How can a financial advisor help me as a real estate agent?
It is crucial for a real estate agent to have a good relationship with a financial advisor, but not just any advisor. He or she must be an advisor who knows and understands the “ins and outs” of investing in real estate. Historically, financial advisors and realtors have been on opposite sides of the fence. The advisors want their clients to invest in the things that they sell: stocks, bonds, mutual funds, annuities, etcetera, because that is how they make their money. In fact, many realtors have received responses from clients saying, “My financial advisor says that real estate isn’t a good investment.” So it is no wonder that this partnership is not very common. But if a realtor partners with the right financial advisor, it should be a beneficial relationship for all.
A financial advisor who understands real estate can help a client to structure the deal correctly, figure out what funds to use to purchase the property, and how much and what kind of leverage to use—if any. Though a mortgage advisor is the expert on the programs available, only financial planners can model the loan into the purchasers’ financial plans to see how the tax benefits and loan affect their long-term financial planning goals. When gathering important data for the financial package, the advisor can also submit financials in one statement, verifying funds on deposit. Although there are several parties involved to make sure real estate transactions go smoothly, it is beneficial for both the real estate agent and the client to work with a knowledgeable advisor. For example, often times it makes sense to transfer the ownership of properties into a family trust and many times it does not; knowing the different options is important.
The biggest reason that real estate professionals should work with well-trained financial advisors is that they should be able to help them sell more real estate. One of the biggest reasons that people hold on to real estate is due to capital gains taxes. And other than the $250,000 exemption if filing as a single person and $500,000 if married filing a joint return, few people understand the strategies that make it possible to avoid capital gains taxes. My personal opinion is that capital gains taxes are avoidable in almost every circumstance; it just takes some planning to do so. Thus, if an elderly couple wants to downsize but is afraid of the taxes, a good financial planner should be able to design a plan to avoid paying them and in the process create more retirement income than they had before.
Investors in real estate make many mistakes from a financial perspective. One of them is getting “too comfortable.” That is, an investor may have bought an investment property 20 years ago and, although it may have been a great investment then, it may no longer be a good investment today. Also, paying it off may mean losing tax benefits and deductions. Another common reason investors do not want to sell their properties is because they feel that it would be impossible to do so in today’s market, or that capital gains taxes would be too high if they did. However, a good financial planner can help to determine whether or not the property in question is still a good investment, and also establish a plan to get increased income (even tax free!) from the property in retirement.
The bottom Line: It is important for real estate agents and financial advisors to work together. The benefits are unlimited.*
Troy V. Collins, RFC.
President, McKinley Financial Group
Phone: (650) 551-8900
CA Insurance Lic. No. 0B96613
www.mkfinancial.com
* This article is oversimplified in many ways and is for illustrative purposes only. McKinley Financial is not recommending any specific product, nor are we recommending that you purchase real estate.
** Registered Representative offering securities through First Allied Securities, Inc., a Registered Broker/Dealer Member FINRA/SIPC.
Investment Advisor Representative offering services through First Allied Advisory Services.
Real Estate: What is it for?
One of the things that I have found over the years in working with clients that own real estate portfolios is that people love buying real estate, but they constantly make fundamental mistakes when doing so. The starting point in deciding what to buy and how to buy it should begin with the answer to this question: What is it for?
This may seem like a silly question, but as a financial advisor I need to know the time frame, expectations, and, most importantly, whether the property will be used to create income, for appreciation, or for growth and income (both).
This is the first in a series of four discussions on the appropriate investment strategy for each.
Real Estate for Income
When buying real estate for income it is necessary look at the type of income that you purchase. Although for appreciation, single family homes in the San Francisco Bay Area may be a great investment, for income typically they are not. Let me give you an example: A two bedroom home in Burlingame, California that would sell for one million dollars rents for $3,300 per month. Subtracting out the annual expenses of about 8 percent plus the property taxes, it would not be uncommon for this property to net $25,000 after expenses (but before taxes).* So for income, $25,000 on a $1M investment equals 2.5 percent, which is a little better than a CD with substantially more risk and work to maintain. Don’t get me wrong; this investment may be far greater than 2.5 percent due to possible appreciation; however, my point here is to demonstrate that for income, this is not a great investment.
So what might work better? For income, multiunit properties, apartments, or commercial properties may be far superior in terms of income than single family homes. In today’s market, you may be able to find a 6 unit property for $1M. You could rent for approximately $1,200 per month, giving you a total $7,200 per month or $86,400 per year in rental income. After expenses, you may still have $70,000 net income after expenses (but before taxes). On a $1M investment, this is 7 percent net income. Now this, as far as income is concerned, is a very decent investment. As for appreciation, however, multiunit properties and apartments do not typically keep up with single family homes in terms of value.
Other options may include using Real Estate Investment Trusts (REITs)** for income. Generally, nonpublicly traded REITS have a more stable valuation than publicly traded REITs and their goal is to pass along high income: 5 to 7 percent income is not uncommon in today’s marketplace. Using REITs instead of owning the property individually allows for the owner to have less of the management headaches that a landlord may experience.
Using leverage may also allow for additional income on a property. If, by using leverage, you are able to buy a larger building with more income, and the income outweighs the expenses of the loan, then this too can be of benefit.
Bottom line: You need to do some planning prior to purchasing a building. You should consider the types of properties, how to fund the property, whether to use leverage, who will manage the property, what improvements it may need, and what annual expenses it might have, among other issues. The list of considerations is long, but the end result well worth the hard work if done correctly.
Troy Collins
* If this property were bought 10 years ago it would fare a little better because property taxes would be reasonable for today’s standards. However, if it is a property that you are looking at today, property taxes would cost more than $10,000 per year.
** Investing in real estate and real estate investment trust (REITS) may not be suitable for all investors and involves special risks, such as limited liquidity and demand for real property, changes in supply and demand for real property, changes in law, tenant turnover or defaults, loss of investment, competition, casualty losses, and use of leverage. Real estate values may fluctuate based on economic, environmental, and other factors. There is no assurance that the investment objectives of any real estate program will be obtained.
Troy V. Collins, RFC.
President, McKinley Financial Group
Phone: (650) 551-8900
CA Insurance Lic. No. 0B96613
www.mkfinancial.com
Registered Representative offering securities through First Allied Securities, Inc., a registered Broker/Dealer Member FINRA/SIPC.
Investment Advisor Representative offering services through First Allied Advisory Services.
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