Inheriting a house, what should I do with the cash from the sale?

Question

Hello all,

First, a little about me. I am 33 years old, married with a son who will turn 2 in two weeks and live outside of Dayton, OH. I have a Business Management degree and am currently working toward my MBA in Healthcare Management. I have a little experience as an investor in a couple of flips, but haven't purchased my first investment property of my own yet. I have listened to just about every episode of the podcast, and read every book I can get my hands on.

My REI goals are to have more cashflow from (mostly)passive investments than W2 income within 5 years, and to be able to fund a lifestyle of travel and amazing experiences for my family. My dad worked all the time when I was growing up, so I want to be there for my son as he grows up. I want my RE portfolio to be passed to my children some day to give them the safety and security to pursue their passions regardless of income potential from their jobs.

I will be inheriting a house soon that is valued around $300k-350k and is paid off. My question is, what would be the best use of this capital? Should I use it as a downpayment on a single apartment building? Several down payments on turn-key properties? Or several down payments on properties to BRRRR? Becoming an investor is obviously an option too, but I like the tax advantages and long-term wealth building aspects of owning property.

I know that these are personal questions, and I am leaning towards an apartment building in my initial thought process, but I want to hear your opinions based on your experience. I am well aware that the first property is key to launching a successful REI business, so what do you think I should do?

Thanks in advance!

- Ben

Thomas Rutkowski · Answer

I think this is a great strategy! The problem with equity, whether its paying off a house early or inheriting one as in this case, its like putting cash under a mattress. It doesn't earn a rate of return and its not liquid.

Robert is showing you a way to derive two sources of revenue from this asset. Rent it out and generate rental income. Access the cash with a HELOC and put that cash to work.

You can get as aggressive as you want with that leveraged money, but I think that with the market as high as it is right now, the safe play withleveraged money would be to simply create a nice, safe interest-rate arbitrage. Private lending can get you anywhere from 7 to 15% on your money in a protected position. What do I mean by protected? A loan is secured by an asset. And usually the loan is much less than the asset's value. There should only be two outcomes: loan is paid off and you receive your interest or borrower defaults and you liquidate the collateral.

There are ways to create additional arbitrages off the same asset as well. Too much to explain here.

Dave Foster · Answer

@Alex Olmo, because of the step up basis he'll receive at inheritance @Ben Miller will probably get that house tax free.  So there will be no need to do a 1031.  At this point he doesn't have those tax mitigation issues.  He's only got to decide where the nexus is between his preferred investing wheel house and maximizing ROI.  Hopefully next time around it will be a 1031 situation!

Robert Gilstrap · Answer

Why sell a property you already own? Rent the inherited house out (assuming it's something that can be rented) so that brings in income and then since it's free and clear put a 1st lien position HELOC on it so you have access to 80-90% of the equity in it and use that equity to leverage purchases of additional property.  Then as rents come in on the additional rental unit(s) you pay down the HELOC and get accelerated repayment on that, rinse and repeat.  Depending on your leverage position and the numbers you can also put HELOCS on the properties you bought with the original HELOC for additional access to capital.  Just be on point with your numbers since you don't want to build a house of cards over leveraging.

Nathan Gesner · Answer

You can get a lot of different answers so think them through before deciding.

If it were me, I would sell it and buy a multi-family so I could maximize cash flow. However, I have a lot of experience managing rentals and could absorb the workload without batting an eye.

However, your market is just like mine: very few multi-family opportunities exist. I also suspect you have little/no experience managing rentals and taking on a multi-family or multiple single-family homes could be too much too soon. A mistake like that can derail your investment plans.

Ideally, you can look for a large multi-family in a hot market. For example, it took just a few minutes to find a 16-unit property in Dallas for $850,000 with a cap rate of nearly 10% and annual net income of $80,000. You could put 30% down and still have money saved for emergencies. Hire a solid property management company to handle the work for you and just collect the income. You'll get a much, much better cash-flow than you would spending the same money on single-family homes.

Andrew Syrios · Answer

It's really hard to say from afar. I would say that if it makes for a good rental that will cash flow, refinance it and use that money to buy more. If not, sell it and use the money to buy better rentals (which at that price point, it's probably not going to cash flow). As far as what to look for, it might not be a question of either/or, keep your eyes open and look for the best possible investment you can find. I would probably try not to put it all in one investment, but I wouldn't shy away from multifamily either.

Antoine Martel · Answer

I would take your cash, buy as many single family homes as possible, all with financing. $15k down for each property so you can get a bunch of properties, each of those will cash flow around $200+/mo.

Ben Miller · Answer

Thank you @Gordon Starr and @Andrew Syrios for the solid advice.

As an update, we sold the house and have been looking for multi-family and small apartments to invest in locally (Dayton and Cincinnati). I found a 10-unit that had good potential cashflow, but due diligence turned up a few things that caused us to look elsewhere. So we're still looking! I wouldn't be opposed to a JV deal for our first one to learn the ropes from someone with more experience, so if anyone out there has a solid investment but needs a HML to get the deal done, I'm all ears!

Gordon Starr · Answer

Hi Ben,

Your doing a smart thing by asking for opinions on this. Your cash on hand from the sale of your property puts you in a powerful position. Whereas 300k gets you one sf house in yellow springs, it could get you perhaps seven finished SFs, or four duplexes, or three quadruplexes in Dayton. That is without any leverage. You could also get a single huge apartment building like you were thinking.

The trouble with having it all in one building is that if something goes wrong with that deal, you have no other to sell. My advice would be to start small with something you can handle in your spare time. Find a PM that you are comfortable with. Get your feet wet. The A neighborhoods are overpriced for rentals in my view and the better B neighborhoods are increasingly becoming so too. Make a highly leveraged bet on these markets, and every month you may be in the uncomfortable position of trying to figure out how you will make the mortgage payments.

Charlie Munger famously wrote there are three ways to go broke: Liquor, Ladies, and Leverage. Say you leverage 70% LTV then the value drops 30% AGAIN! Then its Brrrr like in Brrrrroke or Brrr like its freezing out here. Whereas if you have four duplexes and no debt, you have no problem and cash flow around 3000 per month.

Food for thought..

Robert Gilstrap · Answer

@Ben Miller Customized home sounds nice to me but obviously you know the situation best. I like the idea of renting your home out and moving into this home. Fire station being 100 yards away doesn't sound bad to me. The whole point is to figure out ways to creatively leverage the assets under your control to maximize your overall return.

Inheriting a house, what should I do with the cash from the sale?

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