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Jason K.
  • Real Estate Agent
  • Tucson, AZ
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Ive got a 300K inheritance coming.

Jason K.
  • Real Estate Agent
  • Tucson, AZ
Posted May 13 2023, 17:09
Do I spend it all on realestate and risk paying 50k in taxes or should I take and annuity and thus end up with a mortgage.  

Any thoughts out there??

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Chris Seveney
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Chris Seveney
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Replied May 13 2023, 17:55

@Jason K.

Here comes the give it to me give it to me posts

Honestly this is the worst place to ask for advice as no one on BP should be providing investment advice (especially if not licensed to do so)

Without knowing anything about you it’s impossible to say what to do with it.

I would go to the casino and put it all on black.

It was not my money to start with so I would let it ride.

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Jay Hinrichs#1 All Forums Contributor
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Jay Hinrichs#1 All Forums Contributor
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Replied May 13 2023, 18:13
Your a real estate agent.. so probably best to do what you know best..  or for now you can open a brokerage account and get 4 to 4.5% basically risk free.
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Clark Peterson
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Clark Peterson
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Replied May 14 2023, 12:40

Hi @Jason K. it's impossible to say what the "right" thing to do is without knowing much more about your overall financial picture. My understanding from your post is that your inheritance is in cash. Two general things I can say are: (1) Ensuring you have a balanced portfolio between financial assets (stocks and bonds) and real assets (homes, property, etc). For example I would ensure that you're maxing out your tax advantaged retirement accounts (Roth IRA, Traditional IRA) with a broad and balanced exposure to financial assets like a target date fund. (2) Don't think about taxes as a "risk". They are a cost of doing business when you've reaped a reward. Obviously that said it makes sense to work with a financial and tax advisor to ensure your assets are being managed in a tax efficient way. Good luck!

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Steve Vaughan#1 Personal Finance Contributor
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Steve Vaughan#1 Personal Finance Contributor
  • Rental Property Investor
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Replied May 14 2023, 13:06

I'd pay off any non- real estate debt, then RE debt higher than a 5% rate, then let it ride in a money market account and get my 4 ish % risk and hassle free. 

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Randall Alan
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Randall Alan
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Replied May 14 2023, 14:05
Quote from @Jason K.:
Do I spend it all on realestate and risk paying 50k in taxes or should I take and annuity and thus end up with a mortgage.  

Any thoughts out there??

 @Jason K.

This is a long... but hopefully of some value....

I think it is fine to offer advice on the forum... but it is incumbent on you to consider all your options and realize that no one here is a fiduciary, and is just offering their (possibly lopsided) opinions - so take everyone here with a grain of salt and definitely cross check the direction you choose with other professionals before you go and do anything big &/or risky.

With that said, it starts off with risks and rewards.  Putting your money in the bank is no risk as long as you keep it under $250,000... and quite frankly the reward is probably better than the stock market as of late (lol!).  The best high interest savings accounts are paying 5% right now.   Not too shabby all in all, when cash on cash returns are probably only a few percentage points better at best these days on a cash purchased property.

From a rental real estate perspective, once you understand that leverage (ie. financing your property) allows you to literally multiply you cash on cash return by a factor of 3 to 4, the typical returns on real estate start to look much more attractive than many other investments.  It goes without saying that there are obviously more risks involved than the 'zero' with a savings account.  The challenge in the past year is that interest rates have doubled... which has moved a lot of potential profit into the "interest column' of a leveraged property... negating much of the incentive to invest at the moment.

Real estate is cyclic though... so this will eventually let up... and real estate will again look more enticing.  To give you some perspective, we bought the majority of 37 property portfolio between 2018-2019.  Our cash on cash return was in the 20%-30% range buying C class properties with 20-25% down.  Just incredible returns!  Some of our properties we bought with cash for as little as $50,000 and they were producing a 25% cash on cash return(!!), meaning that the income in 4 years would pay off the entire investment.  Those times are a very distant memory it seems right now.  Prices have doubled in the past 2 years, and so have interest rates.

I would suggest that you recognize that real estate can play a big role in getting some good returns... probably just not right at this very moment unless you just happen to find the diamond in the rough out there.  When interest rates drop back into the 5's and hopefully 4's the situation will have shifted to where investors will see more opportunity... but a lot will depend on housing prices.  At the end of the day (now or then) it is literally just running the numbers and seeing if a deal will cash flow and how much.  There are so many ways to play the real estate market.  I see people setting up boarding houses and making 3 times what a long term rental will make a month.  Short term real estate will also out perform long term rentals... as long as you have a good occupancy rate.  Each market segment has its own set of pluses and minuses.  Short term rental comes with constant tenant turn-over and cleaning expenses, and fees to your platform you advertise on.  I don't do boarding houses, but can only imagine 6-8 individual tenants trying to share common space and what fun that would be to manage!  Long term rentals are more calm than either of those I imagine, but come with lower profits as well. 

This is where the story turns back to risk and reward.  If a long term rental property cash flow's $100/month after expenses and a maintenance reserve... it's still a bad deal in my book.  It's just not worth the risk to make $1200 in a year.  One vacant month, one hot water heater replacement, one AC going out and your profit is not only gone... you are upside down pretty much... maybe for a couple of years if you have to replace an AC.  So you need your profit margin to make sense and outweigh the risks with long term rentals.

