Updated over 3 years ago on .
How Can I Generate Passive Income from an Inheritance
Today we’re going to be discussing how would you structure your passive real estate investing if you just received an inheritance? Well, in this episode, a listener asks just that and Charles discusses what he would do if he received a lump sum of cash and wanted to generate passive income.
Talking Points:
➡ We regularly receive questions from listeners normally they are questions we have answered on other episodes but a listener recently reached out to us and asked what I would do in their situation.
➡ I will not read the entire message but the question reads like this “I recently inherited a significant amount of money from a grandparent that passed away and my wife and I are not sure exactly how to invest it in order to generate passive income. We own our home but have never invested into a rental property and our goal is to create passive income”
➡ Since they mentioned passive income and not the goal of owning and managing properties; I would suggest they passively invest in a real estate syndication and since they asked for my advice; I will explain what I would do in this situation.
➡ First off, never invest into anything that you do not understand. It is important to be educated about anything that you invest into. If it is too complicated; it is best to hold off until you understand the investment, the strategy and the risks.
➡ Next, do not invest more than 5% of the inheritance into anyone property or investment. You want to make sure there is diversification; operator diversification and geographic/market diversification. Now, this becomes difficult if the inheritance is under $1 million since most syndicators will require a $50,000 minimum investment. But the point is to diversify.
o What is operator diversification; at Harborside Partners, we partner regularly with several operators who concentrate on specific markets and specific real estate asset classes. This allows our investors to access deals we are co-operating and investing into and join alongside us. If you are investing with an operator that only works with their own deals; you do not have operator diversification.
o Geographic diversification is also important. You do not want all of your investment dollars in one geographic area if there is a natural disaster; now you will probably be made whole and then some because of insurance and rebuilding etc. But your income might be paused.
o Market diversification is important and COVID is a prime example; what happens if the next pandemic occurs or there is a recession that hurts certain markets more than others? What happens if a market you are investing into imposes new laws like rent control? You want to make sure that all your eggs are not in one basket.
➡ Start small, invest passively into one deal and see how it goes. For a new passive investor; it can be a daunting experience since you complete some legal forms; wire money and wait 30 days until you receive an email that says you closed! Then you wait until your first monthly update; and then you want until your first distribution hits your bank account. It is important to understand how the process works before going all in.
➡ After you understand how the process works; you can develop some sort of criteria that you are looking for; I want to be in 5-10 markets; I want to have a cash-on-cash return of 7%-9%; I want to be in class B properties etc. This makes it much easier to immediately say NO to certain deals.
➡ Another point that I think is important, is when you come into a large sum of money; especially an inheritance; just stick it into a bank for a few months while you come to terms with it. You lost someone; this is probably the most amount of money you have had in cash before and it is best to let that sink in before you start investing. This is a great time to increase your real estate investing knowledge and do your research.
➡ I would also be weary of people pushing you to invest right away, or pushing you to invest a large percentage of it or invest into some financial vehicle that you have minimal knowledge of.
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