. There are to many ways a real estate deal can go sideways. Use your own money to buy some investment real estate for yourself.
He could convert this qualified money into Roth IRA’s. Name the four siblings as beneficiaries Once you guys inherit the money you can make that money last into perpetuity with hard money lending. You could also keep the money intact in an IRA and make it last into perpetuity with lending as well. Just an idea. I get my parents 8-10 percent pretty conservatively.

@Aram V. Another option is to buy a couple of very good properties in places like Austin Texas that is doing very well. Hire a good third party management company to manage it for you.  With the sorta money that you are talking about you could buy very good properties in primo parts of town and cash flow in areas that have historically had very good appreciation rates. 

The underlying advice theme suggested on here is to do what they do where they do it.  

Figure it what you do well, better than anyone else, whatever it is,  and do it where you are.

@Aram V. I think that @Ian Ippolito is right on point: don't actively manage the money/the investments yourself if you want to stay close with your siblings. When things go south, issues arise even among family members.

Invest passively and diversify. Put a portion in the stock market via Vanguard Index funds, consider ETF's maybe through such sites as Betterment or others and put some fraction of it into RE. You can diversify into equity via syndications and debt (short term less than a year fixed interest). 

Best!

@Aram V. he could also put it in a self directed IRA or Solo 401k and invest with that. If he wants to give it to the kids to invest he may have to pay taxes to transfer the money.

I agree with @Theo Hicks . If you have $1mm sitting around I wouldn't jump in and buy a single family. A small portfolio of those is just another job. That same money invested in apartments could make a healthy return and could actually be "passive".

As already stated, be VERY careful taking over the investing of your sibling's inheritance. I've recently seen a "close knit" family basically fall apart over a couple thousand dollars. It's insane what people will sacrifice for a little bit of money. Family should always come first.

@Steven Hatcher , I noticed you mentioned lending. Would you suggest he use a portion of funds to become a private lender and earn a decent interest rate. If that is the case and he used, say 200k, lending and obtaining returns, he could essentially earn a pretty decent interest repeating that process....... Do you agree?

Spend a few bucks to get some  professional advice as to the tax implications, what to do with it, and everything else. For that kind of money it is a good investment.

If it were me I would research 1) the best markets, 2) the best sponsor teams, and then, 3) the best deals within those two contexts. Number 1 is capital preservation, then diversify into solid deals. The reason people on this thread advocate syndications is that they scale nicely and risk can be managed. I'm an advocate of that approach and am doing this myself with my own resources.