You mention 'Annuity"... which is an 'interesting' alternative use of your money.  I'm personally really against annuities in their traditional form.  I'm not sure I that is what you are really talking about... but annuity's are an insurance product... and I'm just working off that premise as to what follows...  I would (personally) discourage you against an annuity.  Once you buy it, you are basically locked into it.  You need to really run your numbers and compare the return on your annuity, with the potential return in real estate or other investments.  Start off with recognizing that most insurance companies turn around and put your money into other investments to fund your return.  Along the way they will 'siphon off' profit from that return and give you some lesser amount of return each month.  Think about it... it's the only way it makes sense for them to offer them.  You are basically inserting a middle-man between you and your money and (more or less) paying them a fee to be there (ie. their profit).  If you lack the basic control to manage your money... maybe it makes sense.  Maybe as a minor part of a bigger investment strategy possibly?  The insurance company knows for a fact that long term they are going to come out ahead investing your money.  Yes, they take on some risk... but you have to know that their 'bean counters' have calculated that risk to make sure they make money.  If they are making money on your money...  you aren't making that part of the profit.  Go back to the percentages I listed above on what real estate is doing for me in my portfolio... returns in the 20% per year range... that is real estate's potential.  An annuity will never ever touch that level of return, and would be a poor investment comparatively in my book.  The upside of an annuity is that it is low risk (for you) compared to real estate.  You get to sit back and watch a monthly check role in. Just know it will be really small compared to real estate.  I ran the numbers for fun... $250,000 annuity earning 5% with an inflation rate of 3%.  After 1 year you could withdraw just over $21,000 on the calculator I checked out.  

Now let's look at a super quick real estate example.  Buying $100,000 houses for $25,000 down each that rent for $1,200 a month that net $350/month in profit after expenses.  Greatly oversimplifying things, this would buy your 10 houses, each returning you $4,200/year.  That's $42,000 in positive cash flow.... but that is just one leg of the stool.  Hopefully your real estate is appreciating.  Maybe in 5 years, it is worth 25% more than now?  Now each of your rentals is worth $125,000.  That's an extra $250,000 in appreciation in your portfolio.. or $50,000 per year!  Along the way your tenants are doing this really nice thing of paying your mortgage each month with their rental payments... so your mortgage balance is dropping each year.  Let's say it's $100/month/property.  That's $1,200 per property or $12,000 per year of mortgage pay down.  Across 5 years that is $60,000 in mortgage pay downs.  On a yearly basis all of this adds up to $104,000 of benefit / gain you are accumulating on your investment. Did we mention depreciation?  You get to write off 3.3% of each of your property's initial value against your income each year on your tax return.  Did we mention that mortgage interest is also tax deductible?  So real estate has major tax benefits as well.  

How is your $21,000 / year annuity looking now?   And just to add insult to injury... the $350/month/door I mentioned earlier... our monthly cash flow across our entire portfolio is north of $675/unit/month after principle, interest, taxes, insurance and $100/unit/month maintenance reserve.  We've been very fortunate with timing and used some proceeds from sold units with high appreciation to pay off other loans, etc.  So try more or less doubling the $42,000/year if you have similar luck!  

I could keep going...  say you put $25,000 of your profit each year to buy another rental.  So in year 2 you would have 11 rentals, year 3 - 12 rentals.  Can you see the snow-ball rolling down the hill?!  Maybe you can see why I think annuities are a bad way to go!

Wish you all the best!

Randy
  
  

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John Morgan
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John Morgan
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Replied May 14 2023, 21:23

@Jason K.

I’d put 20% down on as many rentals you can find. It’s all tax free cash flow and they’ll appreciate well over time.

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Myeasha Jones
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Myeasha Jones
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Replied May 15 2023, 21:27

I would try to write off the 50K in business expenses if your a 1099 agent

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January Johnson
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January Johnson
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Replied May 16 2023, 08:24
Quote from @Jason K.:
Do I spend it all on realestate and risk paying 50k in taxes or should I take and annuity and thus end up with a mortgage.  

Any thoughts out there??

If you are self-employed (which I assume you are, as an agent) you should look into opening up a Solo 401K (see @Dmitriy Fomichenko's post on this.  He's an expert) and use the money to invest in real estate.  I'm not a tax expert, so ask Dmitriy.

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Jason K.
  • Real Estate Agent
  • Tucson, AZ
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Jason K.
  • Real Estate Agent
  • Tucson, AZ
Replied May 28 2023, 11:34
wow ALL great thoughts and info. Not only were my initial thoughts and intentions backed up by you folks but the additional advice I picked up was priceless.  I hope your all having a great memorial day weekend.
Thanks for taking your time to respond.

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David Bilandzija
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David Bilandzija
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Replied Jun 14 2023, 22:29

@Jason K. US Treasury bills are paying up to 5.2% on shorter term maturities.  CDs and high yield savings can’t compete especially given that there’s no state tax on federal bonds.   Safer than any bank or government on planet Earth.  Great place to park your money without any penalty on early withdrawal/sale.  At least earn some interest before you make a bigger investment move.  

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Mike Hern
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Mike Hern
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Replied Jun 14 2023, 22:45
Quote from @Jason K.:
Do I spend it all on realestate and risk paying 50k in taxes or should I take and annuity and thus end up with a mortgage.  

Any thoughts out there??

There shouldn't be any taxes on an inheritance. Have you talked to a CPA?

https://www.nerdwallet.com/art...

"There is no federal inheritance tax in the U.S., and only six states — Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania — actually impose a state-level inheritance tax. In 2021"



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Henry T.
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Henry T.
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Replied Jun 14 2023, 23:32

You lost me when you said risk 50k in taxes. What are you talking about?

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