Financial Advisor says: Real Estate is a terrible decision

Multi-Family and Apartment Investing
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Financial Advisor says: Real Estate is a terrible decision

Ty Doke
Member since 2018 · 10 posts · 6 votes

I am under contract on a property. My partner is providing the capital for down payment, and renovations. Partners capital is currently in mutual funds with a Financial Advisor Firm.  We met with his advisor about 6 months ago and presented the plan to use that capital to purchase real estate, renovate, then refinance out equity and recycle that original capital into next deal.  At that time (6 months ago) the advisor said, we at this firm cannot offer anything that will come close to the returns that real estate provides, so go for it.  

Now, my partner calls the firm to move the funds from these mutual funds into our company bank account so its ready to go to close on this deal and his original advisor's father in law (owner of the firm) hears that my partner is moving his capital out and he tells my partner (without any knowledge of the deal no numbers or anything) He tells my partner that Real Estate is a terrible idea.  He will lose his money if he invests in real estate.  He said it is never a good idea to move money out of a mutual fund, and into real estate deals.  Real estate only  make sense if you can do it without putting any cash into the deal.  He claims he has invested in real estate many times, and has been burnt.  


I am meeting with my partner and his advisors father in law (president of the firm) to present the numbers on the deal.  I am just curious BiggerPocket community, what points would you bring up to this Financial Advisor?  

Little background on the deal.  Its a commercial property with 4 basement apartments, room to add 2 more apartments (4 apartments currently rented for $2400 a month total).  Upstairs is a 4000 SqFt vacant commercial space (gutted) in a downtown of a smaller town 20 miles from major metro.  Our offer for the property is $140,000.  


Any input or suggestions are greatly appreciated!

Have a great day!

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Aaron K.
Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
6y

Your partner's "financial advisor" is not a financial advisor, they are a salesman for mutual funds.  They are almost certainly not a fiduciary and if they are they are pretty stupid if they have your partner invested in mutual funds.  Mutual funds are just more expensive ETFs that under-perform ETFs over time.  I don't know about your specific deal if it is good or not but the "advisor" is looking out for his own bottom line.  I'd take the money you need for this deal and I'd take the rest of the money away from that advisor and put it with a fee only fiduciary financial advisor if your friend thinks he needs an advisor.

It really upsets me how people have taken the job title "advisor" and make it seem like they have your best interests at heart when they really don't.

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  • Aaron K.
    Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
    6y

    Your partner's "financial advisor" is not a financial advisor, they are a salesman for mutual funds.  They are almost certainly not a fiduciary and if they are they are pretty stupid if they have your partner invested in mutual funds.  Mutual funds are just more expensive ETFs that under-perform ETFs over time.  I don't know about your specific deal if it is good or not but the "advisor" is looking out for his own bottom line.  I'd take the money you need for this deal and I'd take the rest of the money away from that advisor and put it with a fee only fiduciary financial advisor if your friend thinks he needs an advisor.

    It really upsets me how people have taken the job title "advisor" and make it seem like they have your best interests at heart when they really don't.

    34Reply
  • Ty Doke
    OP
    Member since 2018 · 10 posts · 6 votes
    6y

    Harry Neal, thank you for pointing that out!  I included the price in an edit $140,000. Thanks!

    0Reply
  • Erik W.
    Real Estate Investor · Springfield, MO · Member since 2017 · 1k+ posts · 2k+ votes
    6y

    @Ty Doke, hi and welcome to BP!

    As others have said, the father knows that if money flows OUT of his firm's management control, he gets paid less.  So his advice subject to bias.  HOWEVER, begin biased does not mean he is incorrect.

    Today, the stock market is down about 20-25% from where it was about 5 weeks ago.  If your partner pulls funds, he locks in that loss, and your investment must not only get him back to 0 (i.e. earn back that 20-25% drop), it must also provide a greater return than stocks would.

    Where do you think the stock market will be 3 - 6 months from now?  How much will it recover, or will it drop further?  That is all unknown, unfortunately, but all we know is if your partner sells out of his funds today, he locks in a loss that today is only on paper.  That could be good (if the markets fall even further) or bad (if they rebound in a month or two).

    Now that doesn't sound like the advise this advisor is giving.  Sounds to me like he screwed up some real estate deals in the past and thinks that because his genius plan didn't work, no one elses' will either.  If I were to meet with him I would NOT ask why he thinks mutual funds are better than real estate: he's just going to repeat his spiel and you won't learn anything.  What I WOULD do is ask him what kind of deal he did, how it was structured, and what caused it to go bad.  You might learn something useful.

