Newbie with amazing opportunity to invest - need advice!

[Lauren N.]

Hi all! I've been diligently reading as much content and BP books as I could consume over the past few months. I've been personally interested in getting involved in REI for a while and have been getting educated. I recently discovered that my Mom will be receiving about half (parents are divorcing) the proceeds from an investment property sale this July or August. The land is in Portland OR and is under contract with a developer for several million.

We've spoken with an attorney about apportioning to the land to be part residential and part investment, as there's a primary residence, and about 8 acres of timber land. I don't know all the details of this, but I believe this is the high level plan for how to manage the tax strategy. They'll do a Section 121 on the residential, and then my Mom wants to execute a 1031 on her half of the investment property. We're working with an estate planning attorney, a 1031 attorney and a real estate CPA, so we're letting them figure this out for us. 

I'm helping her put together a strategy for how to re-invest roughly a $1million or so in capital gains on this land. She has no REI experience, neither do I, but we both recognize that this is a great opportunity to help set her up for cash flow and security in retirement (she's 60). She has "some" interest in managing the properties, but most likely we'll want to use property management company.

Her goal is to generate low maintenance monthly cash flow of at least $4,000 to live on in retirement. She owns her own house outright ($250k). She'll also get about $300k in cash from the sale. We're open to any kind of real estate assets at this point. My Mom is kind of risk averse but is willing to let me help her grow her portfolio over time so she can leave something for her kids. I want to put together a short term plan that can flow into a long term plan. My question for the community is this.....if you were in my shoes helping your Mom invest for retirement what would you do? Thanks in advance! 

Lauren 

[Charlie Fitzgerald]

I'll be the voice of the contrarian here just for a moment and add an opposing viewpoint for you to consider. Your mother is 60 years old and is looking for a "risk averse" manner in which to generate a minimum of a 4.8% annual return on an investment of $1,000,000. Not having the full benefit of sitting down with her personally and doing a complete Financial Needs Analysis for her, I will presume that her other assets you mention her are the total of her life estate at this point and I will further presume that she is debt free. Although you indicate that she would like to be involved in some capacity in the management of a real estate portfolio, you also indicate that the likelihood is that you will engage the services of a property management company. You share that neither you, nor your mother have any experience in with REI, and that you are being guided and advised by 3 professionals that do (which is good) although these three professionals make their livings charging fees for people that are engaged in REI activities and they know you have $1,000,000. The purpose of the investment is to give your mother retirement income ($4,000 per month) and "leave something for her kids".

With the exception of the avoidance of the capital gains taxes, and the possible allure of the future appreciation of a $1,000,000 real estate portfolio, and the potential to perhaps earn a return in the  % you seek, I personally do not feel that moving this money into real estate holdings is the highest and best use for the money, given the short term goal and long term goals of your mother and primarily due to the risk aversion mindset that your mother has.  Coupled with the fact that she has a much shorter time horizon at 60 than she would have at 30, 40 or 50, I would lean more towards getting this money into the hands of a fee based investment advisor and getting it deployed into exchange traded funds (or other suitable principal protected, low fee instruments) that will (if history is any indication) return her much more overall than the real estate portfolio will (if history is any indication), in a completely principal protected environment.  Taxes!  Yes, she is going to pay taxes.  But the far greater returns she will likely realize not investing into real estate will replace that cost much quicker than the anticipated returns on a real estate portfolio will replace the fees associated with that asset category, and the utilization of a property management firm to manage the portfolio will come along with an average annual and ongoing cost of 10% per year...every year, where as the taxes are a one time hit.

I'm advising you to consider this alternative and to engage the rest of the sibling group in a conversation with your mother as to the overall wishes, desires and individual and collective thoughts on the matter at the same time.  It would not take much of a market correction in real estate (especially commercial real estate) to decimate a $1,000,000 nest egg AND the portfolio it was used to acquire.  I would be more inclined to make sure that the money coming to your mother now was invested in a manner that protected the total of that sum for the remainder of her life, generating whatever means of annual income it is able to generate in a principal protected, relatively low fee environment, and at the time in the future when those funds become legacy assets for you and your siblings, that's when you and your siblings should do with it what you want to do, given your individual circumstances, financial needs, dreams and desires at that time.  Presently, the highest and best use for that money in my opinion, is not to try an do both. 

Hope this helps.