Question for Boston Money Coach:
Best course for inheritance money?
I recently received a significant amount of money from an inheritance and I’m just wondering thoughts on the advantages/disadvantages to using this money towards a rental property vs investing it. I’m in my 40s, married and have two kids at home.
Response from Boston Money Coach Steve Stanganelli:
Before investing an inheritance, I strongly recommend waiting on any large commitments for several months just to get the grieving process settled.
After that I recommend setting aside some time to consult with a financial planner familiar with both areas of investing you mentioned. There are pros and cons to investing in the market as well as in an investment property. The best way to handle this is to work with someone who will ask you the right questions so that you may make a more informed decision.
Do you want to be a landlord? Remember you’ll be dealing with “toilets, trash and tenants” directly. What experience do you have in running a business? Don’t kid yourself. Rental property is a business if done right. Do you have the time to manage the property and repairs or will you need to hire contractors or a property manager? What resources do you have beyond the inheritance for repairs or capital improvements or carrying costs during vacant periods?
Do you have an emergency fund for your personal household? What are the plans for college for the kids? (Investment real estate ownership can have an impact for financial aid but there are also strategies that may lower your Expected Family Contribution and increase your chances for other financial aid, for instance).
What is your risk profile like? What experiences have you had with investing (good or bad) that have shaped your outlook on the approach to investing as well as the types of assets owned? Is there a chance that you’ll be relocating in which case you may become a long-distance landlord which offers its own set of challenges?
What is your motivation for one or the other type investment that you mentioned here? I realize that mortgage interest rates are down and many property markets are firming up while rental demand has been very good but whether or not buying a property makes sense really depends on evaluating not just the numbers but what’s behind those numbers. Not everyone is or should be a landlord just like not everyone is or should be a homeowner.
There are alternatives to buying and operating real estate outright. You can choose to invest in private or public Real Estate Investment Trusts (known as REITs) and become a “mailbox landlord” receiving your dividend checks monthly without the management hassles. Or you can invest in a diversified real estate stock mutual fund or a lower cost exchange traded fund. These options provide more diversification – both in terms of geography as well as types of properties – that you can’t get by owning an individual piece of real estate.