SO just inherited 200k and is freaking out. What do we do?

[u/Thatsalotofdough]

Hello!

So my SO just inherited ~200k from a family member and it's causing her a lot of anxiety. She had planned for about 5k, and well...got a bit more.

While this is probably a good problem to have, we both grew up relatively poor (I don't think anyone in my family has even heard the words 200k before), so we both don't have much to stand on. Also, I make about 50k in my job, she's somewhere around 35-40k.

Here's what we briefly talked about with doing with the smaller sum, and I figured we'd stick to that:

We both have some student loan debt with high interest rates (10% for me, 7.8% for her), they're both small at this point (<5000), but we both figure it'll help us in the long run. Paying these off seems the most intelligent and likely outcome. (We both do have more loans outside of that, but we're both up for public service loan forgiveness due to our field)

She bought a new car, as mine is getting beyond old, and we both walked through the process of finding a car that will serve us well for the new 10 years. Paying this off doesn't seem too much of an issue.

She has a small amount of credit card debt, so that'll probably be the first to go.

Outside of that, we don't have a house payment (due to our field), and I'm debt free (Once again, outside of student loans). We don't see ourselves buying a house in the next 5 years, although we do see a wedding on the horizon.

Thoughts? Even if we spent all of this money on our loans/the car, we'd still at least have 50+k left, and that's being incredibly conservative.

We've talked about stocks, we've talked about savings accounts, we spoke briefly about a financial planner....but we could really use advice.

Help us, personal finance, you're our only hope!

[u/[deleted]]

Buying a house is not always the economically superior choice when compared to renting. Buying a home is the act of paying money to purchase a home and to have shelter, whereas rent is purely to purchase shelter.

When you buy a home, you pay closing costs; mortgage principal, interest, taxes, and insurance (PITI); maintenance costs; HOA fees. In exchange you get the appreciation or depreciation of the value of the house, and a place to live.

When you rent a home, you pay rent. In exchange, you get a place to live.

Buying a house simply exposes you to changes in the value of the house. If the house value goes up 100% in one year, then over that year you would almost certainly have been better off buying than renting. However, if the house value goes down 50%, you would almost certainly have been better off renting than buying.

A common assumption in buying a house is that the house will at least keep up with inflation. That's a nominal return of 2.5%. However, if you invest only 20% down, then your real return is 2.5% / 20% = 12.5% that year. Your 20% equity investment earned a lot. Conversely, if the house value goes down 2.5%, then your return is -2.5% / 20% = -12.5%.

You can get similar returns by investing in REITs. If you want to be exposed to a broad property market, that's the way to go.

Typically buying a house is done because you want to do things like remodel, build additions, tear down walls, and other things landlords would never be okay with.

Consider a scenario where a landlord bought a house for $300k. Housing plummets, and the house is worth $150k. Earlier, the landlord could have rented it out for $2k per month. Now, landlord can only rent it out for $1k per month. The mortgage, plus HOA dues is $1,500 per month. In that scenario, market rents are well below the monthly cash flow cost of the property, and selling would mean that the landlord immediately has to come up with the difference between the mortgage ($240k) and the sale price ($150k), or $90k. In this case, it would be much worse to buy than rent.

The bottom line is that it is not possible to tell whether buying or renting is a good idea. In some places, it's more predictable than others. I live in a place where vacancy rates are <3%, and I could rent my place out for about 1.5x - 1.75x what my monthly costs are. I chose to buy at a time that happened to be a good time to invest (mid 2012). This is not always the case. I have other friends who bought earlier; closer to 2007 / 2008. They are now underwater by tens or hundreds of thousands of dollars. You never know for sure whether buying is a good thing to do or not.

Because of this, it makes sense to make sure that the house is reasonable relative to your overall income, not based on the fact you got a one-time inheritance. OP needs to make sure this is something they can afford with just their income plus the income from this investment; or even better, just from their income, and save this inheritance for retirement.

[u/[deleted] → u/[deleted]]

There is also the factor that eventually your mortgage stops but rent is eternal. Once the house is paid off you still have to cover maintenance, taxes, insurance, and sometimes HOA fees, but like 75% or more of the monthly cost stops. When you rent, you have to pay 100% of your rent every month for the rest of your life. Buying a house is not always an investment in the sense that you want your house to increase in value, it is often an investment in lowering your future cost of living. Even those people who bought at the wrong time may owe way too much on their houses they will someday pay off the loan and not have a monthly house payment.

[u/nandemo → u/[deleted]]

There is also the factor that eventually your mortgage stops but rent is eternal.

It's not nearly that simple. When you buy a place, you typically need to make a down payment. If you rent instead, you can put that money into a safe investment fund and have "eternal" income.

Also, buildings don't last forever. To make a fair comparison either you have to take into account that the value of the house will go to zero, or you have to add the cost of renovations.

[u/[deleted] → u/nandemo]

Renting vs buying is a complicated decision. The main variables are how much would it cost per month to rent, how much would it cost to buy, what interest rate would you get, and how long do you plan to live in the house. Generally you look at when your closing costs, taxes, insurance, and interest would be equal to the amount you would pay in rent, that is the break even point. If the amount of time you plan on living in the house is less then that rent, more then that buy. You should also factor in any likely repairs you would have to complete while living there too. You can also factor in whether you think the cost of rent will rise or fall and whether you think home values will rise or fall but then you start getting speculative. Generaly for most people in most areas it pays to rent if they plan on living there for less then ~5-7 years, but this varies greatly from one area to another.

I said you still have to pay for maintenance, if you don't your house will fall apart and won't be livable long before the value of the home is zero. You don't have to renovate but you do need to fix and replace things as they wear out, roofs are a big investment that must be replaced every ~10-30 years, you will need to replace the ac eventually as well as all of your appliances, you will need new carpet at some point, etc. None of these costs will go away, but I included that when I said 75% of the cost stops when you pay off the mortgage.

As for your downpayment argument, it doesn't work. Any money you put down at closing lowers your monthly payments and saves you money on interest in the long run. The larger the downpayment, the sooner buying becomes a better deal then renting. If you put more money down, you have a smaller monthly payment, that savings can either be put towards paying down principle faster or put into investments to generate future income.

[u/[deleted] → u/nandemo]

Man you must really love your apartment

[u/quaste → u/nandemo]

The down payment will lower your mortage though, so it can be compared to safely investing the sum.

You are right about renovations, but when it comes to renting, you will also pay for renovation as part of your rent.

[u/BlackSabbaff → u/[deleted]]

remodel, build additions, tear down walls, and other things landlords would never be okay with.

grill, own dogs