IRS2K

Hi everyone,

My cousin recently lost her parents. Sad times.

Apparently they left her "just under $500k". She's in her mid 20's and just graduated college last quarter. Hasn't found a real job yet because of the circumstances. She has no idea at all what to do with the money. She told me she'll just go "buy a house". I'm sure there's better ways to invest, but when she asked I really didn't have a good suggestion. I thought real estate was good, so she said why not a house then????

Any suggestions? I'd like to be able to give her some kind of options before she meets with one of the financial services company.

Thanks!

The Gasman

Depending on where she lives, buying a house is not a bad idea. It's a way for a 20 year old to hold on to the money so she doesn't blow it on something else. In most markets it will appreciate, and if she lives in it long enough it will appreicate in almost any market. Another thing she could do is buy a place in a market that looks good, then sell it in 2 years after it appreciates. The main thing is that if she can live without it is to keep the principal intact.

WyattH

A house may be a good idea, depending on the area, but leveraged so that you can invest the rest and make a higher return than the interest on the home.
She should just buy some mutual funds. Vanguard, BRK, etc... Doesn't sound like she's able to monitor stocks.

cthree

Buying a house is a good idea. It's free from capital gains and it's a buyer's market which makes it a good time to buy if you don't need to sell.

However, being in her mid twenties and without a job she may have difficulty finding a mortgage under good terms. I would not invest all of it in a property. She should consider investing half in a house and carry a mortgage large enough that she can benefit from the tax deduction she will get on the interest. That will depend somewhat on her expected tax bracket. The balance I would invest in a diversified portfolio of growth securities. Since she is just starting a career being overly conservative will be costly longer term. Stay away from income generating investments as they will carry tax implications and are too conservative for someone in their 20's. Income investments would be bonds and low-growth stocks paying high dividends.

If she's not an interested money manager I'd recommend she talk to a financial advisor and have it invested in a single mid to high risk but well diversified mutual fund. Depending on where you live there are a couple of financial advisors who might be able to point her in the right direction here on s2ki.

IRS2K

She actually wants to "buy" the house (no mortgage). I can understand why, but I just don't think that's the best thing to do.

Where's a good site that she could read up on regarding the tax deductions with mortgage/ tax bracket?

I've adviced her to seek a financial advisor for stocks- long term investments, but she seems to want to use the money for a business. She's thinking half on purchasing a house, and the other half on starting a beauty store. Her reasoning is the house will be paid off so she won't be under too much financial stress, while focusing on building the business.

What do you guys think?

Thanks for the feedback!

WyattH

Whatever gives her the peace of mind.

We can advise her on gaining the most in the long run, but that doesn't always let people sleep well at night.

Money2536

Where is she located? She really needs someone to sit down with her and advise her. I'm a wealth management advisor in Florida. I'm not sure where you are located, but I could give her a few tips on selecting an advisor.

FMINUS

House may not be a good idea as there are expenses of owning a home. Smart thing to do is to invest in any diversified mutual fund and to either withdrawal the annual 50K in interest so she may concentrate on school without working or simply leave it until its time for her first home.

Im not an FC, but I am in investment banker

Money2536

I think the tough part for her is dealing with this huge transition in her life. She just lost her parents, graduated from college, isn't working, and has $500K(which is a bigger problem than she knows). At age 25 $500K may seem like it would last forever. When you combine the money, grief, and uncertainty of what your going to do in life, this could lead to severe apathy or spendthrifting right through the money.

She's not a sophisticated investor, so leveraging a home may not be the best idea. She'll be able to get financed with $500K in the bank, so that's not a problem. Sure in theory it would be nice to go out and borrow to buy a $300,000 home at 6.25% then invest the money and get, say 8%-9% return on her money. That's great in theory, but we live in the real world that includes closing costs, property taxes, etc. The problem is, she's not going to get those returns year-in and year out. Plus she'll probably start an entry level job, so she'll likely be in the 15% or less tax bracket. So the itemized interest deduction on the mortagage won't be as attractive.

We would need to know her current living situation. Maybe her parents owned a home that she could take possession of the payments. Or maybe she'd be better off renting with some friends. She probably wouldn't benefit living alone right now. Plus, she'll likely change jobs a few times and may need to relocate. At least wait until she find's a job she likes before buying a house on the opposite side of town.

She's going to want that money someday to have a wedding, buy a house in the future, and raise some kids if she's like most girls.

In order to sustain this portfolio, I would take an income of about 4% or $20,000 per year. She should hire a financial advisor that can sit down with her, determine her goals and tolerance for risk, and help her invest the money to help her meet her future goals. They can recommend a tax advisor for her. I would recommend an Merrill, Smith Barney, UBS, Morgan like advisor for her. She has enough money that most advisor would take her as a client assuming she's not going to blow through the money.

The twenty thousand will help her supplement an entry level salary. If she needs a car, don't finance it just buy it. She needs to be modest off the bat or the money will disappear much faster than she would like.

If she take a large income like $50,000 off the portfolio and we have returns like we have had since 2003, she'll be fine. But if she takes that much, and we have some consecutive negative years, the principal of that portfolio will obviosuly suffer huge, unrecoverable losses.

IRS2K

OK, here's some more info.

Current living situation is with some college friends. Lease ends next month. Reason why she wants to buy a house.

Parents had a condo that went to her much older brother. They've never been close because of the age gap, and he's married and has his own matters to tend to.

She just got a couple of job offers, the highest for 32k/yr. I believe she's going to take the highest one. But, sounds like she's leaning towards the lesser paying one because she likes the company better. Especially since she "feels" more financially secure.

BTW, she's asking about a Lexus SC430... I think her friends have already gotten to her head...