Do financial advisors just not get RI?

Do financial advisors just not get RI?

Kevin McGuirePro Member
CTO of BiggerPockets · Seattle, WA · Member since 2019 · 178 posts · 178 votes

Hi BP community,

It’s taken awhile to get my financial planner to understand what I’m doing with Real Estate Investing. I interviewed a new one from a well regarded independent boutique firm and again he didn’t quite get it. I don’t need them to help me run the RI business but I do need them to factor it in properly to my overall financial picture and retirement planning.

For my first advisor, he only looked at the value of the equity, I got him to think of it as asset, liability, income and costs. Moving to Quickbooks Online and producing a balance sheet and P&L helped a lot, it then looks like any other business.

My new guy looked at the cash flow as not contributing to retirement income until the mortgages are paid off (my net with mortgages is trivial). But then I explain that I can cash out refinance, take equity out, and not pay income tax. Boom. They don’t know how to model that. Or, sell property to clear off the other mortgages.

I also had to explain to each the whole purpose of doing this: income generation without drawing down the capital producing the income.

I think the basic problem is that financial advisors are trained to think of stocks, bonds, etc. Maybe I need to talk about RI in those terms: property = stock, cap rate = yield, mortgage = margin loan.

I think another problem is the guardrails in place, certainly in the case of the first advisor, on what the firm allows them to advise on.

What are folks’ experience here in working with financial planners? Is this just typical? How can I help them to help me?

6Reply
100 views

Most Popular Reply

Specialist · Paradise Valley, AZ · Member since 2018 · 3k+ posts · 2k+ votes
7y
Originally posted by @Kevin McGuire:

Hi BP community,

It’s taken awhile to get my financial planner to understand what I’m doing with Real Estate Investing. I interviewed a new one from a well regarded independent boutique firm and again he didn’t quite get it. I don’t need them to help me run the RI business but I do need them to factor it in properly to my overall financial picture and retirement planning.

For my first advisor, he only looked at the value of the equity, I got him to think of it as asset, liability, income and costs. Moving to Quickbooks Online and producing a balance sheet and P&L helped a lot, it then looks like any other business.

My new guy looked at the cash flow as not contributing to retirement income until the mortgages are paid off (my net with mortgages is trivial). But then I explain that I can cash out refinance, take equity out, and not pay income tax. Boom. They don’t know how to model that. Or, sell property to clear off the other mortgages.

I also had to explain to each the whole purpose of doing this: income generation without drawing down the capital producing the income.

I think the basic problem is that financial advisors are trained to think of stocks, bonds, etc. Maybe I need to talk about RI in those terms: property = stock, cap rate = yield, mortgage = margin loan.

I think another problem is the guardrails in place, certainly in the case of the first advisor, on what the firm allows them to advise on.

What are folks’ experience here in working with financial planners? Is this just typical? How can I help them to help me?

 They aren't trained on real estate investing because they can't make a commission. There is no point, in their eyes, in directing you to products they can't make money on.

See this reply in the discussion

37 Replies

Jump to latestLatest
  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    7y

    @Account Closed, There's a few levels to your scenario.  

    But first what's the source of the $100K?  If that is the sale of a piece of real estate then you could indeed 1031 into the two properties that you then lease option.  Understand that you actually have to take title to the new properties.   You can assume the mortgages but you can't simply do a wrap or sub 2 kind of thing.  The 1031 is only for real estate that you sell and then purchase other real estate with the proceeds.

    Giving someone a lease option doesn't concern me from a 1031 perspective.  It simply means that you're keeping your options open.  Of course that option fee is taxable.  One of our accountant brethren can give you a better Idea of that burden.  But it has nothing to do with the 1031 so you can take it and put it in a syndication or on the horses or red 36 your choice.

    I think the real tax kicker will come when/if the tenant exercises the option.  When you sell you'll need to do another 1031 to continue deferring the tax - maybe into a couple more lease option properties.

    I did a few middle exec lease options and loved how they worked.  I got the option fee and played with it as you're thinking.  I also built in the option price with escalations at 1,2, and 3 years so I built in the appreciation.  And I also built in the lease increases.  If they exercise you make some money.  If they dont' you spend the option and find another tenant.

    The 1031 Investor5137 Reviews
  • Specialist · Paradise Valley, AZ · Member since 2018 · 3k+ posts · 2k+ votes
    7y
    Originally posted by @Dave Foster:

    @Account Closed, There's a few levels to your scenario.  

    But first what's the source of the $100K?  If that is the sale of a piece of real estate then you could indeed 1031 into the two properties that you then lease option.  Understand that you actually have to take title to the new properties.   You can assume the mortgages but you can't simply do a wrap or sub 2 kind of thing.  The 1031 is only for real estate that you sell and then purchase other real estate with the proceeds.

    Giving someone a lease option doesn't concern me from a 1031 perspective.  It simply means that you're keeping your options open.  Of course that option fee is taxable.  One of our accountant brethren can give you a better Idea of that burden.  But it has nothing to do with the 1031 so you can take it and put it in a syndication or on the horses or red 36 your choice.

