Financial planning - What's a plan without considering real estate?
Landlord · Seattle, WA · Member since 2010 · 3k+ posts · 1k+ votes
Retirement / financial planning are extremely important tasks. My biggest beef and frustration though is that the vast majority of planners fail to consider real estate and other investments when building a plan.
As real estate investors real estate has become an essential element in an financial plan. It is surprising though the lack of advisers that understand how appropriately consider real estate any other alternative investments in a retirement plan.
Bottom line is there is so much more to investing and planning than stocks, bonds and mutual funds.
Perhaps some of you have found financial advisers that appropriately include other investments when helping clients in their financial plans. If so I very much what like to hear about them. If you also are frustrated by the lack of advisers feel free to share your thoughts. Perhaps you feel that financial advisers do not need to include alternative investments, I would love to hear your thoughts on this as well.
This seems to an appropriate place to share the following:
A Comprehensive Wealth Management plan:
1. Creates and Grows Wealth
a. Assures that their investments are appropriate to achieve desired goals.
b. Reviews their income tax situation to make sure they are not paying unnecessary taxes on investment income and excessive capital gains tax.
c. Assures their life insurance is adequate in case of premature death.
2. Protects and Preserves Wealth
a. Reviews current plans for paying for the consequences of life’s unknowns. This includes a discussion of their overall risk management program -- Life, Disability, Long Term Care and Liability -- to make sure the plans are adequate and cost effective.
b. Considers the overall investment portfolio to make sure investment selection and diversification are managed appropriately.
c. Reviews the overall tax sensitivity of these investments.
3. Plans the Distribution of Wealth during Life in the Most Advantageous Way
a. Considers the IRA and qualified retirement plan distribution plan; not as an accountant, but using a tax expert as appropriate.
b. Assesses who serves as their durable power of attorney or successor trustee of a revocable living trust in case of an incapacity - again using the appropriate advice from a CPA and legal counselors.
c. Considers ways to distribute wealth to children and descendants for well-being, education and other purposes and doing so in the most tax-efficient method.
d. Reviews charitable giving for both tax savings and control issues.
4. Plans for the Distribution of Wealth at Death in the Most Tax-Advantaged way.
a. Reviews the titling of all the assets and whether Joint Tenants with Rights of Survivorship makes sense - using the appropriate advice from a CPA and legal counselors.
b. Considers who will serve as the executor or trustee and whether a lack of continuity in the financial arrangements is an issue.
c. Analyzes the plan to distribute wealth at death to their spouse and descendants for both tax efficiency and control - not as a CPA or Attorney, but bringing in those advisers as appropriate.
d. Reviews the charitable inclinations at death for both tax savings and control issues.
To create this Comprehensive Wealth Management plan one must consult with an accountant and an attorney to assure accuracy and legitimacy.
THIS DOES NOT CONSTITUTE FINANCIAL ADVICE.
I STRONGLY urge everyone who reads this to consult with qualified advisers in each area (investments, insurance, accounting and legal matters).
Financial Planners push stocks, bonds & mutual funds as they get a commission from the sale of these and in some cases get a kick back or bonus for selling particular stocks, bonds or mutual funds. They do not get anything for recommending real estate so it is not included.
Also when you set up an appointment to see a financial planner they want you to fill out an informational form that is put together by their industry. Based on the answers on the form they will push certain items.
One financial planner stated I was overly invested in real estate and needed to sell it all and place it into the stock market. Did not listen to that individual.
My financial adviser is the same as the rest. He only wants to buy things that he can sell the next day. About 60 % of my net worth is in real estate and his view was the same as what Dale said above, sell it all and put it into the markets. My viewpoint going forward is to stick with index funds and not pay a wealth manager a percentage.
There are some wealth advisers that push alternative investments but I've only seen that with guys who manage money for pretty high net worth guys. We've worked with some of these advisers when raising money for development projects and they usually get compensated as either a money broker or they take an equity stake in the project.
Money magazine has always had advisers that tell people who write in that they are overweight in RE. Funny thing is they are usually worth lots.
Hate to admit I would have bought more had I not listened at least a little. At least I did not sell as they advised.
The fact is people using advisers make less than people w/o. Many that use them are too busy to do their own stuff, consequently many rich people have them.
It has always been said those richest own RE.
Another thing is the way they calculate returns stocks versus RE. How many banks will loan 80% on stocks and allow you to pay back the loan w/ dividends.
