Came into a lot of money - What should I do with it?

73 Replies

I recently inherited a big chunk of change. I'd rather not disclose the full amount but I do pretty well in my day job (software sales), and it's about 8x the most I've made in a year. For now a sizable portion of it is locked up in a fully paid off brownstone in Boston, but I expect to sell that within a year or so. About 15% of it is liquid now.

Here's my question: What should I do with it?

Points of consideration:
-My family and I don't need the money or cash flow from real estate we'd use it on right now. We live below our means already, have very little debt (70% equity on our primary home, 1 rental property with about 60% equity), no credit card debt, and bought our cars in cash. 
-I love real estate. I love the idea of having someone else pay our mortgage and gaining wealth through cash flow, appreciation, and debt pay down.
-However, the current real estate market feels super overheated...nothing cash flows except in Detroit, Ohio, or Memphis. Yuck on the appreciation front.
-Cap rates are absurdly low, and there has to be a correction at some point. But interest rates are also crazy low, so even if prices drop, could lock in a low payment.
-I've done a ton of research into multi-family syndications (interviewed 15 of them) and invested in 3 of them so far. Big national syndicators, many on the BP forums.
-I live in the Bay Area and am from Boston...I don't really know other areas of the country aside from some basic knowledge of places like Indianapolis and Phoenix.
-I'd like to retire in 12 years (at the age of 52)

Scenarios I've played with in spreadsheets:
-Highest long-run returns - Investing it all in syndication deals. IRRs of 14-16%, which seem pretty conservative, provide a huge amount of wealth if I just keep re-investing it.
-Taking 1/3 of it and buy 5-6 properties with 50% down and 15 year mortgages. The income alone from those properties would be enough to live on in 15 years and they'd be cash flow neutral for the first year or so. Take another 1/6 and buy a MF here in CA on a 30 year mortgage...cash flow neutral to start, but gets me into the high appreciation market of CA. Take the other 1/2 the money and do syndication deals or invest in the stock market. 
-Do some combination of the above but leave 1/2 to 2/3 of the money in cash and wait for the downturn for some cheap real estate. I love the idea of getting cheap real estate but am I just missing out on gains until the downturn? What if we have low interest rates, low cap rates, etc. for 4-5 more years and I miss out on the appreciation, debt paydown, and cash flow?

I'm sure there is no "right answer" here but would love everyone's input.

Why start "gambling" if you don't need the money? Id throw 70% in a heavily weighted bond index fund, 15% in an index fund that follows s&p 500, and the other 15% in REITs or your own property ventures. If you haven't done much property investing, why not start out small locally, and learn from your mistakes while they are still small? 

Have you looked at buying vacation rentals in areas you like to visit?  with the ability to put large down payments down.  I'm sure you could hit a number that would make them cash flow and when you vacation there.  mm. mmm.  I mean when you check on your property its a business expense.

@Alan M.  

First let me sorry for your loss.  Second, congratulations on being in solid financial situation without the inheritance.  As you said their is no one "right" answer so I'll add my thoughts based on experiences below.

Points to consider first...

- You are planning on retiring in 12 years.  From a life stand point it's not really that far away, I am also 40 years old, and life is going incredibly fast.  I try to enjoy my family as much as possible now, while balancing long term saving/investing for the future.  

- You are living below your means so the inheritance ,I'll assume, is between 8x~16X your yearly expenses.  Typically people in the "FIRE" community value time and flexibility/freedom very highly.  This inheritance can "buy" you more time.  If you paid off your primary residence and/or the rental property what would this do to your living expenses?  Could you retire earlier?  The emotional side of being debt free is pretty remarkable.  You mentioned paying cash for cars, so I get the feeling this could be important to you.

- You have about a years worth of pay that's liquid (15% x 8X yearly pay total inheritance).  If you invest in the stock market and then find a real estate deal to invest in, prior to selling the brownstone, then pulling the money out in less than a year would trigger short term capital gains/losses.

- Have you considered a DAF (donor advised fund).  You could make a large contribution this year or next and enjoy the tax benefits while allowing the investments to grow for charitable giving in the future. 

