How should I invest the money I am receiving from a financial settlement?
I am anticipating receiving a financial settlement from an accident. I anticipate receiving between $190,000 and $250,000 in the settlement. I want to use this money to help secure my family's future. I have three ideas for where to invest this money and want to know what the best option would be. My ideas include purchasing a home and renting it out, investing in the stock market, or purchasing a franchise. From my research it seems like all options are viable. Do you have any advice on what the best option would be, or have a different suggestion that I haven't thought of?
This is an interesting question and it would really help to have more information. It would be great to know more about your current financial position such as income, expenses, debt, mortgage or rent, retirement plan, insurance assessment, credit score and more.
All three of the ideas you mentioned could make sense in many situations. One thing you should consider with your settlement is diversification. You may want to invest $50,000 in a rental property, $50,000 in the stock market, $50,000 in a franchise and the remaining $40,000 - $100,000 could be used to pay off debt and build up your emergency fund.
Here are some things to consider about each investment option you mentioned. First, for rental properties, you may want to speak to a lawyer about the pros and cons of putting the rental home in a separate trust. You may also want to consider multi-unit properties to diminish the effects of vacancies. You will have to review your credit score before applying for financing and make sure not to have too many "hard credit" checks in the process. Each hard credit check can drop your credit score between 2-7 points. That may not seem like a lot but it can add up when there are 5-7 credit checks in a short period. You will want to carefully analyze the cash flow on the property and consider the CAP rate.
Second, for your investment in the stock market, you may want to work with a fee-only Financial Planner who can help you determine your risk tolerance and investment objectives. Fee-Only Advisors do not earn commissions from selling products which makes them less biased towards investment products. Determining your risk score can take the guesswork out of investing. You can check your risk score for free by clicking this link.
Purchasing a franchise could be a nice option depending on how hard you want to work, what kind of franchise you are considering, where the business is located, and how well the franchise is run. But there is plenty of risk involved in operating a franchise. Sometimes, you get franchise owners who only show up at the end of the month to collect their check. Therefore, you will want to seriously weigh the pros and cons and perform due dilligence in researching the right franchise for you. It might be helpful to speak to other franchisees and get their opinions.
Congratulations on your financial settlement and having the fore thought to use this money to secure your family’s future. Before you decide which investment option to choose, I would advise you to consult with an accountant or tax attorney to see if you will owe any taxes on the settlement. Second, I highly recommend having financial plan done to really understand what your current investment options will mean for your financial picture in the long run. All three investment options: investing in the stock market, purchasing rental property, and purchasing a franchise are great long-term opportunities. Each investment should be examined for it’s potential return opportunity, liquidity, risk factors, and expertise/commitment needed.
Stock Market: When you invest in the stock market you are owning shares in a business and in most cases creating a diversified portfolio to own shares in multiple businesses. By far, investing into the stock market is the easiest in terms of getting started and exiting when you need access to your money. One of the biggest benefits of stock ownership is that it doesn’t require any work on your part and you can employ a financial advisor to customized a strategy that will help you reach your financial goals. Although, investing in stocks is very liquid, most investors should plan to invest for 5-10 years to manage market volatility.
Rental Property: Purchasing a rental property is a great way to earn income and gain appreciation in the real estate market. One of the primary advantages of owning real estate versus the other options is you can use mortgage loans to leverage your actual investment and potentially invest a larger amount than your original investment. Outside of the market risk for real estate you’d want to ask yourself 1). Do you have or know someone (real estate professional) with the expertise to purchase profitable rental properties, 2). the capital to maintain the property, and 3). the time (or money to pay someone) to manage the property? Real estate also isn’t very liquid, but if you’re investing for the long-term (more than 7 years) it should work for you.
Franchise Opportunity: Most franchises assume that as an owner, you will be investing some of your time and skill into the business, as well as money. An investment in a franchise should provide you a return for both the money and a salary for the time invested in the business. That salary can be paid to yourself if you’re running the business, or to a manager if you’re not. Like real estate franchise ownership is not a liquid investment, but as a long term investment you can plan a successful sale of the business within a 1-2 year period. Questions to ask yourself are 1). Do I have the time, personality and strengths to manage a franchise business? 2). Can you examine and choose the right franchise opportunity for your area?
Deciding what investment is right for you largely depends on your personal circumstances and financial plan. My initial thoughts would be why not start with an investment into a stock portfolio and begin doing your research into successful real estate and franchise opportunities. With proper planning there is no reason that you can’t invest in all three.
This is an interesting question, especially in view of the options that you have outlined. What strikes me first is that two of the three possibilities are passive investments while the third means that you will be actively involved.
Purchasing a home and renting it out has a number of concerns, including finding an attractive property in a desirable area. One of the biggest issues in this situation is that your investment will be illiquid. If you need to get your money out, it could take an extended period for you to find a buyer and complete a sale. What's more, it's likely that whatever you buy will require some investment and time to get it ready for renting. Even then, it could take a while to find a renter and there may be empty periods after one tenant moves out before another moves in. Moreover, what will you do when you get a call during the night letting you know there's a power failure or bad leak or who knows what else?
The prime beneficiary of purchasing a franchise is whoever sells you the franchise. The kinds of franchises available these days require major commitments in time and often less than great returns on the investments you will be making. If you need to hire people to assist you, your overhead may become burdensome. And, let's not forget that you'll have limited free time.
Investing the funds may be a better option, but it would be essential for you to find a competent, qualified, and honest adviser to guide you into an appropriately constructed portfolio. I suggest you go to https://www.napfa.org/find-an-advisor#tab=filters to find an adviser who meets your needs. That's the website of the National Associatoin of Personal Financial Advisors (NAPFA). NAPFA advisers are all highly qualified, fee-based, and must put clients' interest first. Call and meet with a few. Then select the adviser with whom you are most comfortable.
By investing properly, you may well generate worthwhile returns whle still having time to work (if you choose) or spend your time in enjoyable activities. Neither of the other options will be as desirable.
Out of those three options, the one where you can most diversify risk while targeting a handsome return is investing in the stock market. However, your investment should be carefully allocated based on your goals and time horizon. Learn more about how this can be done with an ETF portfolio at: http://bit.ly/ETFAdvantages
First off, congratulations on taking the biggest step which is deciding to invest the money.
There are a few things to consider when thinking about what to do with the money. The best place to start would be thinking about what your objective is. Are you looking to grow this money or are you looking to generate current income. The rental property would be best suited for current income while the stock market would be best suited to grow the money and the franchise would be a combination of both.
Next you want to look at how involved you want to be. A franchise is going to require the most amount of time and if you have no experience operating a business there will be an enormous learning curve. Stocks can be very passive such as an index fund or active with individual company selection. Rental properties can also be a lot of work, but if you hire a property manager you lower your returns and your headaches.
Taxes should also be a consideration. Depending on your current employment situation and other current assets each of these investments can have their tax advantages and disadvantages. I would recommend speaking to a tax professional to walk through all of your options from a tax perspective as well.
I hope this helps point you in the right direction.