If you inherit money they will tell you to not pay-off your house but invest with them. At the same time they would say borrowing against your house to buy stocks is extremely risky.
If you need or want an adviser do a fee only and never someone that makes a commission on what they sell you. Most banks will charge you 5% upfront.
Charles et al,
More and more I find that buyers need to know a lot about what they buy AND from whom they are buying.
LOTS of "professional" financial planner or investment advisers are really selling a product - stocks, bonds, mutual funds, annuities, insurance policies etc. If the consumer really wants unbiased guidance without the products then that consumer should seek out a fee-based financial planner. Expect no answers without paying the fee.
This is really not much different than many other fields.
Banks don't offer hard money loans to either borrowers or savers.
I've read numerous posts here on Bigger Pockets when the original message really amounts to "Is this contractor ripping me off?" or "is the a good deal?"
I will say in the area of financial planning MOST consumers would be well served to meet with professionals who can help them in the fields of investments, insurance, accounting and the law.
Kevin Yeats I see value in all of these investments. It just seems there is a huge need for more comprehensive planning.
Insurance has a role. The equity markets can have a role though I feel that currently they are overemphasized. Gold, Silver and other commodities can have a role. Real estate can have a role.
What I don't see are advisers that can build a comprehensive plan that accounts for all of these needs.
I only buy no load index funds with low fees from vanguard. i also have a low cost/noload 401k thru my work.
everyone is correct - real estate can make you rich, no doubt. but i find it ironic those are talking about fees where RE has some of the most fees around (agent fees; closing costs; license fee; transfer taxes; inspector fee; appraisal; origination charge; title insurance, etc) :)
Seems like Robert Kiyosaki stated it was a "conspiracy of the rich" to keep the average person poor. Also he seemed to refer to some of the brokers & financial planners as "foxes guarding the chicken coops".
It would make sense to be or have financial planners for RE investors.
To me if one has a business they have no business risking their reserves in stocks. Have seen recession destroy business and same time the business owners stock investments too.
If you are heavy in RE, to me being light in stocks is what makes the most sense.
As someone who is currently studying to become a registered financial adviser, you're right. Most of the focus is on paper security instruments. After all, that's how the industry makes most of its money.
One of the things I hope to offer clients is insight into owning real estate, private lending, real estate LPs, and so on as financial assets.
This seems to an appropriate place to share the following:
A Comprehensive Wealth Management plan:
1. Creates and Grows Wealth
a. Assures that their investments are appropriate to achieve desired goals.
b. Reviews their income tax situation to make sure they are not paying unnecessary taxes on investment income and excessive capital gains tax.
c. Assures their life insurance is adequate in case of premature death.
2. Protects and Preserves Wealth
a. Reviews current plans for paying for the consequences of life’s unknowns. This includes a discussion of their overall risk management program -- Life, Disability, Long Term Care and Liability -- to make sure the plans are adequate and cost effective.
b. Considers the overall investment portfolio to make sure investment selection and diversification are managed appropriately.
c. Reviews the overall tax sensitivity of these investments.
3. Plans the Distribution of Wealth during Life in the Most Advantageous Way
a. Considers the IRA and qualified retirement plan distribution plan; not as an accountant, but using a tax expert as appropriate.
b. Assesses who serves as their durable power of attorney or successor trustee of a revocable living trust in case of an incapacity - again using the appropriate advice from a CPA and legal counselors.
c. Considers ways to distribute wealth to children and descendants for well-being, education and other purposes and doing so in the most tax-efficient method.
d. Reviews charitable giving for both tax savings and control issues.
4. Plans for the Distribution of Wealth at Death in the Most Tax-Advantaged way.
a. Reviews the titling of all the assets and whether Joint Tenants with Rights of Survivorship makes sense - using the appropriate advice from a CPA and legal counselors.
b. Considers who will serve as the executor or trustee and whether a lack of continuity in the financial arrangements is an issue.
c. Analyzes the plan to distribute wealth at death to their spouse and descendants for both tax efficiency and control - not as a CPA or Attorney, but bringing in those advisers as appropriate.
d. Reviews the charitable inclinations at death for both tax savings and control issues.
To create this Comprehensive Wealth Management plan one must consult with an accountant and an attorney to assure accuracy and legitimacy.
THIS DOES NOT CONSTITUTE FINANCIAL ADVICE.
I STRONGLY urge everyone who reads this to consult with qualified advisers in each area (investments, insurance, accounting and legal matters).