- Keeping the brownstone.  Not sure what part of Boston it is located in, but does it make sense as a short term or long term rental?  Being fully paid off, it may.  My family has a paid for vacation rental in Cap Cod.  We use it for a vacation every year and then short term renters fill the other ~11 months.  

Beyond these points, your thoughts of diversifying the money into different investments is the correct thing to do.  I think if you are comfortable with the risks of the different investments, then it makes sense for you.

Good luck and congratulations.

@Alan M. I love this post on a different bunch of levels. You obviously have put a lot of thought into this with some of the different scenarios you posted. I'm not a big fan of just sitting out, however I do believe at some point we could see stronger returns. I might recommend taking a portfolio approach and "averaging in". If your goal is to own 6-12 houses...Buy one house a year for the next ten years. If prices get crazy low maybe be a little more aggressive in that period. But don't be super aggressive in this market, put in offers that make sense for you. If the seller accepts it, than great! If not, keep looking. Also, set up some alternative sourcing channels outside the MLS.

Find out where the brownstone is in Boston, it could make sense holding onto it. The rental market around here is insane and believe love those type of houses.

@Alan M. . Honestly I’d slowly sell the inherited real estate over the next year or two and invest it in the stock market.

I believe you’ve posted before and from what I remember this isn’t near where you live. If that’s true I would sell it and invest it in the stock market. Then it’s truly passive. Also if you sell now you won’t pay capital gains taxes due t stepped up basis

@Alan M.   I'd avoid cheap rentals as they are a lot more work.  If it was me, I'd wait a bit and talk to an accountant about my long term plans: retirement, pay off my house, etc.  You sound like you have your finances in order which is great.  If you are planning on managing the rental(s) yourself, definitely buy a solid house in a good area.  I prefer single families to multifamilies, but that is because it is what I do.  this also gives you the option later on of selling them off one by one.

you could also hook up with a really good HML in the bay area and be the bank.. for part of your portfolio.

you can do these on your own as well just need a RE broker to do your disclosures for you.

Also land bank.. find some dirt in the path of progress big money is made in these deals for those that don't NEED cash flow day one.

@Alan M. sorry for your loss. Lot's of good points here, I'll ad some thoughts: real estate is not for everyone; my answer to the famous question "what set's successfull investors apart from those who fail or give up" is "Passion for what they do!" - you can be successful with any of the approaches, but at the end of the day you need to find something you enjoy. Otherwise you won't stick to it long enough. If you like being hands on like me, you'll choose a different strategy than if you want to be as passive as possible and just want to be the bank for someone else. (great proposals by the way from Jay).

Another thought is be very careful who you partner with. I have seen more partnerships fail than succeed. The ones that have been successful often times have three things in common - a very long standing previous relationship, opposite skill sets that complement each other and probably most important: similar values. If your values don't line up you will make different decisions on issues that arise.

@Alan M. I have a high end mf in downtown Pleasanton I’ve been considering parting with but it would be at the absurdly low cap rates you are seeing right now. Pm me for the address and you can drive it if your interested.

If I were you I’d sit on that cash and wait for the looming downturn. Be it 1 mo or 1 year away, cash is king and assets could be on sale soon.

@Alan M. there’s still plenty of cash flowing real estate in Boston if you’re looking and networking for deals in areas that still have plenty of room to improve over the long haul. That’s where I’m investing and doing so with a long horizon for that change to occur while cash flowing nicely along the way. Don’t think you have to go to the Midwest to cash flow deals.

@Caleb Heimsoth

Yeah, I posted something similar around selling it holding onto the Brownstone. Now more trying to figure out what to do with it once I sell.

Plan slowly, act quickly :)

@Zac Ballin what areas of Boston are you referring to? I would be curious

I used to own in Allston but now the appreciation has outpaced the rents and even the same unit wouldn’t cash flow.

I would put money to work in an index family of index funds, you need to study how much risk you are willing to take, based on age, and do you need the money into the short term.

I like Vanguard I understand the company. when you invest 500k or, more you can get a free advisor or very low fee with vanguard they can walk you through what to do based on what you tell them on risk tolerance.

