Three Need-To-Know Secrets of Investing in Real Estate

resource-thumb_Three Need-To-Know Secrets Of Investing

Brian D. Milovich

Managing Principal, Calvera Partners

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.


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