Dale and other hit it, IMO, I have had several dealings with trust companies and estate settlements dealing with the RE side.
Trust departments will usually ding the account pretty hard, those associated with banks, asthey may turn the RE side over to a loan servicing department taking care of taxes and insurance and getting a servicing fee in addition to the vauation for the trust side. You get billed twice.
Other managers, trustees and adminstrators are not set up to collect rents, pay insurance and taxes, and be responsible in safe guarding the property which willinclude maintenance issues.
Some may turn over management to an RE Broker and simply deposit amounts to the accounts. But small deposits are alsoa hassel.
I started out in the financial planning side when I got out of the Army, thinking of RE and a brokerage together. That changed.
I think if you find a stock broker or planner that has an RE license, it will be because they went from RE into the financial side.
CFP can charge in many ways, from propiratery accounts, commissions, salaries or fees based on the portfolio or even by the hour. They generally will not be able to keep up with two industries to provide expert advice. If you find a financail planner trying to be all things, you haven't found a good planner IMO!
A CFP certainly can't churn accounts in RE like they can in marketable securities....(I know, I shouldn't have said churn as that's illegal, so I'll change that to "trade").
Most will require RE to be sold and the proceeds invested in those areas of their expertise.
You can make a trust a member of an LLC with another as the managing member and the trust having a limited role, or just a beneficiary of the LLC making deposits in lump sums helps in larger amounts, like 25K at a time. If you roll your RE over in your estate planning, eventually others will have the authority to sell it and they certainly will, just don't want to be in the RE business.
So, for three reasons, expertise, ease of management and the fudicary responsiblity of management and maintenance. Oh, okay, and they don't make as much on the total value held.
Thanks Kevin Yeats I think this is a very sound framework to building a retirement plan. I think that accountants, advisers and lawyers should work together on something like this. I have found though very few financial advisers that take a holistic approach. Most concentrate on either the equity markets or alternative investment markets. Advisers that take such a narrow focus rarely can give sound advice on the whole picture.
I missed Kevin's post, very good! When I did this in a small town down south I worked with a real estate broker, a CPA and an attorney, all of us gave seminars in the area. It does take a team approach and no one shop can blend all the needs and considerations IMO. And as Kevin points out, the needs change, especially when you're gone or out of the picture.
Thanks Charles and Bill.
I have to add that it is very tough to do on your own ... especially while trying to run a business ... or invest in and manage real estate.
The laws changes about every year. (no politics here)
It seems like very few individuals actually plan for retirement. That is not to say they don't think about it or even wonder about it. They just haven't built a plan or road map that guides them safely there.
IMO part of the reason for that is that there are so few advisers out there that really consider each clients unique situation. Most advisers will build models based on existing retirement accounts, look at future income and expenditure requirements and then build a stock, bond, annuity or insurance model to meet that expected future need.
Most advisers don't really understand real estate investments and many don't have a clue about other alternative investments. This probably is one of the reasons that these investments are often not even considered or are considered in very general terms in a plan.
As an accountant, I see many clients that need, want and even ask for retirement advice. In most cases I have no idea where to guide them because I'm no aware of anyone that could properly take care of them.
Financial planning, Tax planning and the legal framework of retirement / estate planning often have conflicting considerations. Ideally though a financial planner that could take on a more holistic approach would offer a greater benefit to a client and I think the net result would be a plan that a client finds doable and will more likely meet all of there family needs.
Charles Perkins I think the problem is if people really need that much help they are a little inept at business and won't do well in RE. Most people I've known have failed as landlords. You need a good business head IMO to have RE as part of a portfolio, or as a main part.
When it comes to financial planners suggesting people hold RE there is a possibility their client will bomb and then blame them.
Funny thing is lots of planners hold RE.
I agree that not everyone is cut out to be a landlord, but someone can be very successful in finding good deals and managing real estate and not have a good plan for retirement.
There is more to financial and retirement planning than lots people are aware of. I think many do not give adequate thought to there long term real estate exit strategies. For some they may never want to sell. Real estate though is only one piece to consider in an investor's retirement plan.
Other things to consider might be insurance and the many uses during life and after life passes. Long term care issues should be considered. Maximizing social security benefits and how taxes might be minimized when benefits received. The use of retirement accounts, when to take distributions and the consequences of improperly planning beneficiaries and not understanding how plan trustees can affect current and future distributions. What about investments that can provide huge tax advantages when you need them.
