Ask Brian: How should I invest the settlement money? »RealtyBizNews: Real estate news
Ask Brian is a weekly column by real estate expert Brian Kline. If you have any questions about real estate investing, DIY, buying / selling homes, or other housing inquiries, please send your questions to [email protected]
Question from Kinsley: Hi Brian. Last week I was informed that a settlement for a horrific car accident was about to be available and I can expect to have the money in about two weeks. The settlement is $ 600,000, which is a huge amount of money for me. I’m just an average Jane. I am 42 years old and divorced with two teenagers. I own a modest house, but I still owe about $ 164,000. I have a car payment and other debts of about $ 23,000. I see this large amount of money as an opportunity for me to move forward in this world and hope to do more than just pay for my children’s college. But I know I’m not smart enough to invest to do it on my own. What should I do?
Answer: Hello Kinsley. Congratulations on your great settlement and I hope you have fully recovered from the accident. Normally my first suggestion would be to contact a CPA or tax advisor (and that’s always my suggestion) to figure out how to minimize taxes and help you understand how much of the money comes back to you after paying taxes. The good news is that money received in an insurance settlement is generally not taxed. But check with a tax advisor to make sure this applies to all the money you will receive.
And keep that CPA or tax advisor phone number handy because you’ll need more tax advice when deciding how to invest your money. This is a time when you should seek professional advice. Other professionals you might need advice from include an investment professional, estate planning lawyer, real estate agent, and possibly an insurance agent. Before deciding who to go with, talk to several in each profession and get recommendations from people you already trust. Keep in mind that these people are not there to tell you what to do. Their role is to explain to you and help you understand your options. My suggestion is that you talk to each of these professionals and do nothing for several months. For a few months, think about your options and what you want to do. If you immediately feel like doing something extravagant, set a firm and reasonable budget for the extravagance, maybe $ 10,000 for a new wardrobe and a vacation. But don’t spend any more until you make some thoughtful decisions about the rest of the money and your future.
You are going to have four general options. You can donate some of the money (charity), spend it on yourself or your family, pay off your debts and invest. Most people who get a big windfall decide to do a little bit of each. A good place to start is to budget a specific amount for each option.
But you will still have to make a lot of decisions for each of these choices. For example, should you pay off the mortgage on your house? With the amount of money you have now, there’s a good chance you’ll soon decide to buy a bigger house. That alone comes with several decisions. Instead of paying off the mortgage, you could sell your current home to turn it into a larger home. Or you can keep your current home and turn it into an investment property. Even an investment property comes with choices. You can turn it into a rental if you agree to own it. Or you can fund a seller’s sale for a revenue stream. These are all reasons you need a good CPA or financial planner to help you understand the numbers, taxes, profits, and risks of every possible choice.
Kinsley, your car payment and other debts are low enough that it probably makes sense to pay them off so that you no longer make high interest payments. But before you trade in your car for a luxury model, it makes financial sense to work on your investments first to create future income streams to pay for the luxury you are going to want. The other thing I suggest you do quickly is create an emergency fund. You should always have three to six months of expenses recorded in a money market account to deal with major emergencies. This gives you a solid foundation to start making sound investment decisions. This is also probably the time to put in place a comprehensive plan to fund your children’s college expenses.
After a few months of dealing with priorities, you should still have most of the money available to invest in your future and hopefully the future of your children. Kinsley, since you asked me, you should know that I am going to recommend investing in real estate. Good real estate investments accomplish two important things. Real estate investments provide a flow of income that can continue for many years (until retirement) and they have a long history of appreciating in value to keep up with inflation. Even after you’ve taken care of priorities, taken advantage of some of the money, and established an emergency fund, you will likely still have close to $ 500,000 to invest. A good financial advisor will almost certainly suggest that you diversify part of your investment outside of real estate. And that’s a good idea. In the end, you will probably never see this kind of windfall again – with the right use of it, you should be able to enjoy it all your life and leave a legacy for your children!
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Author Biography: Brian Kline has been investing in real estate for over 35 years and has been writing about real estate investing for 12 years. He also draws on more than 30 years of business experience, including 12 years as a director at Boeing Aircraft Company. Brian currently lives in Lake Cushman, Washington. A vacation destination, close to a national and the Pacific Ocean.