Receiving Substantial Inheritance Pay off Mortgage/Real Estate
Member since 2022 · 3 posts · 2 votes
Receiving Substantial Inheritance Pay off Mortgage/Real Estate
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Accountant · McKinney, TX · Member since 2023 · 393 posts · 580 votes
3yGreat commentary here and I think some analysis and number crunching is in order. I am normally not big on paying off the mortgage prematurely because of the opportunity cost and ability to use the funds to generate alpha from other diversified options. The margin loan can be a good option assuming you have a low cost provider and invest wisely. I would work with someone or a team of people to help you understand the pros/cons of any number of directions you can go.
9 Replies
- Rental Property Investor · North Palm Beach, FL · Member since 2018 · 2k+ posts · 1k+ votes3y
Of course, paying off your mortgage would be the safest decision but, another option not mentioned above would be to invest the money in the market (index funds), and then take out a margin loan against these funds in order to build the homes. This is a more advanced strategy but, it allows your money to work for you in the market while getting a tax-free (floating rate) loan against the index funds. Your credit is not touched, and in most brokers, you can borrow up to 50% (not recommended) of the value of the index funds. DM me if you are interested in this, and I will let you know what broker I use.
- Real Estate Broker · Denver/Castle Pines/Colorado Springs, CO · Member since 2021 · 248 posts · 136 votes3y
Quote from @Charles Carillo:
Of course, paying off your mortgage would be the safest decision but, another option not mentioned above would be to invest the money in the market (index funds), and then take out a margin loan against these funds in order to build the homes. This is a more advanced strategy but, it allows your money to work for you in the market while getting a tax-free (floating rate) loan against the index funds. Your credit is not touched, and in most brokers, you can borrow up to 50% (not recommended) of the value of the index funds. DM me if you are interested in this, and I will let you know what broker I use.
Fantastic out of the box thinking @Charles Carillo
Can you give some more details of the ARM? Refi or paying it off was my first thought, but if there are parameters that make it worth keeping, I would look into that. Tons of different options, talking to a financial planner in your area or a real Estate investor specialist would be a great idea. Without knowing the rate of the ARM and what it could do, most people here can only guess as to your best option.
Good luck and let us know how it goes! - Member since 2019 · 18 posts · 24 votes3y
@Laramie Allen Sounds like you are in a good position. Another option is to be a passive investor in Multifamily apartments. If you invest as a limited partner in syndication structured deals you would own a percentage and your investment will make you monthly distributions.
Your distributions would be through a preferred return and equity split. And then when the property is sold in 3-5 years you get a large big payout in the form of a shares of the profits. In In addition to cash flow and appreciation, LPs can also benefit from tax advantages such as depreciation and 1031 exchanges.
I am happy to go into further details to explain this type of investment and if it would work for you. Have a wonderful day :)
- Financial Advisor · Saint Paul, MN · Member since 2016 · 190 posts · 143 votes3y
Decisions like this are normally a mix of what you want to accomplish with what you're comfortable with.
First, look at your most recent tax return & see if you itemized your deductions. If you did, your mortgage interest is tax deductible. Take your marginal tax rate (usually listed on one of the first few pages of your tax return) & subtract it from 1. (1-22%) = .88, now multiply this against your mortgage rate & you have your After Tax mortgage rate. Example - (1-22%)*5.5% (mortgage interest rate) = 4.84% (in this case).
Now at least you have a number you can use to make decisions. if you think you could invest elsewhere & make more than 4.84%, you now have data that you can actually use to make a decision.
Like others have said, paying down the mortgage would be the "safest" option. One of the downsides of this is now you've lost accessibility and easy control of your money. Yes, you can setup a heloc like you mentioned, but now you're paying fees & interest (variable most likely) to have access to your money to invest into RE. This to me seems like a lot of work to end up in kind of the same situation as you started, having a variable rate loan. I'm not saying this is bad, it's definitely the "safest" and most "mentally comfortable" decision.
