Do real estate investors need a financial plan?

Question

Hey successful investors -

If you have a robust property portfolio do you still need a financial plan? Or as long as you have cash coming in you're all set?

What are your reasons for having or not having a plan? Apart from not finding a good advisor who knows real estate or not believing in advisors in general, how do you think your finances would or would not benefit from professional guidance on retirement budget, insurance, estate plannings, tax strategy?

Has you thinking or your reservations shifted in the current environment?

I am biased since I'm a planner specializing in property investors and personally think investors needs MORE planning because of all the moving pieces in their finances and the planning industry needs to do much more to serve real estate investors.

But I am curious about the opinion of the BP community!

Thank you,

Ruzanna

Mike Dymski · Answer

Financial planning is pretty easy, particularly for someone that is savvy and driven enough to have a robust property portfolio. Save, invest in low cost index funds/ETFs, real estate, or your asset classes of choice, and have term life insurance until the kids are out of the house. The people that likely need or want more help are those are not interested in learning about real estate, investments, or tax matters. My mom is an example. Spoke with her about an hour ago. She has a CPA and a broker and neither will answer her question about whether or not her stock/bond portfolio is set up properly from a tax standpoint...both point to the other.

Steve Vaughan · Answer

I'm with @Mike Dymski. Seasoned investors or folks that have their ducks in a row enough to not have or at least want their home to be their largest asset got there by setting goals and already having a good plan.

I can see seeking some tax guidance for the transition out of RE into debt /held mortgages (a complete 180) but if we've done it right we are self-insured as to life insurance, disability, nursing home, etc.

If I go into a nursing home, I'm gonna own it. No joke. We think and act differently.

A requirement I've had when people approach to offer 'professional ' services like this, especially financial, is their personal stats need to do the talking. If you havent been financially independent for at least decade, you are driving a payment, need the paycheck etc, what could you possibly teach for the $ you charge?

Ruzanna Queenan · Answer

@Mike Dymski you can view financial planning to the extent of your own worldview which may not be as complete. Let's look at insurance for example. You mention that you only need term insurance until kids leave college, but insurance is a great, underused tax-free tool for retirement planning. For older, retired couples, health care is a huge expense and if you deplete most assets on taking care of one spouse, having a big lump sum come in and help the other person is HUGE. Same with the ETFs - your expenses will be 2.5x in 30 years, do you know what the annual amount is even ballpark to know if you have enough at the right growth target? From your Mom's example, the only way to know if her portfolio is set up properly is to know her goals and her tax exposure - with a financial plan.

Henry Clark · Answer

@ruzzanna

Your asking a question to which you are the solution. You should be telling us why we need you.

We have a very good team of financial planners and a very good Tax person who does a lot of real estate.

Both do very little from a Real Estate planning standpoint. We can ask specific questions and respond.

But if you’re into REI you should already know the majority of the planning questions and tools.

How do you get paid? Our planners get paid based on the assets they manage. They don’t get paid on our REI since they don’t manage it. They don’t even want to talk about it.

So why did we get a planner? My wife does not want to get her head into REI. Having a second person talk about our overall wealth position benefits her.

Non REI subjects. We can ask them and they can offer thoughts and products. Look up my post “What happens if you die?” Are these items in your checklist as a planner?

Ruzanna Queenan · Answer

@Steve Vaughan

I'm assuming you're planning to get a lot of default insurance if you're holding debt as your strategy. And hopefully life won't happen to you as you're managing a nursing home at 85.

I started my business because my kids are off to college - financed completely by their 529s, and I've always wanted to run my own 7-figure business as I earned my CFA, MBA, RLP and now going for my EA.I don 't think everyone is as lucky or brilliant to do it all on their own and what I do gives people peace of mind. Not everything in life is driven by a paycheck.

David M. · Answer

Yup, I think we are saying the same thing...

Ruzanna Queenan · Answer

@David M. You can make or lose money on ANY investment, it's knowing how the loss will affect you and how to reduce risk. That's planning and maybe it's not as exhilarating or quick but it'll sure help you sleep better at night.

Ruzanna Queenan · Answer

@Henry Clark

Good point, I sure should know the answer;)

If you have real estate and your advisor doesn't discuss it, they may be leaving you exposed to risk and not maximizing the planning tools that may be available to you.

Some planning issues I commonly see:

- income stability. How will your rental income support your expenses in retirement? What's the cash flow, how do you keep up with inflation?

- reserves. If your portfolio ages and the expesnses increase, how much do you allocate to expenses? What's the long-term trend for all your holdings?

- tax issues. Once you deplete the depreciation deduction and mortgage is paid off, what are your taxes?

- who will manage the property portfolio if one spouse is disabled/passes away? Are your kids onboard to help manage? If you have to sell, what are the implications?

- insurance. do you have an umbrella policy? a hybrid long-term policy to cover nursing home if need be?

- business structures. How do you plan to collect income, pay taxes and then transfer real estate assets?

- estate planning. different assets have different inheritance rules and if someone gets IRA vs property, the basis and your heirs' tax exposure is different. How do you make sure every descendant gets what they need?

I get paid a flat annual retainer, I rarely charge an advisory fee because I want to spend the time advising on my clients total wealth.

Checking out your post now.

David M. · Answer

@Ruzanna Queenan

Absolutely! I THINK that many new investors don't have a great plan, at least for covering their risks. They are "sold" on how they can only be successful. Many don't have their tax strategies worked out, including "successful" investors who are so afraid/against paying tax that they are losing money.

I find it interesting that investors can be "sold" on investing in real estate, where its still possible to lose money and I know many who have, but won't both to investigate other investing strategies and classes. This would even help with diversification.

Do real estate investors need a financial plan?

Do real estate investors need a financial plan?

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