What Do I do If I Inherit a large sum?

[Wade Alderson]

My father died 2 years ago and left everything to my wonderful step mother. My step mother has made it very clear that the balance of her estate is to be divided 3 ways between my sister, my sisters daughter/my niece, and myself. Part of the estate includes a 401K worth at this time just over $3,000,000. Because the stock market is a scam and I know that IRA's and 401K's are a rip off I am going to take the up front tax hit and cash out and after taxes I could maybe get around $600,000. My question is... when that very sad day comes and my wonderful step mother passes... what would you do with $600,000? I have read "7 Years to 7 Figures" and I like the idea of taking a bit of a short cut and buying the 75 unit apartment, or should I just bite the bullet and go with buying 20 single family homes, or should I think about all the garbage dealing with so many property managers and just take the middle road of "7 Years to 7 Figures" and buy two 20 to 30 unit apartment buildings and just use the cash flow until I can flip them for the 75 to 100 unit apartment building.

My wonderful step mother beat cancer 4 months ago, but now she has no lymph nodes and her doctor told her if she gets sick it might kill her. Right now she isn't feeling well, and if I had hair I would be pulling it out (I shave my head) but she says she is fine (she is a really tough woman and never wants us kids to worry) 

I am ALL ABOUT THE CASH FLOW I don't care about the take the money and party, go on vacation, or any of that other nonsense... I just want to do the right thing with the money, and then hid until my grief passes. And I want to make that happen as soon as I can so that my grief does not get in the way and I do something stupid like buying a condo in Costa Rica and thinking I can start a coffee farm, or even worse a hard wood farm. (20 years for cash flow... are you kidding me?) 

Any advice you can give I would love a heads up, think about this, you need to worry about that, kind of stuff.  

[Jay Hinrichs]

another option that you may like and we see many veteran landlords do is they will diversify into really good performing notes..

they get that monthly check they want but dont' have to deal with the day today of the asset.

also you will be able to look at some apartment syndication.

as well as teslas' 35k car is out in a few months.. buy one of those so you don't ever have to pay for gas again.

or better yet move to a city that has great public transit and car sharing and never own a car at all.

[Joseph ODonovan]

TBH, I like the idea of the coffee farm.

[Lee Ripma]

In order to create cash flow with 600k I would buy value add MF small to medium apartments in Kansas City (that’s the cash flow market I know, there are tons of others) with each one I would force appreciation by raising rents and cutting costs. Once I had raised the value significantly I would cash out refi or trade up into larger apartments. I don’t know how much monthly cash flow you need but I think you’ll be able to get it with 600k. The question really is how many times you need to trade up. I’ve calculated to reach what I want I’ll need 800k. Since I don’t have that I’m doing value add small apartments and will keep trading up and up until I get there. All apartments are the BRRRR strategy on a larger scale. Lisen to the podcast with Swanny he did what you need to do. He’s also very nice and helpful and would likely talk you through it on the phone. Good luck and keep us posted!

[Annette Hibbler]

You're right, stock, bonds and mutual funds are too unreliable. Over the course of history, the very best and solid investments are real estate. You could easily use small portions (use OPM such as loans and only have to cover the down payment) at a time to secure a variety of real estate investments from buy & holds, fix & flips and small to large scale MF units. We all remember the crash in 2007 that lasted a couple years. Unlike many other types of investments, home prices are back up nationally 5-8% depending on the state. Real estate is reliable because it always recovers and a historical trend that gains in value over time. That's just MHO. 

[Chizoh Uzegbu]

Get a solid team in place of tax attorneys - cpas - Get advice from them as oppose to us. Maybe search these forums about where to find one?

If you really want to invest in real estate - try owning a couple properties or 2 and see how you feel.

Hope all works out for you.

#cheers

[Jordan Moorhead]

It sounds like you already know what you want to do and are just looking for others to validate your opinion.

If I inherited that amount of money I would absolutely diversify in stocks, bonds, active real estate investing, passive real estate investing and other ventures. Passive real estate investing could be a great avenue to be in real estate but not have the huge learning curve.

From reading your posts it sounds like you want to be a landlord. I’d start now and buy a small multi family property or a few to get started. That way if and when you inherit anything you’ll be ahead of the learning curve.

