A Strategy For A Recent Heir — Or What To Do With Grandpa’s Cash And House

Posted @ 7:31 pm - Filed under Purposeful Planning, Real Estate Investing, Retirement

So I’m minding my own bee’s wax in Starbucks the other day when a guy sits down next to me. He seems friendly, and apologizes for interrupting my reading, but could I spare a couple minutes? Sure, what’s up?

Seems he’d overheard some of my conversation with a client a few minutes before, and concluded I was in investment real estate.

He wanted to talk investing with me, which in that setting, and after coffee and a huge chocolate chip cookie, I could just about manage. What investment strategy would you suggest for a guy like me? Well, that depends. What’s a guy like you?

He’s a regular guy, (looks about mid-40’s) who recently came into a couple hundred grand through the recent passing of Grandpa. He and his wife wanted to invest that money towards a better retirement — and hopefully a new retirement. What should he do?

Great question — but I think Starbucks closes in about six hours. Since he laughed at this sad attempt at humor, I began to warm up to him. Turns out he also inherited Grandpa’s home, which was a few miles from his. It also was in disrepair since Grandpa wouldn’t allow him (Steve) to use his skills as a journeyman carpenter to fix things.

So here’s the scenario: Steve has inherited a house with about a decade of deferred maintenance — along with just over two hundred grand in cash. The house is received by him with a ’stepped up basis’ which means when he sells it, any profit will be calculated not on what Grandpa paid for it, but what it was worth when he passed.

I ask him if he’d mind moving into Grandpa’s house and he’s fine with that idea. Here’s what I told him.

Move into Grandpa’s house. Then he can sell his home, as it’s worth roughly $500K with a loan balance of about $250K. The entire gain would be tax free forever. (It’s been his primary residence for the last several years.) Now he has a new home, and over $400K in cash. Nice position. Steve is now not only smiling like kid with $10 in a candy store, he’s paying pretty close attention.

He then comes up with that ‘by the way’ comment that happens so much in my business. Seems Grandpa’s home was free and clear. Geez.

I then ask him how much to make Grandpa’s house perfect — in his eyes. He pauses to reflect a minute or two, then says $50K would do just fine. (The kitchen is original – 1950’s.) That leaves him with over $350K in cash.

First — Using appropriate and prudent leverage, invest in a region currently in a long term growth phase. This will enable Steve and his wife to acquire no less than $2Mil in investment property — probably in Boise. (There’s a surprise.)

Second — Hold back $75-80K in easily accessible cash reserve. Nine out of 10 doctors say eight hours of high quality sleep makes for healthier, happier investors.

Third — Refinance his new home to the same level of his old home, with about the same monthly payment. This will net him an additional $250K in tax free cash. He said his wife would like the payments not rising, plus getting the quarter mil. Ya think?

Fourth — Increase the number of exemptions claimed with his employer to at least 10. This will result in his take-home pay increasing significantly. Between the interest & tax deductions on his home and the $25K of annual depreciation, he’ll be saving a bunch on income taxes. (Probably over a grand a month.)

Fifth — Remember, he’s a journeyman carpenter, not to mention all his buddies in related construction trades. He’s the perfect guy to buy and fix local properties. He has $250K in cash for down payments, rehab, holding costs, and Murphy’s Law. When finished with each project he can decide, based on the current market whether to sell, hold, or some combination.

There are thousands of people in Steve’s position. Some by way of inheritance, some by any number of other circumstances. They have cash, or the ability to get cash. They have assets that can be transformed from under or non-performing, to turbo charged growth vehicles, safely transporting them to the retirement they’ve always wanted. And earlier than they’d thought possible.

Don’t let Steve race past you like you’re standing still. If your investment capital isn’t growing, your retirement isn’t coming any closer. You can successfully reverse that trend.

You might start by going to Starbucks, grabbing a cup of coffee and a cookie, and thinking about it.

This entry was posted on Thursday, March 29th, 2007 at 7:31 pm and is filed under Purposeful Planning, Real Estate Investing, Retirement. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.