Should we use an expected inheritance to invest in a rental property with cash, i.e. no mortgage?

Question

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.

Answer 1

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.

Answer 2

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.

Answer 3

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.

Answer 4

Quite honestly, with the current interest rates, you're better off getting a loan, putting the cash into some top performing equity funds and paying down on the loan.

If for some reason you're in need of the capital, the stocks are going to be much more liquid. Being debt free is a good thing, but there is also a right way to leverage yourself.

At the end of the day though, and despite what anyone on this site tells you, you need to run the numbers, make the long term projections to determine what's the best route to take.