[Jason Hartman]

Hi @Wade Alderson - This discussion would make for a good podcast, want to come on the show and discuss? 

[Rick Pinney]

Could you roll over into a self directed IRA? Avoid the taxes, and then find a lender who will use that as collateral to then buy other properties that cash flow that you can play with?

[Wade Alderson]

@Jason Hartman I am all in if you want me 

[Jason Hartman]

Great - let's do it this week. 

[Wade Alderson]

Will Do @Jason Hartman

[Rachel H.]

@Wade Alderson Interesting topic! Start with a small deal in a niche you feel comfortable with. Get to know the market. Build your team. Buy the property. Fix up the property. Fill it. And learn from the experience. If it works out, great! If not, you can get out of a small deal much easier than a large one in general. It may be wise to diversify some of the funds into other properties and/or investments. Good luck! 

[Scott Settimo]

What @Derek Domback said.

[John Kunick]

Wade, I totally agree with @Derek Dombeck said. I am a REI in Tulsa (in your backyard) that was fortunate enough to get into SFH using my cash flow from my primary job to build a large portfolio of SFH. But, I was also frustrated with the performance of my stocks, mutual funds and especially my 401k. So, I rolled the 401k into a self-directed IRA and now have a much larger portfolio of properties earning ~16% cash flow. I also sold a bunch of my stocks and bought both SFH and minority interests in MFH - just to get some diversification within the REI. I still have some stocks, but I no longer have ALL stocks.

Just wondering if you could use a SDIRA to avoid paying the taxes?  That would give you a lot of extra $ to build long-term cash flow.

BTW, I just retired at age 55 using the cash flow strategy you mention. I now just focus on the REI and collecting checks! You can do it!

[Nancy N.]

First you invest 100K with XXX or XXXX Wealth, then buy 10% gold/silver. Then add RE to your portfolio.

[Wade Alderson]

For all the VERY KIND people telling me to either use the 401K to invest in real estate or to roll the 401K into a Self Directed IRA... that is not what would work for me. I want CASH FLOW shortly after I inherited the money. It's my understanding that commercial property takes 3 months to close so 4 to 6 months in not so bad. Investing in SFH closing takes 1 month. If I wanted to wait 5 years for the money I would just put it in Life Settlements that pay 50%.

[Steve B.]

How is your track record of managing money and investments currently. I was unaware the stock market was a “rip off” and 402k’s were scams. Surprisingly they have been doing well for me for years

[Sebastian Lee]

I don't think you're looking for advice, I think you're on here to peacock about once being a financial advisor and that your getting an inheritance. There's very successful people giving great advice and your responding with a word vomit of what you know. Set your ego aside and listen ;)

[Bill F.]

@Wade Alderson Forgive me for being so blunt, but you asked for people's advice, they give it, and tell them its not the advice you want... seems like you already know what you want. 

And I'm sorry, you rail against the evils of the stock market and 401k/IRAs but bring up Life Settlement??? Man you must love paying taxes and getting pennies on the dollar for your assets. Just let the coverage lapse and move on. 

You worked in sales for a mutual fund company. Your job was to upsell people. Mutual Funds are not the stock market. You can be in equities and not pay active managers thanks to Jack Boogle. 

It seems like you you want your $600k to cash flow. Go pay someone to model out various scenarios so you can make an informed decision instead of going off broad brush statements and assumptions.

[Satish Boggavarapu]

@Wade Alderson Congratulations on your potential windfall and hope you find the cash flow properties you are looking for. I wanted to address couple of topics you raised. You speak of 401k scams and stock market scams etc, and I cant help but notice the irony as your windfall is partially if not completely because of a 401k that is worth 3mil.  Are there 401ks with high expense ratio funds in them? absolutely. But as an informed investor with financial industry knowledge, you sure can find and invest in index funds with low expense ratios. You asked if any 401k's achieve 642% return over 45 years, assuming a 6% return (i think avg market returns over such time span is 7% yoy) over 45 years, you will get 1376% return. Losses can happen with any investment whether it is in stocks, 401(K) or real estate. As others have mentioned, diversifying is important. If 401k and stocks are not for you, that is fine. No reason to call them scams.

[Mike Dymski]

Where do you currently invest your savings?

