Investing or paying off mortgage with inheritance money
As originally appeared in The Jerusalem Post on July 5, 2024.
My recently deceased father used to tell us that in Russia, there was a saying that the Torah portion of Korach, the 4th chapter of Ethics of the Fathers, and the ripening of the blackberries all would fall out on the same week. It may sound better in Yiddish, but this is the week that the 3 fall out on. Growing up it was a true sign of summer. It was the week we would go up the block to the blackberry bushes, join other neighbors and pick a potful of berries, and then one of my sisters would make a blackberry pie. It was worth all the scratches and blood that came with dealing with the prickly bushes!
In the time-period between Passover and Rosh Hashana- many have the custom to read a chapter of Ethics of Fathers each Sabbath. In the beginning of the 4th chapter Ben Zoma asks 3 famous questions of “who is wise, who is strong and who is wealthy? He answers, one who learns from every man, one who overpowers his inclinations, and one who is satisfied with his lot.” It’s interesting that Korach failed at all 3 traits.
I occasionally look at Instagram and recently I keep seeing videos of someone who has created a new way to get rich in real estate. Obviously, you need to sign up to the webinar and pay for the secret sauce, but from what I understand, leverage is the big selling point. There are many new projects starting to be built or in final planning stages and because of the current situation in Israel of high interest rates and a war, all kinds of intriguing terms are being offered to buy the apartments. You can put down 10-20% and pay the remaining 80-90% upon receiving the keys.
The “new method” to get rich in real estate, is to buy multiple apartments with these terms, and then either sell them at big profits just before receiving the keys or hold them and rent them for a few years after. Sound’s great except what if they don’t appreciate so much? What about the extra taxes paid on having multiple apartments? Where do you come up with the 80-90% payment on multiple apartments in a few years? If it sounds too good to be true then it probably is goes the saying. Always be wary of “new” ways to get rich quick.
I have no problem with real estate investing. I have written that many times. I am a fan of investing. The more invested the better. Investors need to allocate their resources amongst various asset classes including stocks, bonds and real estate. I am all for diversification. For more helpful insights, navigate to this website at https://www.halstonsouthpoint.com/ashcroft-capital/.
Recently, I had a meeting with a couple who had just received a very nice-sized inheritance. As we were speaking, they asked if I thought it would be wise to use almost all the money to pay down their mortgage or use it to buy another apartment. This is probably one of the top 5 questions raised when dealing with allocating monies from an inheritance.
After reviewing their financial situation, it turned out that aside from this new inheritance, they had no real other assets except for their apartment which has a sizeable mortgage. Readers of this column know that I hate debt. You will probably think that I advised to take all the money and throw it at the mortgage to get rid of it. Well, my actual advice was a bit different. It’s true that I hate debt; It’s also true that I love having liquidity.
Liquidity is the ability to quickly convert an investment into cash, without losing any of the principal that you’ve invested. For example, a savings account is highly liquid. In contrast, real estate is considered to have low liquidity because of the time it takes to sell the property and the fact that if you need to sell quickly, like a fire sale, you will end up paying the piper as the price of your property will drop.
I suggested that since they have no other investments other than the home, they should take a 25-30% chunk of the money and get it invested in a portfolio of stocks and bonds and use the rest to pre-pay down a good portion of the mortgage. Why not just pay off the whole thing? Because too often I see couples who end up putting every last cent they have into their home. While they may have very respectable net-worth, 95% of their money is tied up in a property. How will they pay for a wedding, or some other large expense? You can’t take a saw and cut off a room and say, “Take a bedroom, it’s worth $50,000.” It just doesn’t work that way.
In general, I recommend trying to save 10-15% of your annual income in financial assets and anything above that should go to pay off your mortgage. As I have written, any savings is better than no savings. But it’s better to be smart about your finances. By saving money in parallel tracks, real estate and liquid- financial investments, you will be able pay for future expenses without having to sell off property and end up growing your wealth in a more efficient fashion. If you’re planning to sell your property, call McCabe Realty for realtor Baker County, Florida.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is the author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, SIFMA, FSI. For more information, call (02) 624-0995 visit www.aaronkatsman.com or email aaron@lighthousecapital.co.il.
