Unexpected inheritance/windfall... spread it out?

Question

Hello BP fam! Here's my story.

A couple of years ago, my Dad passed away and left me an inheritance. There is also a wrongful death lawsuit, in which I am starting to receive proceeds. I never expected myself to be in this situation, but am resolved to make the most of it.

My Dad was actually invested in some real estate, and taught me a few basics. Nothing sophisticated, but good fundamentals. e.g. he explained CapEx to me, but never knew it was called that. Sadly I had to sell the properties he owned, to split the proceeds among siblings/Mom. So I am actually in the unusual position of having more experience in selling (5) properties than buying them (1).

For a while there though, between ~12-18 months, I was the landlord for his properties! Just fell into my lap. Nothing terribly difficult, a few repairs and a few months of "the checks in the mail". I never had to find new tenants or anything, so I just got a little slice of the life. But I decided that it's something I could handle and knew I wanted to invest in real estate down the road. Well here we are.

Things are mostly done now, except for the lawsuit settlement, which should (finally) be finishing in the next few months. All said and done I should have something like mid six-figures to invest. Which brings me to my real question here, if you're still reading this far.

Should I still just start with a single property? Or, because of my situation, just invest in an apartment building or a number of houses right in my first year? Am I just wasting my time buying a little house, when I (fortunately) have the ability to go much bigger straight away? I also don't know how much to "spread out" (number of houses in the suburbs) vs "go vertical" (e.g. 6 flat in the city). Trying to think more about strategy than tactics right now, if that makes sense.

What a weird situation I find myself in, a trying few years in my life tbh... but also I have this opportunity now to grow something big, and that's exciting. Thanks for reading, and any insight or advice you can provide.

John Thedford · Answer

I would consider becoming a HML. You can grow the money pretty fast in that arena.

Jaron Walling · Answer

My advice, seek out a professional financial planner. I lost my grandpa last year and dealing with his estate was nightmare. On a good note he was financially free and invested wisely leaving a lot behind for Dad and family. You want to set long term goals with that money.

If you decide to get into real estate (you should) read a few books, and research your market before doing anything crazy.

Alina Trigub · Answer

@John S. I'm sorry to hear about your personal situation: your dad passing away and the lawsuit.

In terms of your question, it is a matter of your personal preference and long term goals. If you're in real estate for the long term, and want to grow, then the economy of scale dictates that multifamily in general helps you scale up faster. Also, you need to decide for yourself as to how active you want/can be. There're ways to invest in real estate passively and spend much less time on it if that's your preference.

Tandi H. · Answer

@John S., I could be wrong, I'm pretty new to REI, but I thought it was 25% equity to avoid MIP. Maybe there are differences by state?

Also, with your experience I wouldn't worry about waiting to invest...just read lots of forum threads and blogs here for a while and I'm sure you will fill in any blanks you might have. Also from my short experience you learn a lot as you go. I try to follow the basic guidelines of 1% rule and cap rate to make sure I'm on the right track. And you can always post questions here and get help if you need it.

Jaron Walling · Answer

@John S. It all depends on your goals, cost of living, and risk tolerance. I would contact family members first and see if they recommend a financial planner. It doesn't hurt to meet with people. My Dad decided to continue working with the investment planner my grandpa was using. I may follow suit because the same planner saved me money! The government claimed I owed $4k in unpaid taxes. He helped me complete an amended tax return for 2012, and lots of paperwork.

John S. · Answer

Great replies all, I really appreciate it!

@Jaron Walling I've hesitated on getting a financial planner, because I'm worried they will just want to push certain investments, or "manage my money". Do you have any tips on finding a financial planner that just gives advice, and doesn't pressure me towards certain investments?

@John Thedford Interesting, I'll have to research those, and maybe mention it to a financial planner if I get one.

@Tandi H. So great to hear from someone else in a similar situation. One question, I thought 20% was the threshold for mortgage insurance to kick in? I don't think I understand how market fluctuations affect the down payment and MIP.

@Caleb Heimsoth For sure, great advice. I've already read a couple of books - https://www.amazon.com/gp/product/1118172973/ref=o... and https://www.amazon.com/gp/product/0071448357/ref=o... I need to start reading more articles and posts on biggerpockets now.

Jon Stin · Answer

With that kind of money, in most markets, you could reasonably get ahold of 4 units or more B or C class units which not only allows for meaningful cash flow but also really mitigates your risk. While you might be able to buy outright, you’re generally much better off using financing if you don’t intend to stop there.

Tandi H. · Answer

We had a similar situation, less money, however it allowed us to start investing. We are finding that adding one small multifamily at a time is great. Maybe a new property every 6-9 months. That gives time to get used to a new property, iron out any issues, get it settled and tenanted, and move on to the next one. 2-4 units are great for fixed 30 year loans. If you can house hack you can put even less down and then leverage your money even more. We like 25% down because that avoids MIP and is more conservative than a lower down in case of large market fluctuations. But if you're buy and hold that is less important to worry about.

If you do that for a few years, maybe even at a quicker pace depending on your lifestyle, you should be able to spread that inheritance into a large portfolio. Maybe even refi'ing on some if you add value or there's large appreciation. By doing it over several years you may also be able to take advantage of an upcoming market dip, if there is one.

Alina Trigub · Answer

@John S.

Yes, you're correct - put down the minimum. Also in case house-hacking is an option for you, consider buying a four-plex and living in one of the units. Otherwise in general terms, leverage & OPM are your best friends.

In terms of the ROI via passive investing - everything is relative. If someone wants to be passive and spend 5-10 hours on reviewing the investment, then even 8% return may seem like a lot! So my point is - everything is relative and depends on one's wants/plans/bandwidth.

Best of luck! PM me if you have any questions.

Unexpected inheritance/windfall... spread it out?

Unexpected inheritance/windfall... spread it out?

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