[Julia Parslow]

All these people are offering you wise perspectives from their experience.  Best advice I ever received after inheriting-  take two years, let the emotion clear, learn what you want and the steps necessary to get there.  Just read, research and chart your own path.

[Dave Visaya]

Hey @Wade Alderson you might like this episode: https://www.biggerpockets.com/renewsblog/2015/05/18/askbp-021-65000-dollars-investing-real-estate/

[Ben Narro]

Your 50, why sell??? Just buy 20 units and learn for 2 years. Then refi and buy more. Buy buy buy till you die and leave it to who ever you want. Also look into Realestate 401ks, it might save you in the tax hit.

[Wade Alderson]

With respect @Satish Boggavarapu there is no such thing in my experience as a current return of 6% on 401K's the proof is in the real value by taking your ending balance of your 401K taking out all your contributions and those of your employer, and then divide the sum by your beginning balance. 9 times out of 10 because of hidden fees that you were not aware of you are getting much less than that, maybe not even enough to surpass the rising cost of living. There is a great article by John Bogle called "The Problem With 401K's" from Morningstar dated June 13th 2013 that I really wish every one would read before they talk about how wonderful their 401K is. If you have not read that, then can you really say you understand my point of view how vile and evil 401K's are? When Index Fund managers have to rebalance their portfolio do you think they do that for free? When the line up of the  S&P has changed (google that too) and the managers of that Index Fund have to up date their portfolio do you think they do that for free? The thing is that YOU HAVE NO CONTROL over your expenses in a 401K! 

Can you even imagine owing rental properties and having no control over the average cost? Heck NO! We as biggerpocket members would NEVER do that, we have the calculators for a reason and we use those calculators to project expected cost and if things fall out of those cost we need a damn good reason why. 

John Bogle says that on average there are 22 hidden cost in 401Ks, so how many hidden cost are there to owning a rental property? 

So that whole broker nonsense about how The S&P averages 6% a year... ask your broker if that calculates the cost to sell the companies delisted from the S&P and the cost to buy the new companies that replaced the delisted or is it with out those cost?(Who wants to bet their last oreo how brokers calculate the cost?) 

I Worked IN The Industry... any one who thinks that the sacrifice of 40% of the value to get the money TODAY so I can WAIT 9 YEARS using a Self Directed IRA... well there is this thing called "The Velocity Of Money" that I think you need to google and see what I am talking about.

Here is HOW I look at it... if (and again GOD Forbid) I inherit my wonderful step mothers estate and get 1/3rd of everything including my fathers 401K I have to take mandatory distribution even if I transfer it into a self directed IRA (It's in the IRS rules... look it up) so that means that instead of having a flat tax of using @Brandon Turner "7 Years to 7 Figures" and I buy 2 24 unit apartment buildings that are cash flowing $5,000 each (I put $250,000 on each property for the down so I get biggger cash flow... again using the numbers on the PDF)  a month as passive income and that means I pay 20% passive income real estate tax. 

Now if I were to follow what the bobbing heads on TV tell me I would leave the money in the Self Directed IRA (since as a non spouse I can not leave it in the 401K) and I don't want the so called "Big Tax Hit" and I am getting $45,000 a year using the 3% rule, and HOW MUCH are my taxes since I am not eating into ANY of my principal? (I am not gay, not married, have no children so NO WRITE OFFS!) I am taking home $36,543.67 by following the rulse of the Bobbing Heads. Are You kidding me? And then there is this little jem, over the last 45 years have taxes and the cost of living gone up or gone down? Right... the tax and the cost of living have both gone up so if I am expected to live off of my income for the next 40 years (I am only 50, I have a life expectancy of 88) how far is $3,000 a month going to get me in 40 years if in 1978 would by the same amout of stuff back then as it cost $11,313.65 to buy today? 

This is why I LOVE cash flow real estate investing over "Lump Sum Retirement" 

With lump sum I don't know what the cost of living is going to be in 40 years so I don't know how much I really need to contribute to the ponzi scheme called the 401k or IRA. 

With Cash Flow focused real estate I know right out the gate if I buy a house that after all the cost for property management, vacancy, long term maintenance, insurance, taxes, and the house payment that my cash flow is $200 and that my tax rate on that $200 is only 20% then I KNOW for a FACT that I have $160 I can spend on a nice steak and pay my AT&T outrageous cell phone bill. If the cost of beef skyrockets and I change from AT&T to Cricket (same network, just secondary status) the next year and the cost for those two and the property manager told me rents have dropped because of a new apartment building in the area... I know for a fact that I have to eat more chicken and less steak and get a cheaper cell phone plan. 

