SS65: How Can I Generate Passive Income from an Inheritance?

How would you structure your passive real estate investing if you just received an inheritance? Well, in this episode, a listener asks just that and Charles discusses what he would do if he received a lump sum of cash and wanted to generate passive income.

Watch The Episode Here:

Listen To The Podcast Here:

Talking Points:

We regularly receive questions from listeners normally they are questions we have answered on other episodes but a listener recently reached out to us and asked what I would do in their situation.
I will not read the entire message but the question reads like this “I recently inherited a significant amount of money from a grandparent that passed away and my wife and I are not sure exactly how to invest it in order to generate passive income. We own our home but have never invested in a rental property and our goal is to create passive income”
Since they mentioned passive income and not the goal of owning and managing properties; I would suggest they passively invest in a real estate syndication and since they asked for my advice; I will explain what I would do in this situation.
First off, never invest in anything that you do not understand. It is important to be educated about anything that you invest in. If it is too complicated; it is best to hold off until you understand the investment, the strategy, and the risks.
Next, do not invest more than 5% of the inheritance into anyone’s property or investment. You want to make sure there is diversification; operator diversification and geographic/market diversification. Now, this becomes difficult if the inheritance is under $1 million since most syndicators will require a $50,000 minimum investment. But the point is to diversify.
- What is operator diversification; at Harborside Partners, we partner regularly with several operators who concentrate on specific markets and specific real estate asset classes. This allows our investors to access deals we are cooperating and investing in and join alongside us. If you are investing with an operator that only works with their own deals; you do not have operator diversification.
- Geographic diversification is also important. You do not want all of your investment dollars in one geographic area if there is a natural disaster; now you will probably be made whole and then some because of insurance and rebuilding etc. But your income might be paused.
- Market diversification is important and COVID is a prime example; what happens if the next pandemic occurs or there is a recession that hurts certain markets more than others? What happens if a market you are investing in imposes new laws like rent control? You want to make sure that all your eggs are not in one basket.
Start small, invest passively into one deal, and see how it goes. For a new passive investor; it can be a daunting experience since you complete some legal forms; wire money and wait 30 days until you receive an email that says you closed! Then you wait until your first monthly update, and then you wait until your first distribution hits your bank account. It is important to understand how the process works before going all in.
After you understand how the process works; you can develop some sort of criteria that you are looking for; I want to be in 5-10 markets; I want to have a cash-on-cash return of 7%-9%; I want to be in class B properties etc. This makes it much easier to immediately say NO to certain deals.
Another point that I think is important is when you come into a large sum of money; especially an inheritance; just stick it into a bank for a few months while you come to terms with it. You lost someone; this is probably the most amount of money you have had in cash before and it is best to let that sink in before you start investing. This is a great time to increase your real estate investing knowledge and do your research.
I would also be weary of people pushing you to invest right away, or pushing you to invest a large percentage of it, or invest into some financial vehicle that you have minimal knowledge of.

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing how can I generate passive income from an inheritance? Now we regularly receive questions from listeners, and normally there are questions that we’ve answered on other episodes. And, but a listener recently reached out to us and asked what I would do in their situation. I won’t read the entire message, but the question reads like this. I recently inherited a significant amount of money from a grandparent that passed away. And my wife and I are not sure exactly how to invest it in order to generate passive income. We own our own home, but have never invested into a rental property. And our goal is to create passive income. Now, since they mentioned passive income twice and not the goal of owning and managing properties, I would suggest passively invest in a real estate syndication.

Charles:
And since they ask from my advice, I’ll explain exactly what I would do in this situation. First off, I would never invest into anything that you do not understand. It is important to be educated about anything that you invest into. If it is too complicated, it is best to hold off until you understand the investment, the true and the risks next. I don’t invest more than 5% of the, of my network or your inheritance into any one property or investment you wanna make sure there is diversification operator diversification in geographic market diversification. Now this becomes difficult. If the inheritance is under $1 million, since most indicators will require a $50,000 minimum investment, but the point is to diversify. What is operator diversification? Well at Harborside partners, we work can partner regularly with several operators who concentrate on specific markets and specific real estate asset classes.

Charles:
This allows our investors to access deals. We are co cooperating and investing into alongside us and they can join with us. If you are investing with an operator that only works with their own deals, you do not have operator diversification. Next is geographic diversification, and this is also important. You do not want all of your investment dollars in one geographic area. If there’s a natural disaster, now you’ll probably be made whole, and then some because of insurance and re bowling, but your income might be paused during that process. Next is market diversification, and this is important. And, and COVID is a prime example of what happens if the next pandemic occurs, or there is a recession that hurts certain markets more than others. What happens if a market you are investing into imposes new laws like rent control, you want to make sure all your eggs are not in one basket.

Charles:
And now, as we saw on COVID, there were some states like Nevada that had unemployment up to almost 30%. While other states like Connecticut were, had unemployment less than 10% in other states throughout the Sunbelt, we’re around 12%. So you wanna make sure that you have diversification throughout markets next is start small, invest passively into one deal and see how it goes for a new passive investor. It can be a daunting experience since you complete some legal forms, you wire money and you wait 30 days until you receive an email update that says we closed. Then you wait until your first your first monthly update. And then you wait until your first distribution hits your bank account. It’s important to understand how the process works before going all Lynn, when you’re looking at an offering memorandum from a syndicator, they’ll have a lot of numbers and it looks round and it looks like it’s gonna be exact every month.

Charles:
Hey, there’s gonna be a 7% cash on cash return. Well, that might that’s over the year. That might not start in the first distribution. You might not have equally one quarter of that in the first dis distribution. So important to understand how the process works. I mean, you know, you’re not, you’re not investing into an annuity that has an exact payout every every month or every quarter. You’re investing into something into a business that can have ups and downs, especially with the value add model of real estate investing, where we’re taking a property, that’s working, that’s running well. We’re gonna disrupt that a little bit and we are gonna do some work to it and push more net operating income out of it. Well, it’s not gonna be an exactly uphill battle. You’re have to shake it up. It’s gonna have some, some months that have a lower net operating income until you get the property back on track and you start making it more profitable than it was before you purchased it.

Charles:
Now, after you understand how the process works, you can develop some sort of criteria that you’re looking for. I want to be in five to 10 markets. I want to have a cash on cash return of 7% to 9%. I want be in class B properties, you know, et cetera. And this makes it much easier to immediately say no to certain deals. So when they cross your desk, you say, Nope, I that’s not, you know what my goal is. But it, you know, it might be something down the road. So you can make note of that, but you can tell them for that point. I’m not interested in investing. That another point that I think is important is when you come into a large sum money, especially in inheritance, just stick it into a bank for a few months, or while you come to terms with it, you lost someone on, this is probably the most amount of money you’ve ever had in cash before.

Charles:
And it is best to let that sink in before you start investing, this is a great time to increase your real estate investing knowledge and do your research. I would also be wary of people, pushing you to invest right away or pushing you to invest a large percentage of it, or invest into some financial vehicle that you have minimal knowledge of, make sure put the money into, into a money market or savings account. Let it sit there and then you can figure out exactly what is the best course of action for you and your family. So I hope you enjoyed, please remember to rate, review, subscribe, submit comments, and potential show topics at global investors, podcasts.com. Look forward to two more episodes next week. See you then

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.