    Good luck!

    19Reply
  • Philip Bashaw
    Investor · Atlanta, GA · Member since 2014 · 172 posts · 64 votes
    6y

    Bad mojo from that mutual fund guy. I recently had a real estate broker tell I need to get out of this business because I was trying to buy his property at a big discount. Like someone else said "Everyone has their own agenda" 

    Ignore the chatter and if the numbers work, show the guy after you renovate and sell or refi. He will probably just say you got lucky. Just use this 4 letter word: NEXT

    3Reply
  • Bjorn AhlbladPro Member
    Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
    6y

    Go ahead and meet. No need to present your deal he will just poke holes in it anyway (and he is not in the real estate business). Thank him for his input and move the money as planned! It is your partner's money and the guy is not his mother. My so called 'wealth adviser' at the bank told me not to sell any funds last year when I converted a whole bunch to cash. Looks like your deal floats well even if the store fronts take a while to fill.

    2Reply
  • Kyle J.
    Rental Property Investor · Northern, CA · Member since 2012 · 5k+ posts · 5k+ votes
    6y

    @Ty Doke You don’t need to convince them. It’s your money. Plus, it’s a conflict of interest for them because if you invest in real estate it means they no longer have the benefit of your money. So they’re not really giving you impartial advice.

    If you really want an unbiased opinion, find another financial advisor who’s not currently holding your money and get their opinion. But for what it’s worth, based on the limited numbers you provided, the deal sounds pretty good. 

    1Reply
  • Jonathan R McLaughlin
    Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
    6y

    @Bjorn Ahlblad @ty doke 

    A manager of high fee mutual funds discouraging real estate, eh? Shocking. 

    Only thing I would add to this good comment is his goal should be to get him at least neutral since he is an ongoing threat to your funding and your partnership. Use the mantra of "diversification" and hint or say outright that you plan to reinvest the profits in other areas and you both hope you can call upon him for his expertise. You should work the word "fiduciary" in there, too :) And yea, what the hell, let him pick apart the deal and praise him for his perceptiveness when he hits on something obvious you have thought of. "YES! you are absolutely right...thats why we...." 

    He will undoubtably be at some party and saying in a self-important tone " I don't like real estate in general you understand, but I looked at the deal, gave them some insights and advised them it was pretty solid..."

    7Reply
  • Carl Millsap
    Investor · Midwest · Member since 2019 · 333 posts · 225 votes
    6y

    @Ty Doke truth be told every real estate investor has been burnt at some point or another. The degree of the burn varies.  

    If the property is bringing $2400 consistently and will cover the mortgage / expenses while you renovate and add units then go for it. 

    You've done your homework, you have a plan and know the risk. He is biased for all of the reasons mentioned and thus can only provide value by telling you what mistake he made so you can learn from it. 

     Truth be told every stock market investor has been burnt as well. Go forth and do great things.

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    6y
    Originally posted by @Kyle J.:

    @Ty Doke You don’t need to convince them. It’s your money. Plus, it’s a conflict of interest for them because if you invest in real estate it means they no longer have the benefit of your money. So they’re not really giving you impartial advice.

    If you really want an unbiased opinion, find another financial advisor who’s not currently holding your money and get their opinion. But for what it’s worth, based on the limited numbers you provided, the deal sounds pretty good.

    this happens all the time with the folks that set up self directed IRAS the big custodians just drag their feet letting the funds go.

    I would be more concerned about the deal.. that one sounds kind of wonky.. small towns ( commercial) that could sit vacant for a long time and this could be a big fat white elephant so.. I have no way of knowing but i would be very cautious with this property and in today's environment a refi could be next to impossible.. so tread carefully dont get caught up in the real estate BRRR stuff.. it works great for many but you need to know what your doing and what the asset is.

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    5Reply
  • Sam Josh
    Sunnyvale , CA · Member since 2017 · 373 posts · 362 votes
    6y

    @Ty Doke

    It’s your money and he only loses if you took your cash and invested it elsewhere. I know BP skews heavily towards Real Estate but as an investor I am diversified across RE, Equities and other assets. In good times they all do amazingly well. So I can’t tell anyone that one is a better investment than another.

    1Reply
  • Brian Ploszay
    Investor · Chicago, IL · Member since 2009 · 1k+ posts · 1k+ votes
    6y

    I've experienced something similar.  True, the fund manager wants the funds under his management.  These days, such money managers probably can hide under a rock.

