The divorce is final. The settlement is completed, and you have your portion of the assets, property and debts. Hopefully, you had good representation that provided you guidance regarding what to keep, sell, divide or surrender. In many ways, the challenging part of the allocation is behind you.
Unfortunately, over the coming years you may find some of the decisions you made were not the best, while some, with careful management may turn out to be financially rewarding.
Divorce has only two sides. The only problem is that the process of the divorce is like a multi-armed monster. You have custody, support, retirement accounts, investments, home, property, debts, and oh, a failed marriage. If your head isn't spinning by day two of the divorce negotiations, give it until day three.
Settle and get it done
By the time you're negotiating assets, many of you aren't completely attentive to every detail that may affect your long-term goals or financial portfolio. Depending on the extent of the emotional baggage, sometimes the after party isn't really top-of-mind when you're trying to just get the divorce completed. This may have caused you to give up what you really should have kept or take on what you didn't want.
Revised portfolio of assets and debts
You now have a financial portfolio that has been ripped apart; your portion put back together in your name only. If you received a lump sum settlement in lieu of support payments or as payout for your spouse acquiring another asset (house, investment account, rental property) you will need to reallocate those funds in order to maintain your investment goals. It's best to wait until you have cleared away some of the emotional baggage from the divorce before making major financial decisions, unless necessary for tax reasons or penalty avoidance (consult your accountant, IRS or financial advisor for more information).
Ideally, you should have between 2-6 months reserves for emergencies in a high liquidity investment account like a money market account, savings account or a short-term certificate of deposit (CD). Once this is achieved you should then consider investing the remaining portion of your settlement in other investment vehicles like IRA's, stocks or bonds, mutual funds, real estate, small business, etc.
Based on your age, goals and total net worth, most of you won't want to keep your remaining funds in low yield investments like a savings account, money market or CD. Here's why:
$10,000 lump sum settlement
Money Market - Your lump sum settlement over 30 years with a rate of return of 1.75% (not including taxes, fees, inflation) = $16,828 Secure Investment
S&P 500 Stock - Your lump sum settlement over 30 years with a rate of return of 10% (not including taxes, fees, inflation) = $174,494 Moderate to High-Risk Investment
We aren't investment, real estate or business brokers, but you will want to maximize your return based on your goals and risk factors that a broker will have experience to properly advise you. Not achieving the highest ROI (rate of return) possible based on your maximum risk potential can be as irresponsible as investing in extremely high-risk investments.
Do not take advice for an investment plan for your lump sum settlement from your former spouse, friends or family unless financial and tax experts have reviewed and approved the plan is best suited to your goals. It's a good idea to have a basic understanding of the various forms of investments available so that you can discuss your investment options fluently with your broker. Check out the DMK Article Investment Options Explained.
Real Estate
Real estate can be a very safe place to invest part of your portfolio. Especially if it is your own home or rental in an appreciable area. It can also be very risky, especially if you try to take part in "get rich quick" schemes or intend to rehab properties for a quick return.
It helps to have a background in real estate or a relationship with professionals who can guide you. The most common professionals include real estate brokers or agents, real estate attorneys, accountants or tax advisors, contractors, pest companies, foundation repair companies, building inspectors, real estate management firms, real estate listing services, appraisers, mold or radon mitigation contractors, mortgage brokers and real estate firms that offer as-is properties and/or foreclosures near your area of interest.
Rentals (Moderate risk, good tax shelter, capital gains loopholes and potentially safe investment for long-term appreciation make it worth considering.)
The property should be in a stable neighborhood where properties are expected to appreciate over the term of your ownership. You should consider the costs associated with buying, refinancing and selling the property, capital gains taxes along with the common expenses associated with rentals when calculating the potential for long-term ROI.
The local market should substantiate the home's ability to provide a positive monthly cash flow (more than the cost to maintain all expenses related to the ownership and upkeep of the home).
The most common expenses include but are not limited to, enough to retain a management company, updates and repairs when needed and mortgage, taxes, insurance and private mortgage insurance, when required.
Your ROI increases two main ways - generated cash flow after expenses and appreciation of the house based on others in the area. The better each performs - the more return on your investment. So, choose wisely.
You should know the laws regarding eviction and worst-case scenarios. Your management company should have a clear contract that stipulates each other's responsibility. They should have a good screening process for tenants.
If you manage the property yourself, you should have reasonable handyman skills and the time to address issues as they arise. Expect the unexpected and always have room in your budget to carry the mortgage during vacancies or the eviction process. The times of a handshake and a smile are over - get everything in writing!
Rehabs (High risk but high potential for big returns.)
You should have skills needed to do much of the work or locate rehabs that have enough potential return for you to hire a contractor. You should plan to list the home(s) with a local, trusted Realtor® and you should factor the commission in as a deduction from your potential profit when deciding if the rehab is a good investment before you purchase it. Do this even if you plan to sell FSBO (For Sale by Owner) or with a listing service - to ensure you have enough money to enlist the help of an agent or broker if things don't go as planned.
FYI! Things never go as planned! The longer you're in the business, the more you'll learn, but you'll also increase your chances of running across a bad investment. Bad rehab investments are the easiest thing to learn the hard way in real estate!
Try to buy properties that only need cosmetic repairs like paint, kitchen or bath updates and landscaping (most things you can do yourself). Be aware of all the other costs associated with rehabbing. Some include foundation or roof repairs, termite treatments and repairs, windows, doors, plumbing and electric code violation requirements, radon or mold problems, permit costs and time constraints associated with inspections, home staging and curb appeal modifications...just to name a select few.
Often the properties are not owner occupied and the seller sells as-is and without a Seller's Disclosure. You may be able to have a building inspection, but when buying as-is, you will not be able to ask for large repairs or have the opportunity to cancel the contract should you find a latent defect (unless otherwise agreed in the Sales Contract). Usually, you want to know enough so that you can increase your chances on "hot buys" that may get multiple offers. It helps to have your own real estate license or have some knowledge of real estate law in your state.
Taxes
Unfortunately, some of your tax liability for assets you assumed as part of your settlement with the intention to sell or retain may incur a hefty tax liability. If your intention was to sell a particular investment with a gains tax of 20%, you should have sold prior to the divorce so that the actual value after taxes was considered in the settlement.
We can only hope that some of you are reading this before your divorce is final. If so, speak with your attorney, an accountant, tax advisor or the IRS for tax implications regarding your settlement.
Investment option explained
Find brief explanations to numerous investment options available in our 2019 DMK article, Investment Options Explained- The article provides an explanation of common investments that you may want to consider following a divorce.
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