@Erika Grant
As literally the only licensed wealth manager (7/66), Real estate Broker, Life Insurance and Life Settlement Broker in America, I pride myself in the ability to cut through the BS and provide my clients with unfiltered, and unbiased advice. Much like in life, there are no black and white answers, but as a Wealth Manager myself, with $140M AUM personally, here are a few things everyone needs to consider:
1. As a real estate investor, by default you ARE a wealth manager. You are managing the wealth of your current and future family. The ability for you to a great wealth manager yourself, is a function of your investment knowledge, your current market, your "edge" (what do you know that nobody knows to provide you outsized returns) and your ability to leverage your assets, knowledge, and rules for a return that is stable, and hopefully better than average.
2. Wealth Managers by default will gravitate towards stocks/bonds/mutual funds etc, and insurance. This is both a function of their licensing (if you can only sell insurance, you wont recommend anything else) and their firms ability to accommodate. Edward Jones, Merril, JP Morgan, Goldman, they are all hamstrung by regulations, so by walking to a firm like that, you WILL get the Stock/Bond pitch.
3. There is a place for every investment in a portfolio. Nobody should be 100% in real estate, as nobody should be in cash 100%. Each choice has a risk/reward ratio that is driven by personal needs/fear and timeframe/financial goals. However, I would counter that real estate is a far superior investment on a long term horizon due to its tax efficiency, leverage, and inefficient market (everyone knows what a stock of Apple is worth. What is your 4-plex worth? That depends on the buyer, their creativity, and your ability to sell the story) Hence, there are opportunities to turn $4 Million in real estate into $80 Million in 2 years...Its always been there, nothing changed, just the creativity of the buyer in this example. You don't have that power with stocks. (I'm not saying the market is efficient, I'm saying the price of a stock that second is the right price)
4. As a hypothetical. How much stock can you buy with $100,000? Answer: $100,000 (or $200K with margin, or $400K with institutional help)
How Much Real Estate Can you Buy with $100,000? Answer: $500,000 (Typically) but in some cases unlimited amounts (consider a master lease Option as an example)
So if both the stock market and the real estate asset go up 5% a year, what did you earn on the stock and real estate investment? Stock= $100,000*5%= $5,000 Real Estate = $500,000*5%=$25,000 ( I am obviously ignoring taxes and mortgage payments in this example)
So would you rather make $25,000 or $5,000 on your $100K investment per year? The answer should be $25,000 assuming the risk is the same. Once you consider the mortgage payment of $16,200 per year your actual return is $8,800 vs $5,000. That's a a 76% difference in returns.
5. That's the Capital Appreciation. Real Estate is also paying you a dividend each month (rents) which provide you with cash flow. You also get to depreciate the full purchase price of the real estate over 27.5 years (or do Cost Segregation and accelerate the depreciation for 5 years). So the after tax return on real estate is higher (it reduces your income tax)
6. Once you want to sell, you can use a 1031 Exchange (or our Alternatives) to continue to defer the capital gains/depreciation recapture tax virtually indefinitely (until your children inherit, or you have an estate tax problem) Can't do that with stocks.
7. Stock/bonds come into play when you are required to (your work 401k wont allow you to buy a 4-plex no matter how great the investment) or if you can't find any deals the put your money to work... ie. you win the lottery and won $50 Million. Where would you place your money if you had to invest it within 5 days? You couldn't (or shouldn't) buy $50 Million in real estate efficiently in such a short time period.
8. Exit Plan-We all think we are going to live forever, and our investments will continue to appreciate. Well, what if they don't? What if we get too old to manage the property ourselves, are tired of investing, want some free time? What if you wanted an easy life? How do you sell your assets in such a way that is tax efficient both to you and your heirs? This is where trust/tax planning comes in. Unfortunately, most will consider this when it is too late, instead of planning to be fabulously wealthy in the beginning where these concepts and strategies are easier and cheaper to implement.
9. As a real estate investor, your #1 Priority should be to offset your jobs income tax hit. Typically you should own $1 Million in real estate for every $36,000 in income. It won't happen immediately, but if you didn't pay taxes on your income today, you would be receiving at least a 30% salary increase (when has that last happened) which allows you to put away 30% more (all else being equal) to reach your tax-free goal sooner, and by default your financial goals much quicker.
This might seem like a rant, but an investor should always make their money work the hardest with the most efficiency. Anyone who tells you differently, is just trying to sell you a product. Ask yourself, how hard is your money working for you today, and what can you do to make it work even harder?