Newbie Seeking Advice on Investment of Inheritance

[worldexplorer]

Hi! Glad to have found this board and all the amazing advise you offer.

Background:
43, with 56 YO hubby who is planning to retire in 4 years. I plan to retire in 9. Good start on retirement savings, about 350K and currently saving 30K/year for retirement. Assets - Home has 75% equity, low mortgage, paid in 9 years, now valued at 375K, also, hubby's business valued at 200K will be sold and money invested in 4 years. Also PLAN to increase savings to 39K/year within 2 years, which I'd continue for 7 years until retiring. We want to move to a warmer climate with a reduced COL in 9 years, will sell our home, buy one for much less and invest the difference. I will have pension at 65, hubby won't, both eligible for SS, will need to self-pay health care in retirement. We live modestly, love to travel, but do so on the cheap, and feel like our savings plan will get us to where we want to be, but any comments welcome.

QUESTION:
The one thing we had hoped to do by this point was buy a second home and have it paid for by retirement, so we could invest the total sale price of our current home to help fund our retirement. I recently got 50K inheritance (not included in savings above) and am contemplating buying a home in TX, not to exceed 150K, using the 50K inheritance as a down payment and taking out a 100K/10yr. mortgage. Our hope would be to rent it out for the next 9 years to cover mortgage costs, so it would be paid by the time we retire, then sell our home in MA and move there.

If I invest the 50K, in 10 years it'll hopefully be worth at least 125K. At this point, with the state of the RE market, I'm not sure what the house would be worth in 10 yrs, but it would give peace of mind knowing we had a place to move to that wouldn't cost anything and be able to cash out our current home. The RE markets we're looking in, San Antonio and Austin, have held their value and enjoyed modest increases unlike MA, but I realize that could change. The reason we originally hatched this idea was because of the huge increase in RE values in our area - we thought when it came time to retire another home would be out of reach or wouldn't enable us to cash out any equity to put toward our retirement, but with the current RE market, the situation is less clear. Can anyone offer advise as to the pros/cons of this strategy? I feel like there are things I'm not considering and want to make an informed decision.

 

[bbbamI]

First of all, welcome to the forum!

I live North of Dallas, so I am not well informed of the areas you want to retire to. Where I live, you can get a nice home for $150k. The value of our home is in this price range and it's all we need. There is no state income tax here, but the property tax on our home is around $3300 a year.

Do you have someone that lives in TX that could keep an eye out on your rental? Being a remote landlord can be a PITA, but if you have someone that you can trust and know that they will not leave the area would be a plus.

If you decide not to buy, I suggest taking a look at Fidelity or Vanguard websites for investment options. Then read through the old posts for investment ideas...there are many.

Again, welcome.

 

[worldexplorer]

Thanks!

Thanks for your advise. It's good to know the price range we're considering is accurate. We bought our home for 130K in 1987 and current tax assessment is 375K, so you can realize our fear in rising costs. The lack of income tax is one of the attractions in TX. We currently pay 3K in property tax, so we'd be fine there. We plan to hire a management company to oversee the rental, they advertise, do credit checks, collect rent and arrange all maintenance for a 10% fee and don't charge unless rented, so it seems worthwhile. I'm already with Fidelity and made a 30% return last year, never below 10%, so I'm confident we could make that if we didn't use it for a downpayment.

 

[bbbamI]

It sounds like you've done some homework on your options. I've never used a management co, but someone else on the board may come along with their thoughts.

Just take your time as you map out your future retirement plans. We look forward to hearing more from you.

 

[Rambler]

nothing but grief with rentals

DW & I had rentals in the 80s and 90s. We also bought hoping to use one of the rentals as our home in the future. We had one bad experience after another with them though.

With rentals, one thing you must remember is that most renters will not treat the home like it was their own. You will need to change the carpets before you move in, I can 99% guarantee that, and probably the kitchen/bath flooring as well...plan your cash for it.