Vanguard is a trillion-dollar company they will cover you if some one is a loose cannon causing to lose money based on fraud type actions that works for Vanguard.

Then I would hire a company that you do back ground checks on a company that can help you invest in real -estate. If you are not sure on how to do a back ground check on a company to help you invest in real estate, check with a lawyer in the field.

I would invest in ‘A’ type of properties no need to have risk here.

@Alan M. Personally I’d keep the brownstone because it sounds like a property that would be hard to replace with something better on the open market, but if you’ve already decided to sell, the smart move is to take the money and park it in a high dividend yield index fund comprised of aristocrat stocks like SPDR S&P Dividend ETF. Unless you have an appetite for risk and want a second job, or bring real estate expertise to the table along with a work ethic and don’t mind running a real estate investing business that will enable you to beat the stock market, in which case you should buy into a bunch of syndications and rentals. But I would probably just go with the passive dividend income from aristocrat stocks. So much less headache and risk.

Originally posted by @Alan M. :

@Caleb Heimsoth

Yeah, I posted something similar around selling it holding onto the Brownstone. Now more trying to figure out what to do with it once I sell.

Plan slowly, act quickly :)

From your post for when you want to retire you’re around 40.  

I would take the same proceeds and invest in 65-75 percent stock and the rest bonds, then let it ride. Real estate is not really what you want to be getting into unless it’s totally passive and I’ve seen a lot of dubious syndication offering lately so if you go that route, vet vet and then vet some more the sponsor and deal 

Sorry for your loss.

You can get into RE Syndication and get mailbox money every quarter. Maybe now you are an Accredited investor so you have complete access.

Purchase REITs that pay dividends.

or..just wait and think about your choices before jumping into anything.

Keep the brownstone in Boston because that will appreciate.

@Alan M. . First step, don’t tell anyone you came into a lot of money. Plenty of people will have lots of ideas on how they can invest it for you. Second step, educate yourself and begin learning about investing in your area of interest. Third step, take action.

@Alan M. when I’ve found myself struggling to decide on a course of action (including, deploying our own capital)... It’s been most helpful to “slow things down,” and clarify big picture wealth and lifestyle goals, both for our own family as well as others who may need our assistance.

Example: for my own family, we have a target for monthly passive and active real estate income. We are on track to hit this target on our planned timeline, but still have a couple years to realize it.

With this^ goal in mind, I have walks away from some investments where the one of the variables doesn’t align to that monthly real estate income target (e.g. Hold period, payout frequency, return, passive/active time investment alignment).

Bottom line: when a large cash influx occurs, I build in a required planning exercise with my business partner (and wife), to help us avoid jumping to action before we’ve align said action to our “big strategy”

What is/are your goals?

good luck thinking through it!

I find it interesting the number of people who said to invest in the stock market (index or otherwise).

What I am going to say might be controversial. Most of the BP community is trying to build wealth or create wealth through savvy choices. For some, they have already arrived and there is no need to create wealth.

With that in mind ...

Pretend you had more cash than you new what to do with. Seriously more. Hundreds of millions in spare cash just sitting around being eroded slowly. The objective would then be to protect the capital rather than creating wealth. 

Buffett's Rule #1 - Never lose money. So, the goal then is to protect the principal rather than worry about the best yield or the best appreciation. Being in cash is better than buying into the wrong investment. Buffett is generally sitting on cash while waiting rather than worrying about rushing the cash into something which is not a stunningly good deal.

If you already created wealth or have all the wealth you need, focus on high quality assets which will weather the test of time. Up, down, sideways, etc. The yield matters less when you are protecting the principal. Higher quality, stuff which is easier to sell in a down market and similar.

I have no idea where the brownstone is. Boston is a fine city. A quality property in the right area is very hard to beat. With zero debt, it can be a great store of value (inflation hedged asset which produces an inflation hedged income stream). The friction of selling and buying something else plus the possible tax implications might tip the scales. 

Note: Given the building was 'recently inherited', there may be little to no tax implications if the property was sold.