    I think the real tax kicker will come when/if the tenant exercises the option.  When you sell you'll need to do another 1031 to continue deferring the tax - maybe into a couple more lease option properties.

    I did a few middle exec lease options and loved how they worked.  I got the option fee and played with it as you're thinking.  I also built in the option price with escalations at 1,2, and 3 years so I built in the appreciation.  And I also built in the lease increases.  If they exercise you make some money.  If they dont' you spend the option and find another tenant.

    I expected you, @Dave and a couple of others on BP, to be able to figure this one through.

    I was actually trying to point out why Financial Planners don't take the time to learn this stuff. It gets pretty technical. FP's refer you to someone else as our stalwart friend and freshly minted Certified Financial Planner @Scott Jensen has done three posts back. (No offense intended Scott) My point is made, now I’m off to buy more properties. Lol

  • Dave FosterBusiness Member
    Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes
    7y

    @Account Closed - Which is worse - an RMD or a WMD??

    The 1031 Investor5137 Reviews
  • Scott JensenPro Member
    Financial Advisor · Blaine, MN · Member since 2014 · 478 posts · 387 votes
    7y

    @Account Closed  No offense taken. I have enough of understanding of 1031s, lease options, to know that there's a lot of landmines and you'd probably want a good CPA and intermediary to walk through it. 

    You can't know everything about everything. We oftentimes work with good CPAs to sort out complicated tax issues, good attorneys to do estate planning, mortgage brokers for mortgage issues, etc. It's just like a good GC doesn't know as much about plumbing or electrical as a master plumber or master electrician.

  • Specialist · Paradise Valley, AZ · Member since 2018 · 3k+ posts · 2k+ votes
    7y
    Originally posted by @Scott Jensen:

    @Account Closed  No offense taken. I have enough of understanding of 1031s, lease options, to know that there's a lot of landmines and you'd probably want a good CPA and intermediary to walk through it. 

    You can't know everything about everything. We oftentimes work with good CPAs to sort out complicated tax issues, good attorneys to do estate planning, mortgage brokers for mortgage issues, etc. It's just like a good GC doesn't know as much about plumbing or electrical as a master plumber or master electrician.

     You've got a good attitude. I'd recommend you in a heartbeat. There is another CPA from Colorado on BP who argues rather than explains, her attitude is a turnoff. That's the difference between professionalism (you) and well, the other kind. Lol

  • Realtor and Investor · Scottsdale, AZ · Member since 2017 · 1k+ posts · 1k+ votes
    7y
    Originally posted by @Account Closed:

     They aren't trained on real estate investing because they can't make a commission. There is no point, in their eyes, in directing you to products they can't make money on.

    Nail Hit On Head!

    Kevin is exactly right.  They don't make commission on it, so they don't even want to give it value.

    Stocks they know, Real Estate they don't.....unless it is a REIT that they can sell you stock in.

  • Flipper/Rehabber · Member since 2019 · 5 posts · 1 vote
    7y

    @Kevin McGuire Financial Advisors don't want to understand Real Estate Investing because they don't get paid a commission on it. Keep on track with real estate investing and for stocks and bond investments, open a Vanguard Self Managed Investment Account.

  • Rental Property Investor · Boise/Portland · Member since 2017 · 709 posts · 742 votes
    7y

    The last time I met with my FA, I had to advise them on REI. Its just not part of their bandwidth.

  • Murfreesboro, TN · Member since 2019 · 41 posts · 14 votes
    7y

    @Kevin McGuirey look at this as an advantage. You can appear poorer in paper for federal tax purposes. Donald Trump does that

  • Developer · NY/NJ/PA · Member since 2018 · 758 posts · 935 votes
    7y

    Most regular FA's are salesmen. They listen to their strategy guy and look at commissions. They are never as educated as their strategy guy. 

    Once you graduate from the regular FA to PWM, their fees are not being too bad in the bigger picture. They really do care about your overall portfolio and help with a bunch of other issues that cost more if you did it a la carte. Granted they still aren't as educated with certain things as specialists.

    Also REI is great for active investors. FA's deal with a lot of people who are not active investors and have lucrative/busy day jobs. They want truly passive income and long term growth. REITs aren't a bad option for many people who want exposure to real estate with literally no time invested.

  • Member since 2019 · 1 post · 0 votes
    7y

    I believe hiring a Financial planning portland oregon can be a great use of your resources as long as you also take responsibility to learn about money management yourself, come prepared and informed to each meeting, and bring a list of questions to each meeting. Money is a complex topic that covers everything from holding adequate insurance to estate planning and taxes. The more assets you have, the more complex finances can become. While certain fundamentals are self-evident: spend less than you earn, etc. — the details can be quite tricky, and its a wise idea, in my opinion, to have a trusted set of eyes that can double-check your work or offer a second opinion.

  • Investor · Jonesboro, AR · Member since 2017 · 136 posts · 79 votes
    7y

    @Jim K.

    I’ve been doing ok with vanguard so far. I’m thinking of a ballance if cash there and real estate. It’s easier to will to family some

    Day

Join the conversationCreate a free account to reply, vote on answers and follow this thread.