Now... the real cost of real foods went up around 23% over the last 5 years, odd are with global warming and the wacky weather it brings the cost of foods are going to keep going up significantly in the next 40 years and beyond (yeah every one wants to pretend global warming is a myth as island nations are disappearing and New York is building floating real estate today to contend with rising oceans by 2020, and all those folks making a fuss over GMO food are not going to be to high and mighty to eat a mushroom that taste like steak when beef goes up to $25 a lb) so that whole dafy "Lump Sum" thing with retirement accounts don't account for that. (I mean seriously how many of you with 401K's see that ice cream drum sticks at the store went from like $1.29 to $2.33 at the gas station from last summer to this summer and thought to yourself... "Gee... I better start shoveling more money in my nest egg"?  I will bet my last oreo cookie that most people who were complaining about the rising cost of gas and food, the last thing on their mind was they should max out their contribution to their retirement nest egg. 

Now for the cash flow investors,  who were saying to themselves "Most cash flow real estate investors quit their J.O.B. when they are making $4,000 a month, but with the rising cost of food, energy, and auto fuel is $4,000 going to be enough?" and some of them kept working while they increased their cash flow real estate holding and some of then said "Screw It!" and then found OPM to raise their cash flow. 

Do you REALLY think old people who had pensions are working at Wal Mart because they want to? I worked at an Indian Casino and the place was flooded with retirees who had to work to cover the rising cost of medial care. They didn't want to work, their pension was supose to be enough and over the last 40 years HMO's have ruined health care cost and big pharma that sells those little pills in India and Canada for like .25 a pill but charge $4.00 here in the US... well who saw that coming 40 years ago... I sure didn't 

Just to pick a pretend future for myself let's say it's 10 years from now and I inherited my share of my step mothers estate. And I call Platinum Property's and tell that awesome Sara ( think that's how you spell her name)  that I want to buy as many single family homes returning 30% or more as I can, and ask her how to make that happen.  And over the next 3 to 6 months I end up buying 25 single family homes cash flowing from $198 to $600 each and I am making like $9,000 a month before taxes. And then an energy crises hits the United States 5 years later and the cost to heat or cool our homes triples... so me being from California and mistakenly moving to Oklahoma so I could have 4 seasons instead of just Blazing Hot and Slippery Wet I need to always have either the heater or the air conditioner (the humidity in Oklahoma is so bad fish hitch hike between ponds)  before I FINALLY get to move to Florida and get on those awesome "Florida Resident Only" discounted cruises. It's 5 years later... do I have enough equity in my homes to take some money out and after cost and fees have enough to buy more properties to increase my cash flow I don't know... but I am SURE going to try. Now here is a loaded question... how are you going to do that with a 401K? 

I don't know about the rest of you... but I think about stuff like this every day and I work on hundreds and hundreds of hypotheticals over the years of "If this, then that" scenarios.

When I first came to Oklahoma after a broken heart in 2003 my father (Long May The Suns of Heaven Shine Upon Him Always) lost over $1,000,000 in his 401K because he listened to his broker instead of me when I told him to move out of equity stocks and balance more into income stocks when he retired  (when you are young you can take risk and you have time to recover from mistakes and so called "corrections" in the market, when you retire you should have VERY LITTLE of your portfolio in equity stocks your wealth building years are behind you and you need to focus on income.. but my fathers broker told him that was the old rule and the new rule was to buy into equity and sell the profits... this is how you know you have an idiot for a broker there are NEVER new rules, the rules are the rules are the rules. And we always follow the rules because rule breakers get punished and like the second half of the saying that most people either don't know or just blow off "Fortune Favors The Bold and Punishes the Unwise" not following rules that have been in place since the stock market first was established, and those morons who say "Rules Were Made to Be Broken" can break the rules with their own money and do what The Old Guard of the stock market told their children to do with our money. 

Morons think the rules do not apply to them, morons thing "this time it's different" morons give you advice on things they don't really understand. 

I am NOT a moron.