Three Need-To-Know Secrets of Investing in Real Estate
Real estate is likely missing from your investment portfolio. It’s not your fault — the deck is stacked against you. From many investment advisors not wanting to provide advice for investments they don’t earn a commission on, to the horror stories of becoming a landlord and dealing with stopped up toilets and irate tenants, investing in real estate gets pushed to the side. Though at the same time, we all know of real estate’s cash generating potential and we instinctively want a piece of it.
Particularly for those nearing or in retirement, real estate can be a fantastic way to generate stable cash flow while preserving their nest egg. It’s no secret that interest rates are at historical lows. This makes the normal retirement portfolio, which is usually realigned away from equities and into fixed income, not feasible unless you’re comfortable with seeing your principal balance decline over time or you are willing to significantly change your lifestyle. You shouldn’t have to make that choice when real estate can help you achieve your retirement goals.
There are many ways to invest in real estate from purchasing REIT stocks to investing in Real Estate Limited Partnerships to buying a duplex on your own. In all instances, you are seeking stable, tax-advantaged cash flow with the possibility for long-term appreciation without the volatility found in the stock market. That’s real diversification that our portfolios need. Additionally, real estate can be a hedge against inflation as the Federal Reserve moves us out of this low-rate environment. Since rents rise during inflationary periods, so does the property’s cash flow. Bond yields are locked in when you buy it and the value of your cash declines.
However, unlike stock investing, where being passive and finding low-cost mutual funds or ETFs is the best way to generate the highest returns, real estate requires you to be proactive. You must be ardent in your desire to add real estate to your portfolio because no one else will tell you it’s a good idea. You must learn how to evaluate a real estate transaction yourself, but you already know how to do it. And you must decide which type of real estate investment matches your personality and how you will invest to capture the unique tax advantages afforded in real estate. Once you conclude real estate meets your need for reliable cash flow with the opportunity for appreciation, invest in it.
Below are just a few of the many tips that we’ve picked up during our years of investing in real estate that can help you take ownership of your portfolio and demystify real estate investing:
1. Defeat your allies: In many cases, your trusted and paid advisors (broker, wealth manager, tax accountant, etc.) may suggest you avoid real estate in your portfolio altogether. They generally give the same tired reasons that it’s “illiquid” or “too management intensive.” Those can be valid arguments based on your specific situation, but that’s not the real reason they want you to avoid real estate.
Stockbrokers don’t get paid for you to invest in real estate. There’s nothing in it for them, no commissions and nothing to do. That is, unless they want you to purchase a high-cost non-traded REIT, but now you’ll know their true motivation. You need to do your own homework to decide if the potential cash flow from real estate is right for you.
2. Elementary school arithmetic: We all know that real estate is a numbers game, but you may be surprised to know that you learned all of the skills necessary in elementary school. To decide whether or not to pursue a potential investment, you’ll only need a few key formulas — and nothing will be more difficult than long division. Once you’ve remastered these concepts, you’ll have the numerical tools to effectively underwrite real estate investments.
3. Use a taxable account: Why try to avoid taxes by investing through an IRA or 401k when the government provides tax advantages to real estate? Especially in the early years of a real estate investment, the cash flow that you receive may not be entirely what the IRS considers taxable income. Non-cash items like depreciation and amortization serve to dramatically reduce your taxable income but have no impact on your cash flow. Taxable losses are potentially wasted in an IRA or 401k but have great value in your taxed account.
Real estate needs to be a part of a diversified investment portfolio, particularly in retirement. By equipping yourself with the proper tools to evaluate transactions and the self-awareness to seek out real estate investments when others tell you not to, you will take ownership of your investment future.
SAN FRANCISCO OFFICE:
2 Embarcadero Center, 8th Floor
San Francisco, CA 94111
729 Washington Ave N, Suite 600
Minneapolis, MN 55401
Please subscribe me to the Calvera Insider.
GET INSIDER UPDATES
GET INSIDER UPDATES
Performance data listed in this website or is otherwise provided by Calvera Partners, LLC, or its affiliates (“Calvera”) with respect to a particular property or project represents past performance calculated for the relevant project and does not purport to reflect the overall performance of any private funds managed by Calvera, which may include other projects, as well as charge additional fees or carried interest, or have additional expenses, which would reduce the overall performance of the project from the perspective of a fund investor. Past performance does not guarantee future results; Current performance may be lower or higher than performance data presented. Calvera is not required by law to follow any standard methodology when calculating and representing performance data; the performance of any of Calvera’s projects may not be directly comparable to the performance of other investment vehicles or funds; and qualified potential investors can contact Calvera Partners for more current performance data of any private funds managed by Calvera.
This website is provided for informational purposes only. Nothing contained in this material is an offer or solicitation to buy or sell any security. In addition, (i) any securities offered to investors that respond to any general solicitation or general advertisement made by Calvera, may be sold only to accredited investors; (ii) such securities will be offered in reliance on an exemption from the registration requirements of the Securities Act and such securities offered are not subject to the protections of the Investment Company Act or required to comply with specific disclosure requirements that apply to registration under the Securities Act; (iii) Neither the SEC, nor any state securities regulator, has passed upon the merits of or given its approval to any securities offered by Calvera, the terms of the offering, or the accuracy or completeness of any offering materials or the accuracy or completeness of any of the information or material provided by or through this website; (iv) the securities will be subject to legal restrictions on transfer and resale and investors should not assume they will be able to resell their securities; and (v) investing in securities involves significant risks, and investors should be able to bear the loss of their investment. Please click here for additional important disclosures.