You will also not always have renters...be prepared to make the mortgage payment one or two months out of every couple of years. Be prepare to have wallboard patched when the renter couple have major fights, to replace doors when an angry spouse/partner is locked out and kicks one in...etc, etc, etc. I had one guy who didn't pay his electric bill and his electricity was disconnected. He hooked jumper cables to the main and nearly burned the house down. We had another who was too lazy to take the trash out. They opened the door to the garage and tossed. When they moved out we had two construction disposal bins full of trash to remove.

After 8 years of this, we had enough and got out of the landlord business. For the first 6 years we had management (we were overseas) and did the last two years ourselves. From the time we bought until the time we sold, the real estate market in our area did an inverted 'V', and we didn't make any money out of them...but we did learn how to patch wallboard, replace toilets, fix doors, re-landscape, clean carpets, replace electric metering equipment, etc.

Good luck! Hope your experience is better! ...but I would never do it again.

 

[militaryman]

We bought our home for 130K in 1987 and current tax assessment is 375K, so you can realize our fear in rising costs.

Actually, I am not so clear as to your logic.

130K invested at 6% return is well over 400k. You should not be fearful of the rise of 130k to 375k over a 20yr period as that is about a 5% return on investment. Of course, since you are able to live in the house at the same time this makes sense but a 5% return for a long term investment is otherwise poor.

I would bet the tax savings of a real estate investment is a tradeoff for the upkeep and hassle of the property ownership unless your are getting a lot more for rent per month than the mortgage/taxes and insurance.

I would stay away from a long distance landlord situation unless I was trying to keep a property that was already sentimental and in the family and I wanted it to stay that way for future use.

I guess you need to ask yourself if you think it is worth it to go through the trouble of buying a house and renting it for what you described above as a 5% return --- I would rather stick the investment $$ in an index fund.

 

[FinanceDude]

Hi! Glad to have found this board and all the amazing advise you offer.

Background:
43, with 56 YO hubby who is planning to retire in 4 years. I plan to retire in 9. Good start on retirement savings, about 350K and currently saving 30K/year for retirement. Assets - Home has 75% equity, low mortgage, paid in 9 years, now valued at 375K, also, hubby's business valued at 200K will be sold and money invested in 4 years. Also PLAN to increase savings to 39K/year within 2 years, which I'd continue for 7 years until retiring. We want to move to a warmer climate with a reduced COL in 9 years, will sell our home, buy one for much less and invest the difference. I will have pension at 65, hubby won't, both eligible for SS, will need to self-pay health care in retirement. We live modestly, love to travel, but do so on the cheap, and feel like our savings plan will get us to where we want to be, but any comments welcome.

QUESTION:
The one thing we had hoped to do by this point was buy a second home and have it paid for by retirement, so we could invest the total sale price of our current home to help fund our retirement. I recently got 50K inheritance (not included in savings above) and am contemplating buying a home in TX, not to exceed 150K, using the 50K inheritance as a down payment and taking out a 100K/10yr. mortgage. Our hope would be to rent it out for the next 9 years to cover mortgage costs, so it would be paid by the time we retire, then sell our home in MA and move there.

If I invest the 50K, in 10 years it'll hopefully be worth at least 125K. At this point, with the state of the RE market, I'm not sure what the house would be worth in 10 yrs, but it would give peace of mind knowing we had a place to move to that wouldn't cost anything and be able to cash out our current home. The RE markets we're looking in, San Antonio and Austin, have held their value and enjoyed modest increases unlike MA, but I realize that could change. The reason we originally hatched this idea was because of the huge increase in RE values in our area - we thought when it came time to retire another home would be out of reach or wouldn't enable us to cash out any equity to put toward our retirement, but with the current RE market, the situation is less clear. Can anyone offer advise as to the pros/cons of this strategy? I feel like there are things I'm not considering and want to make an informed decision.

I like your ideas, but buying a second home and being a landlord a long way away seems like adding stress to your life. If you put that $50K in something boring like an index fund in the end you'll probably have more money, and you will have more options........

Houses are NOT liquid, contrary to what folks think. It depends on the RE market at any given time........