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My wife and I will be getting an inheritance soon. There are many ways to invest this money. One thought we had was to take advantage of the down real estate market and buy a house for a rental property. We would look for houses at or (preferably) a little below the amount of money we will receive so we can buy it without a loan.

We would use the rental income to build capital so we have money for maintenance etc and perhaps an additional rental property someday.

We live in Portland, OR where the real estate prices have gone down but seem to have stabilized.

My question is: Is this a good way to invest this money? It seems that if there is not mortgage than we would be less exposed but perhaps we don't fully know what we would be getting into.

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Well it took a while but here we are. We got the inheritance and we decided to buy property. With prices at the bottom (hopefully) we thought it was a good investment. We bought a 1 bedroom condo that was in perfect condition and a 3 bedroom townhouse that was trashed. Both were bank owned and we paid cash for both. We got a renter quickly for the 1 bedroom. It took me 5 months to get the 3 bedroom place ready. But it is finally rented. In total we are collecting $1700 a month in rent - with no mortgages on those properties. –  HitLikeAHammer Aug 12 '10 at 6:24

3 Answers 3

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Portlander here too!

Have you made sure to consider the tax burden you will have from the inheritance?

  • Do you have any debts? Pay them first.
  • Sounds like you have a current mortgage. Pay that first before you invest.
  • Do you have several months of expenses in cash as an emergency fund? Make sure you do.
  • Do you have a fully funded retirement? Pay that and any catch up.
  • If you have children or plan to, is college paid for?

Investing in extra property is something that you should do when you are all paid up. You don't want a job loss or other emergency make it impossible to keep the house you live in. What happens if you buy a house and then lose both your jobs? Do you let the bank foreclose on both homes?

I think you would be in a much more stable position owning fully all your property. Once your first house is paid off, you can rent that or consider buying another.

The key advice here is to stabilize and remove all your debts now. It is less exciting but safer.

But if you don't owe any money. Go for it.

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+1 excellent answer. I agree there shouldn't be any other debt before investing in a rental property. The only thing I would add is: it's not easy being a landlord: learn as much as possible about renting out properties before any deal. –  Chris W. Rea Jan 12 '10 at 12:49
    
The bank wouldn't foreclose on both homes if one was bought with cash. However unfortunately they would foreclose on your main residence, which isn't what you want. –  DJClayworth Mar 23 '11 at 21:10
    
I dunno about having to pay off your mortgage before investing in a rental property. In the OP's current financial state, he can afford the mortgage he has on his home with the money from his day job. Paying off that mortgage is great, but if he's thinking about a rental property, I would pay for that property in cash and keep my existing mortgage. That way you're not worried about keeping a tenant to cover the mortgage. Even though your own mortgage would be paid off, you'd be in the questionable position of paying a mortgage on a house you don't live in. –  KeithS Jan 25 '13 at 16:18
    
Now other debts - car note, furniture loans, credit cards, even HELOCs - definitely pay those off first. But your own primary home mortgage? Between paying that off and buying a rental property in cash I'd actually go for the latter. –  KeithS Jan 25 '13 at 16:20

I disagree. I believe money should be invested, not spent. Investing is something you should do as early as possible, even (especially) before incurring personal debt, such as cars, houses, student loans, etc. As Warren Buffet says, delaying investment until you are all paid up, is like saving sex for your old age.

Remember that you are considering an investment, not another expense. The only consideration is whether or not the property will be cashflow-positive, i.e. "does it make more in rent than it costs to maintain?". If it is, buy it. You can use the income to pay off those debts faster, and at the end you will still have the income stream.

Second, it makes no sense to use all your cash when the bank is willing to lend you money. There is nothing wrong with debt, as long as it is attached to an asset, i.e. something that makes more money than it costs. If you have that much cash, buy several apartment buildings, hire a management company, and retire.

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I think it's a bad idea. You are taking a large amount of cash and changing it into an investment that is not liquid - if you need the money, it is expensive to get it back.

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By that reasoning we should never invest. –  littleadv Jan 25 '13 at 6:07
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@littleadv Fallacious reasoning on your part. Eric qualified the investment as one that "is not liquid". There are plenty of investments that are liquid: marketable securities like stocks and bonds. But you knew that. –  Chris W. Rea Jan 25 '13 at 18:13

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