You could also invest in the market like Charles mentioned. The Margin loan is actually a great idea and it allows you to retain accessability and control of the funds. Depending on what company your advisor is with, the margin rate will vary. And in all likelihood, your advisor may not even know. This is one of those strategies that aren't on the "first line" of thinking for most advisors. So they may not see the idea immediately.
If they are with a large firm, they may have significant buying power with the custodian & get favorable margin rates. The benefit of this strategy is that you retain complete control of the investments.IE - depending on your tax situation, you can cash out money as needed. You can realize capital gains & losses in a tax-advantaged way. Among other benefits.
To be clear, I would ask your advisor about these strategies (somewhat vaguely) to see what their reaction is. You can gauge how knowledgeable & comfortable they are with this idea based on their reaction.
- 3ySheri FluellenBusiness MemberReal Estate Agent · Cheyenne, WY · Member since 2020 · 122 posts · 64 votes
Great suggestions already!! My first question to you is around why you're determined to build spec homes. I am a high performance coach and sometimes find that people get set on an idea, but it may not be the ideal. My concerns are just that (at least in my area), builders aren't in a good position to guarantee profits. Market is a bit unstable, unless you have amazing margins. So you could come up with some additional ideas. Also of importance that we don't know is how much time and energy you have to give to active investing. Just something to think about. The other thought I'll add is that one of the equations that I have found most valuable is return on equity. This helps you be able to compare apples and grapes. Divide your cashflow by the amount of equity that is available. This is how people can choose to sell over time. At a certain point the cashflow doesn't keep up with the equity built. This can help you decide if the $2400 income from paying $250k is more valuable than the other options.
The Titan Real Estate Team, Real Broker52 Reviews - Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes3y
Quote from @Sheri Fluellen:
My first question to you is around why you're determined to build spec homes.
My thought as well. Specs and flips- the only guarantees are high transaction costs and high tax rates IF you net anything.
I'd buy risk-free t-bills (4 week paying 5.4%) or leave it in a money market account (4%ish yield) while I cost/benefit my options.
In this inverted yield environment we are paid well to be patient and strategic. With risk-free returns so high, it takes a lot for me to take on the risk and hassle of RE at this time.
- Accountant · McKinney, TX · Member since 2023 · 393 posts · 580 votes3y
Great commentary here and I think some analysis and number crunching is in order. I am normally not big on paying off the mortgage prematurely because of the opportunity cost and ability to use the funds to generate alpha from other diversified options. The margin loan can be a good option assuming you have a low cost provider and invest wisely. I would work with someone or a team of people to help you understand the pros/cons of any number of directions you can go.
- Rental Property Investor · Dallas, TX · Member since 2016 · 261 posts · 170 votes3y
@Laramie Allen I wouldn't pay off your mortgage (it's cheap money) unless you are retirement age and peace of mind is top priority for you. Financial advisors are a waste of money. Take Warren Buffett's advice, if you don't know what to do and have no time to figure it out, put your money in an S&P 500 index fund and let it sit. You won't get eaten up by fees from a wealth manager, and over the long term it will yield about 10% a year. When he dies, this is where he has directed his estate to be invested.
If you plan to actively invest your money, make sure you have experience in whatever venture you decide. If you don't, find someone who does to guide you. - Member since 2019 · 7k+ posts · 4k+ votes3y
- pay off your mortgage only if the rate is higher than 5.5, mortgage is blessing from gov. ; no need to pay off very early, pay off 30Y in 15-20 YR is very doable though.
- why do you need financial advisor when it's the age of AI and robo platform :) LOL. be your own financial advisor, it is not that difficult, the simplest thing is to just put in wealthfront, that's it.
- having 2k or 10 mil from inheritance or company stock, doesn't really matter these days. You still need to be careful on risk and possible return whether you have $2000 or $20 mils in the bank.
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