    The fund manager can easily give you good advice by stating that such deals are risky for those who have limited experience with investment / commercial real estate.  Such a statement is true and potentially preserves both of your best interests.  But to say that real estate doesn't have the potential for a positive return is preposterous.

    2Reply
  • Anthony Vicino
    Investor · Minneapolis, MN · Member since 2017 · 95 posts · 130 votes
    6y
    Originally posted by @Erik W.:

    @Ty Doke, hi and welcome to BP!

    As others have said, the father knows that if money flows OUT of his firm's management control, he gets paid less.  So his advice subject to bias.  HOWEVER, begin biased does not mean he is incorrect.

    Today, the stock market is down about 20-25% from where it was about 5 weeks ago.  If your partner pulls funds, he locks in that loss, and your investment must not only get him back to 0 (i.e. earn back that 20-25% drop), it must also provide a greater return than stocks would.

    Where do you think the stock market will be 3 - 6 months from now?  How much will it recover, or will it drop further?  That is all unknown, unfortunately, but all we know is if your partner sells out of his funds today, he locks in a loss that today is only on paper.  That could be good (if the markets fall even further) or bad (if they rebound in a month or two).

    Now that doesn't sound like the advise this advisor is giving.  Sounds to me like he screwed up some real estate deals in the past and thinks that because his genius plan didn't work, no one elses' will either.  If I were to meet with him I would NOT ask why he thinks mutual funds are better than real estate: he's just going to repeat his spiel and you won't learn anything.  What I WOULD do is ask him what kind of deal he did, how it was structured, and what caused it to go bad.  You might learn something useful.

    Good luck!

    Erik is spot on. The key takeaways are:

    1) Locking in losses right now is a question your partner will have to weigh for himself right now. Will stocks return in 6 months to where they were before all this went down? Who can really say? That's between you and your oracle. Though, like Erik pointed out, this doesn't really sound like the argument the financial advisor is making.

    2) It's not your job to convince the Financial Advisor. In fact, it's nobody's job to convince the Financial Advisor. It's your partners money. He's the person that needs to be convinced.

    3) Don't trust anybody who makes broad sweeping generalizations such as "never invest in real estate". And yes, "don't trust anybody who..." is a broad sweeping generalization, so I guess maybe take this advice for what it's worth. ;)

    1Reply
  • Todd Dexheimer
    Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes
    6y

    Bring the business plan and financial pro forma of the investment that shows the ROI to your partner to show how everything will work. Make sure that what your are purchasing is a solid deal.

    The advisors job is not to advise on what is financially prudent for your partner, but to convince him to keep his money with the company. You won't convince the salesperson otherwise. They get paid on fees, so if he pulls his money they don't make as much money. 

    1Reply
  • Charles East
    Rental Property Investor · Augusta, GA · Member since 2018 · 58 posts · 51 votes
    6y

    Tell the advisor that a proper asset allocation model would include exposure to real estate. You’re goal is to diversify the overall investment portfolio with non-correlated assets.

    1Reply
  • Account Closed
    Investor · Ormond Beach, FL · Member since 2019 · 78 posts · 73 votes
    6y

    @Ty Doke I know there isn't time to do so for this particular situation, but going forward and for the sake of knowledge, read Andy Tanner's "401(k)aos"...after the read, you will be far better educated as an investor and will know all you need to ever know about mutual funds.

    Best of Luck!

    1Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    6y

    @Ty Doke real estate isn't for everyone and it might not be for you either. BRRR is a good strategy but the fact that you're borrowing the down payment tells me you're probably undercapitalized.

    Putting your money with a financial advisor is also generally a bad idea as they charge lots of fees and will pull stunts like your friend is experiencing.

    Your best option is to learn how to do this stuff yourself (manage money) and do it that way.

    1Reply
  • Greg Dickerson
    Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes
    6y
    Originally posted by @Ty Doke:

    I am under contract on a property. My partner is providing the capital for down payment, and renovations. Partners capital is currently in mutual funds with a Financial Advisor Firm.  We met with his advisor about 6 months ago and presented the plan to use that capital to purchase real estate, renovate, then refinance out equity and recycle that original capital into next deal.  At that time (6 months ago) the advisor said, we at this firm cannot offer anything that will come close to the returns that real estate provides, so go for it.  