I think there are a number of things that hinder the advice coming form financial advisers. Regulations sometimes get in the way. An advisers experience sometimes hinders there advise. Also firms and third party providers may interfere with the planning process.
Regardless most people don't realize how much better off they could be because they don't have good guides to help the navigate the retirement land mines.
An individual might have a lot of bond interest income supplemented by net rental income and find that 85% of their social security is taxable. Worse yet they may be saving a significant amount of the income they are earning in retirement.
This scenario could probably have been made much better with more forethought before retiring, but an individual doesn't know what they don't know.
For clients late in the game, I can understand the concern over taxation of ss benefits. But for those planning with a time horizon of 15-20+ years, I hope they are planning to retire much wealthier than that. If nothing else, the real income from ss will probably decline substantially over that time frame. But I guess that a whole separate topic.
Every individual is going to have there own unique situation. I applaud any investor that seriously considers retirement when they still have 15-20 or more years. Most take a haphazard approach to retirement putting some money aside in deferred retirement accounts and perhaps dabble in other investments.
I agree that an investor can do quite well in real estate and might retire quite wealthy. Chances greatly increase when you plan on success. If you are hoping that success happens usually people are disappointed. Just my 2 cents.
Toby Cook I'm glad that this is helpful. Do you have any of your own experiences you would like to share or lessons you have learned from others. I would love to get a broader sense of what others feel on this topic.
Charles Perkins "An individual might have a lot of bond interest income supplemented by net rental income and find that 85% of their social security is taxable. Worse yet they may be saving a significant amount of the income they are earning in retirement."
Charles, there are a couple of statements here not understanding. Are you saying bond interest w/rental income is not good. Are you suggesting tax free bonds? Know nothing about SS so isn't 85% usually taxed?
Are you not supposed to save in retirement? The idea of spending down assets doesn't appeal to me. It is like watching your life disappear and when it is gone it is time to go. I am ok leaving w/cash in the bank.
@Jeff S you have hit Step 3 & 4 as I outlined above ... Planning for the distribution of wealth during one's life time and Planning for the distribution of wealth after one's life time. Both have lots of "moving parts".
The effect of income on Social Security payments ... prior planning may reduce the amount of income during one's working life and thus reduce the amount of taxes paid on Social Security earnings during retirement.
As for leaving "cash in the bank," is that the best route if there is a desire to leave a legacy? Do estate taxes as well as income taxes come into play after death? What is the best way to transfer accumulated wealth to desired recipients (spouse, children, family and charities) to maximize the amount transferred, minimize the cost of that transfer (and planning) and perhaps minimizing taxes.
Lots of people make no plans and Uncle Sam (and sometimes the state) end up being a major beneficiary of this wealth.
Well said Kevin Yeats.
"More and more I find that buyers need to know a lot about what they buy AND from whom they are buying."
@ Yeats, I think this is the most important part of the equation. I've struggled over the past two years with this problem with financial managers. Love him or hate him, Kiyosaki's point in Rich Dad series that everyone needs a financial education, and its not being taught in schools remains true. But when people wake up and try to find competent help to find financial advice to plan for retirement, its the same advice over and over, diversify your portfolio, buy mutual funds and max out your Roth/IRA/TSP/401K. Its good advice, but most of the time however the guys are pushing their company funds. Many I've used have been far to conservative and after 10 years my market/TSP/IRA accounts basically broke even.
I for one will no longer give money to someone else to manage. No more blind trust that someone else is looking out for my retirement. This year I started trading on my own, bought my first rental property last month and have tried out some alternative/social investing like lending club. Win or lose, I'm paying for my financial education and doing it myself rather than hoping the guy I'm giving my money to knows what he's doing. If I'm competent on the mechanics, then I can easily tell if someones blowing smoke. I'm kicking myself for getting this far in life without getting educated.
I'm also not hoping my pension will still be there in 30 years, I think everyone in their 50's-60's is sweating that right now. It will be nice to have a pension, but I'm not planning on it being there, as with social security, if I do things right I wont be eligible for SS because my investments are carrying me through my life.
End state, I want to work for myself. This site is basically 100,000 financial advisors, and I want to learn from your experiences and make my own way rather than putting $ in a piggy bank. I think if I figure out Yeats 4 step plan myself, Im ahead of the power curve and then bounce it off you all and can make course corrections. I just wish I had the resources I have here and now 10 years ago.