Getting Started - Thoughts on Working with a Financial Advisor?

Question

Hey guys, I’m just getting started on my real estate investing journey. I work in analytics consulting and have managed my finances and investments well by myself. 401k, investment accounts, high yield savings account, own a house in a nice neighborhood with a traditional 30-yr mortgage, etc.

Before I buy my first property, I’m curious to talk with a financial advisor to ensure I’m in a good spot and figure out the most tax efficient way to pull together a down payment. I’m pre-approved for a second mortgage, have a realtor who is investor-friendly, etc., but I’m curious what your alls thoughts are on how beneficial a financial advisor could be.

I’m not interested in having someone actively manage my investments as I’m comfortable with doing all of that. More interested in more of an assessment and guidance related to real estate. What are your thoughts?

Rick Albert · Answer

I think you are on the right track with talking with someone. I have a financial adviser/financial planner and people were shocked when they found out I was working with someone. I told them this: My expertise is in real estate and I want to spend my time there. I will hire out to another expert to handle other aspects of our finances to make sure those are on the right track. One of the best decisions we ever made.

I agree, you need a fee only, which honestly is the best option. I interviewed a few financial planners with different models and the fee only was the only way they get paid without me spending money (in trades, buying insurance policies, etc.).

Talk to @Michael Izbotsky. He's sharp. I work with him and do real estate consulting work with some of his clients so that he covers his basis.

Bill Hampton · Answer

@Andy Gibson

Make sure you work with a fee-only financial planner who is a fiduciary. Not a stockbroker or insurance salesman.

A financial planner will look at your complete financial picture, provide unbiased advice on your current situation and help you map out a plan to reach your goals.

This will help you determine if you're on the right track or need to make adjustments.

Good luck.

Michael Izbotsky · Answer

Thanks for the shout-out, @Rick Albert! @Andy Gibson I'm always happy to chat, even if it's to point you in the right direction. As Rick mentioned, I'm a fee-only CFP.

A client of mine actually recently utilized a securities-backed line of credit (SBLOC) for a real estate deal. Same way you have a HELOC on your home, you can take out an SBLOC against your investment portfolio. The caveat is it can only be on your taxable investment accounts, not any retirement accounts. Could be an option to avoid liquidating your investment portfolio.

Andy Gibson · Answer

Loan from my own 401k for me to personally buy real estate

Andy Gibson · Answer

Does anybody have experience using a 401k loan to fund a property? Pros/cons?

Michael Izbotsky · Answer

Unlike a SBLOC I mentioned above, the money you take out as a loan from a 401k is no longer invested in the stock (or bond) market. So you miss out on market participation. However, the interest you pay on a 401k loan is paid back to yourself, whereas the interest on an SBLOC is paid to the lender.

The most important thing is to consider what happens to the loan if/when you leave your current job. Most 401k plans require you to repay the loan within a very short amount of time (few months or less). I've only come across a couple 401k plans that allow you to carry the loan and continue making payments after you're no longer employed with that same employer.

If you don't repay the loan, then it's counted as an early distribution. You'll have to pay taxes plus a 10% federal penalty and sometimes a state penalty, depending on the state. For example, California charges a 2.5% early distribution penalty.

You can find a lot of information from the plan documents, but it might be best to just call the 401k provider and ask them the terms of the loan.

Randall Tannen · Answer

Hey @Andy Gibson

The upside is fairly obvious (i.e relavitvely immediate funding etc. etc.); the larger drawbacks of course are lost investment gains in the plan and potentially needing to repay the loan balance in full if circumstances change, among others. Good luck!

Nicholas L. · Answer

@Andy Gibson

I can go ahead and eliminate 1 and 3 for you.  Yields in RE have been pushed down because of the increase in interest rates.  So it's just extremely unlikely that you'll be able to generate a return that would justify paying the taxes in 1 or offsetting the interest you'd pay in 3.

If you save up and buy a traditional LTR at or above the median price, you'll likely be break even or negative.  And that's with a cash down payment.  Do anything more 'creative,' like 100% leverage, and you'll be substantially negative.

Nicholas L. · Answer

@Andy Gibson

interesting question. can you elaborate?  i don't know if this is something a financial planner will have any expertise in.  a real-estate savvy CPA might be able to help you.  or just ask the question here in the forums.

the best way to have a down payment... is usually cash.

Getting Started - Thoughts on Working with a Financial Advisor?

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