    Now, my partner calls the firm to move the funds from these mutual funds into our company bank account so its ready to go to close on this deal and his original advisor's father in law (owner of the firm) hears that my partner is moving his capital out and he tells my partner (without any knowledge of the deal no numbers or anything) He tells my partner that Real Estate is a terrible idea.  He will lose his money if he invests in real estate.  He said it is never a good idea to move money out of a mutual fund, and into real estate deals.  Real estate only  make sense if you can do it without putting any cash into the deal.  He claims he has invested in real estate many times, and has been burnt.  


    I am meeting with my partner and his advisors father in law (president of the firm) to present the numbers on the deal.  I am just curious BiggerPocket community, what points would you bring up to this Financial Advisor?  

    Little background on the deal.  Its a commercial property with 4 basement apartments, room to add 2 more apartments (4 apartments currently rented for $2400 a month total).  Upstairs is a 4000 SqFt vacant commercial space (gutted) in a downtown of a smaller town 20 miles from major metro.  Our offer for the property is $140,000.  


    Any input or suggestions are greatly appreciated!

    Have a great day!

     Compare the returns from the mutual funds and your deal. It’s all about the numbers.

    2Reply
  • Ty Doke
    OP
    Member since 2018 · 10 posts · 6 votes
    6y

    @Caleb Heimsoth putting down 28k have 47k in reserves. Would that be considered undercapitalized?

    0Reply
  • Caleb Heimsoth
    Rental Property Investor · Durham, NC · Member since 2016 · 7k+ posts · 7k+ votes
    6y

    @Ty Doke it’s not your money, it’s your partners money. How do you play into this? If you have no money to provide to this then I believe YOU are under capitalized. Your partner is probably okay, but that depends on rehab budget and what you’re doing

    1Reply
  • Ty Doke
    OP
    Member since 2018 · 10 posts · 6 votes
    6y

    Caleb Heimsoth:  Thank you for your input.  With all due respect, I do not believe I am the first or last to not bring capital to a real estate deal.  What I am providing is my 15 years experience managing commercial and residential properties.  I will be managing the residents, and rehabs.  Absolutely I am not bringing money to the table.  What I am bringing is time, energy, and experience to stabilize the property and bring it to its fullest potential.  

    2Reply
  • Dillon Dale
    Real Estate Agent · Owatonna, MN · Member since 2017 · 221 posts · 152 votes
    6y

    @Ty Doke they can't profit from you investing in real estate. It's in their best interest to keep all of your money invested with them. Do what's best for you

    1Reply
  • William Alonso
    Real Estate Agent · Columbus, OH · Member since 2016 · 42 posts · 37 votes
    6y

    @Ty Doke

    Hey Ty, ask your advisor to estimate his total return after 20 years and have him show you his calculation. You can run the numbers yourself using the compound interest calculator on Money Chimp so you can go in prepared and know if his numbers are accurate. Then show him your #s if you take that same amount of cash and put into the real estate for 20years. Of course you’ll have your cash flow, the equity you’ve built by appreciation and having the renters pay down your loan, and of course the tax benefits of owning real estate. The investment in real estate will win, often times by almost double. You can then add in what the other poster mentioned about diversification. Then ask him why it wouldn’t make sense to diversify and get a likely higher return on real property. I’m willing to bet you’ll be selling him at that point.

    1Reply
  • Blank Johnson
    Member since 2020 · 2 posts · 1 vote
    6y

    @Ty Doke I do not agree with the financial advisor but I think Real Estate is not going to appreciate in real dollar terms for another 2-3 decades.

    0Reply
  • Jhon Restrepo
    Member since 2019 · 56 posts · 22 votes
    6y

    Thats why investors have to learn by themselves, you can always ask for advice but in a smart way (like i have a friend of a friend planning to do this etc) , cause if you ask for advice showing lack of knowledge, and eager to invest, 90 something percent of people will take advantage of you. Cruel reality. My 2 cents.

    1Reply
  • Doug Wilson
    Financial Advisor · Austin, TX · Member since 2018 · 4 posts · 5 votes
    6y

    @Ty Doke

    Hi Ty, there is no reason for that meeting. It’s your partner’s money and he can do whatever he wants with it. Sounds like this advisor simply wants the opportunity to poke holes in the deal and retain the assets.

    The conversation this advisor needs to be having is whether or not a real estate venture with that piece of capital is in line with your partners overall financial plan and risk tolerance. Only once that has been assessed is it worth anyone’s time to even look at the numbers on the deal.

    I would add anyone who thinks RE is always a terrible investment might be the worst person to analyze the deal at all, whether they are the President of a firm or not.

    Best of luck on the multi!

    1Reply
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