How to Make Good Use of Community Property Settlement Funds After Divorce

Your community property settlement is finally done. You’re in charge of your future and your wealth. So, now what? 

Developing confidence in your investment decisions can be daunting after a divorce. Whether your former spouse managed the investments or you are learning to budget on a single income, sifting through the myriad choices available today can be intimidating and time-consuming. 

With today’s higher inflation, you’ll want to ensure that a portion of your property settlement is invested in assets that will help you hedge inflation. Real estate remains one of the best ways to hedge inflation and it’s never been easier to invest in it.

Real estate offers a number of additional benefits as well. It’s a great source of passive income, it builds wealth through property appreciation over time, it offers tax advantages, and the judicious use of leverage can boost returns.

As a rule of thumb, I recommend targeting about 25% of net worth to your home and another 5% to 15% to other real estate assets. 

We’ll take a look at three of the most common real estate investments and discuss the key pros and cons of each. 

How to Invest in Real Estate After Your Community Property Settlement Is Done

1. Real Estate Investment Trusts

Real estate investment trusts (REITS) own, operate, or finance real estate assets. There are three types of REITS. Mortgage REITS own residential or commercial mortgages, equity REITS own the actual properties, and hybrid REITS own both. 

REITS are required to pay out 90% of their free cash flow so they provide a steady stream of passive income through monthly or quarterly dividend payments. Since most are publicly traded, REITS are the cheapest and most liquid way to own real estate.

After my own divorce, I invested in a number of monthly-dividend-paying REITS which served as a second income and reduced my dependence on my salary. 

Buying a diversified REIT portfolio has never been easier, thanks to the rise of exchange traded funds (ETFs). One highly rated option is Fidelity MSCI Real Estate ETF (FREL). As of Sep 15, 2021, FREL’s yield was 2.75% with a YTD return of 27.9%, according to Morningstar. 

Another top choice is Vanguard Real Estate ETF (VNQ). VNQ’s yield is 2.19%. It was also up 27.9% through Sep 15, 2021, per Morningstar.

For mortgage REIT exposure, consider VanEck Vectors Mortgage REIT Income ETF (MORT). As of Sep 15, 2021, MORT’s yield was 6.8% yield with a YTD return of 17.5%, according to Morningstar. 

2. Rental Properties

Real estate income is considered passive income, but directly owning property is not passive. Rental properties are most suitable for those with larger community property settlements who can afford to put at least 30% down on each property, those who won’t need access to the capital for at least five years, and those with sufficient free time to monitor the properties.

Here are a few questions to ask yourself about becoming a landlord:

Do you want to be an active or a turn-key landlord? How do you feel about being the one who gets the call when the pipes burst while your tenant is away on vacation? Can you handle tough conversations with tenants about late rent and property damage? 

If you like the idea of owning the property but don’t want to deal with tenants directly, consider using a turn-key property manager. These companies handle everything from finding tenants to handling repairs, collections, and evictions. If you go this route, be sure to assess the management company. Speak with past and current clients and understand what’s included and what fees they charge. 

Do you have time for a part-time business? If you’re going to invest directly in rental properties, be prepared to treat it like a part time job. I recommend allocating five hours per week per self-managed property.

How much capital do you have to invest? In most cases, you’ll need to put down 30% to get the best mortgage rate. You’ll want to ensure you have sufficient cash reserves to cover vacancies, leasing costs, and repairs as well. 

If possible, follow the 1% rule – the monthly rent should be 1% of the value of the property. If you’re buying a $200,000 property, you’ll want to ensure market rent is at least $2,000 per month.

3. Crowdfunded or Private Placement Real Estate

The terms crowdfunding, syndication, and private placement are often used interchangeably, although there are investing nuances to each. In general, however, these offerings allow investors to purchase fractional ownership in a particular real estate asset or in a portfolio of real estate properties. Like REITS, these can be investments in the mortgages or in the actual real estate. Unlike REITS, these are private investments so they are not subject to the volatility of the stock market. Be sure to assess the following items.

Do I qualify to invest? Most crowdfunded and private placement offerings require investors to be accredited. As an accredited investor, you’ll want a property settlement of at least $1 million excluding your home. Alternatively, you will need to earn at least $200,000 per year, or you will need to hold certain professional qualifications. 

How long can I tie up my money? Many syndicated real estate deals have a lock-up period from 1 to 10 years. Be sure you understand how long the funds will be invested and match the deal with your investing time horizon. Only invest money that you will not need in the near term for living or educational expenses. 

Be sure to look at the company’s management team history. Have they successfully managed through real estate market corrections or have they been riding the real estate bull market of the past decade?  Evaluate the management company and the underlying asset before you invest. 

My final thoughts are these: Owning real estate remains one of the best hedge’s against inflation. It is a good way to build wealth and generate passive income to replace the second salary you may have relied on in the past. Investing through REITS and private placement or crowdfunded real estate serves an important role in a diversified portfolio.  For those who want to own the brick & mortar, there are a variety of active and passive choices available today. Do your due diligence before investing. Whether you decide to ever remarry, having your own portfolio is always a good idea. Real estate is one of the best assets to include in it.