Learning, Sharing, and Teaching > Real Estate and Landlording
Inheritance, Real Estate Investment, and SSDI
ZeroToRetire:
Hi folks,
I've been reading up on MMM for a while now, and I'm attempting to get more into this lifestyle. It has major appeal.
In this case, though, I'm trying to utilize the little financial literacy I've picked up to help out my father. I'd appreciate some thoughts and advice.
My father has a lot of health problems, including crushing two disks in his back quite a few years ago (15-20 now?). He has made some very poor decisions historically that have left him with nearly nothing but his house (self-built, 50k owed). He gets 800/month from SSDI and that is effectively his only income. His house payment alone is 750/month (500 of which is basically taxes). I help him out here and there, and his father helped him as well. He is 56 years old, and does get around OK movement wise, just needs to be careful and not lift a ton. All of his skills involve physical labor, as he went into business with his father straight out of high school doing concrete work.
That said, a few months ago, his father passed away. He is now dealing with the estate. There was really no cash, so the only real asset to speak of is a property worth ~125k per recent appraisal.
I'm trying to figure out the best way to utilize this newly found asset to get some additional income (per his wants, and it makes sense). He wants to get into rentals, and thinks that it would be best to rent out his father's old house.
We expect that he could get roughly 1000-1200 per month for it, as it is a very nice piece of land, but otherwise in a pretty out of the way area. Looking at the 50% rule of costs for real estate rentals, that puts him at 500-600/mo extra with no mortgage. That's significant compared to his current income, but will not break him out of poverty.
Instead, I'm thinking that he would be better off selling the property and investing in some existing small apartments. This would spread his risk (single vs multi-unit), better utilize the money currently sitting as equity, and allow a much greater cash flow. Here are a couple samples I was looking at (real on market right now):
ListedDownpaymentTotal Rent (as listed)Profit/Mo after 50% expenses & subtracting Mortgage185k46250254048295k23750220069597k242502715944
That totals about ~95k downpayment, which leaves him a bit after selling the house for improvements, savings, etc. It also has a monthly cash flow estimate of about 2,100. Now, these aren't hopping city properties, surely. The first property has a GreatSchools rating of 4, and the other 2 2-4 depending on school. I actually went to the school of the first one growing up and it wasn't bad at all - just a small country school.
Unfortunately, as part of SSDI, he can only make so much money before he loses his benefits. I believe that number is ~1180 or so/mo. While most could live reasonably in general on 2100/month estimate above, I think that it would be very hard for him due to medical expenses, and losing all the assistance he currently gets. That probably deserves a case study by itself.
All that background to boil down to a few questions:
1) Should he invest in the other properties in this manner, rather than renting the single home? Do the number above add up as I believe that they do? Is there an alternative we aren't considering? Index fund at 4% safe withdrawal is only 400/mo, so traditional doesn't seem like a good option. I think we need to be a bit aggressive.
2) Since he cannot earn more than 1000/mo or so without losing benefits, would it make more sense to funnel these investments through a business? Starting some type of corp (as it couldn't be an individual proprietorship, to my understanding) would allow his investments to grow, allow him to pull a small payout (1k/mo), and keep his subsidies. My thought is that with the remaining 1000/mo or so sitting in the business, it could easily buy a couple more properties over the next few years, allowing him to truly break out of the poverty world he is in and more comfortably give up all his benefits. Is this possible/make sense?
3) If he does manage to get the above successful and breaks out, any advice on healthcare? He has massive healthcare costs, and should expect to max out any plan he is on. Do individual health insurance plans (ACA?) increase in cost per year based on usage, like auto insurance? This may well deserve its own thread in another section.
I really appreciate any thoughts you folks may have. I know that increasing income is the opposite of the normal cutting of expenses, but he really is well below needs at the moment.
Thanks for your time.
Dr Kidstache:
I don't have any real estate advice but I would encourage you to double-check that he is receiving SSDI and not SSI. SSDI is not asset-tested and so you're correct that there's a limit to earned income (not sure how/if rental income applies to this). But if his only income is $800/month, is he not SSI-eligible? [don't know - maybe his personal house as an asset makes him ineligible?] If he is in fact receiving SSI or any other asset-tested assistance, that might impact what he should do with the inherited property.
Also, if he truly has such significant medical expenses, losing Medicare coverage by losing SSDI could end up exposing him to so much in healthcare expenses that it could eat up the inheritance quickly. I've just gotten on Medicare after the waiting period for SSDI and the ACA marketplace was not a pretty place to be. The plan I had refused to cover anything (literally - they paid $0 of my health care expenses 1990's HMO-style) so my out-of-pocket expenses were enormous. I'm a Texas resident, though, so he may have better options. You can search for plans in his zip code online on healthcare.gov to get an idea.
ZeroToRetire:
Hi Dr Kidstache,
I've been told that he has pursued those other options in the past, but frankly, he is terrible at nuanced activities like that. He is really struggling as executor of the estate. It may be worth looking into.
The health insurance is truly a big deal. He has several appointments a week, including regular therapy for his back that will never go away. That's why I think it has to be an all-or-nothing experience. Pulling just enough to lose SSDI/Medicare is a disaster scenario. I've always had employer health insurance that was reasonable - its a whole other world without it.
Thanks for your thoughts. I'll definitely keep them in mind.
better late:
I agree you need to know *exactly* what program(s) he is enrolled in currently.
My understanding with SSDI and medicare is that there are no limits to the amount of passive income you can make, but you can not earn more than $1180 a month.
$1,180 is SGA, and social security administration looks at that and says "oh, he can go to work and earn $1180 a month, he is no longer suffering from a physical disability"
But don't take my word for it -- I am learning as I go while helping a family member myself.
ZeroToRetire:
--- Quote from: Better Late on July 14, 2018, 08:46:32 PM ---I agree you need to know *exactly* what program(s) he is enrolled in currently.
My understanding with SSDI and medicare is that there are no limits to the amount of passive income you can make, but you can not earn more than $1180 a month.
$1,180 is SGA, and social security administration looks at that and says "oh, he can go to work and earn $1180 a month, he is no longer suffering from a physical disability"
But don't take my word for it -- I am learning as I go while helping a family member myself.
--- End quote ---
Hey Better,
Thanks for these thoughts. I didn't realize the difference between passive and earned income here! That's interesting, and makes me lean even more towards putting his inheritance in a business. If my understanding is correct, this means that he could put 100-120k after house sale into the business as an investment, and we could run the business basically as a property management company (perhaps paying ourselves a small bit?) and we could payout whatever to him in dividends, without it impacting his medicare/SSDI. Does that sound right? Perhaps we could also pay him as a contractor if he wanted to dub on a few small projects here and there, as well.
On the SSDI versus SSI, I looked into it a bit. Unlike SSDI, SSI appears to have an asset test, which he barely fails (owns a small lot outright, and a few k in an IRA). It seems like we could free up the land thing (been harping on him for that), but the cash in reserves is a bit scary. Less than 2k at any given moment doesn't seem like a thing to aspire to for a few hundred more a month.
Appreciate continued thoughts.
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