Real Estate Planning

MAKE PRUDENT REAL ESTATE INVESTMENTS A PART OF YOUR REAL-LIFE, LONG-TERM FINANCIAL PLANS.

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“I want to make an investment in real estate but I don’t know how it would affect my financial plans.”

Benefits of Real Estate

Investing in real estate provides you and your loved ones many potential benefits:

Equity ownership in an asset you can touch and feel
Possible income and income tax advantages
Diversification away from bonds and equities
Concentration, real estate is sometimes a family’s largest asset

Americans Love Real Estate

Investing in real estate is popular. It offers both risks and potential rewards. Here are some recent statistics about real estate ownership in America:

0.7%

Americans own their primary residence

million residential properties in USA

million commercial properties in USA

Source: National Association of Realtors website accessed on December 30, 2020.

Key Questions to Help You with Real Estate Investing

Here are some common questions about investments in real estate.

Should I invest in real estate or stocks and bonds?

As with any investment in life, the amount of return is commensurate with the level of risk you take. Real estate is a concentrated asset and often highly-leveraged. In other words, we took on debt to buy a single property. Just know what you are getting yourself into and how different real estate is from a diversified portfolio of equities and (possibly) fixed income.

What should I know about buying a home?

“Be an owner, not a loaner.”

These words describe one of the best benefits of owning compared to renting a home. When you rent your home, you may be helping another person make their mortgage payment. If you own the home, and you take out mortgage, then a small portion of the payment goes to pay down the loan value. Every month you make the payment, the amount you owe declines. Your equity grows over time.

When making the purchase of a first home, there are several factors to consider. If you, or your kids or grandkids, are considering a purchase, ask:

What kinds of loans are there? Do I qualify for any subsidized loans from the Federal government?
How much home can I afford?
How much do I need to set aside for maintenance? As a general rule, 2% of the purchase price per year is the cost of home maintenance.
How much will I pay in taxes this year? And how much might that increase every year?
How much will I pay for insurance?
How much will it cost me to pay the utilities, like electric, internet, natural gas, and more?
What are the commissions and other closing costs?

A financial planner at A&I Financial Services would be happy to help you or your kids or grandkids calculate the costs, risks and potential rewards of a first home purchase. Don’t be afraid to ask!

Should I sell (or downsize) my home in retirement?

Selling Your Home in Retirement

If you own your own home, you may be considering selling it in retirement. Some people we know invest the proceeds and choose rental homes. Others, on a whim, buy a “land yacht” and travel the country. But more commonly, retirees choose to downsize in retirement.

Questions to consider as you think about selling your home in retirement include:

What do you love about your home? How much will you miss it?
What do you dislike about your home? How much better will you feel when you get rid of it? Yard-work is a common complaint!
Where do you want to go? Have you spent all four seasons there? If not, can you find a way to spend more time in that climate?
How close is the medical care to where you want to be?
Will your health insurance need to change? Look at your Medicare Advantage plan, if appropriate, and find out.
How convenient and/or expensive is travel?
How close are you to friends? What about the family?
How fast is the internet? As crazy as this might seem, in a world of video-conferencing, fast internet is becoming a must-have.
Have you put together a family financial album and/or your end of life plan? Sometimes the questions asked in these documents can help you make a more informed decision with your living situation!

What should I know before I buy a vacation home?

Many people dream of owning a vacation home in the mountains or on a beach! Purchasing a vacation property can sometimes also be an income source. But the tax rules are complicated and subject to change at any time.

You don’t want to run afoul of the IRS.

Working with a financial planner at A&I Financial Services will help you make the right decisions for your family. As part of a long-term, real-life financial plan, vacation property may appreciate in value, possibly provide some income, and provide a place for building many fond memories.

Questions to ask as you consider the vacation property:

How often will I use it? How often will I use it 5 years from now? 10 years from now?
If I use a mortgage for the purchase, how much will I regret making the monthly payment?
If things go badly, financially, and suddenly, how much do I have in reserve to keep making the mortgage on the vacation property?
Will I rent it out? How often? What can I learn about the legal, insurance, and tax implications of this decision?
If I rent it out, have I checked with the HOA and the local government about rules and taxes? Don’t run afoul of these issues!
What about property maintenance, taxes, utilities and other costs? Will I be able to cover these comfortably or will it be a stressor?

If all of this is not stressful, but exciting, then pursuing a vacation home may be right for you. And if it is both stressful and exciting, owning a vacation home may still be exciting. In any event, the best results are achieved with a plan. Make sure to discuss your goals, dreams, objectives, fears and excitement with your financial planner before taking the plunge to purchase a vacation home.

What should I know about buying investment property?

Investment real estate has made some very well-known people wealthy. The saying, “God only made so much earth” is a truism that benefits the real estate owner. Know that the returns promised by many real estate salespeople are not always achievable, nor may they even be likely.

The big truth with real estate investing is that potential returns come with commensurate risk. The bigger the potential returns, the larger the risk.

Real estate investing is a concentrated investment decision. Many families have a large amount of money tied up in a property they cannot easily sell, making real estate an illiquid investment. Many families have a mortgage on that property—a leveraged investment. And many families depend upon rental income to make the mortgage payments—even more risk.

Here are some questions to consider as you look at an investment property:

What income can I realistically expect?
What costs can I realistically expect? Have I considered all of the costs?
How will I make the payments if the income disappears? And how long can I make it without rental income?
Toilets, trash, tenants, taxes. Do I have a comfortable grasp on who will handle these issues and how much they will cost me?
What is the opportunity cost? Where else could I invest my money and earn what rate of return instead of putting it into a rental property?
What happens if I become disabled or die? Will someone else be able to manage the property? To sell it? Do I have that estate planning in place?

Investments in real estate are a large part of the assets of many of the clients at A&I Financial Services. The financial advisors here are happy to prepare accurate and timely financial plans for your unique situation so that you can make a confident and informed decision in alignment with your personal goals and values.

Services We Provide

We help you by providing financial planning advice when you are:

Purchasing a residence

We help with the financial planning for real estate purchases and provide education about mortgages and more.

Selling your residence, particularly in retirement

We help retirees make decisions in alignment with their goals, maintaining dignity and independence.

Purchasing a vacation property

Learn the ins and outs of vacation property taxation and make a plan.

Purchasing and managing investment real estate

Planning for investment real estate can reduce stress and increase your chances to achieve financial success.

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Client Stories

A Family Made for TV

Becoming a Landlord

Mitch and Sarah found us by watching one of the Denver television stations, who followed the family and their financial planner, Karl Frank, as they dreamed about owning their first home. It was the middle of the 2008 financial crisis and the television station wanted a story with a happy ending. They chose the right family! They were renting and holding down two jobs, saving money, staying frugal. Real estate prices fell through the floor but getting a loan was difficult in the Great Recession. We:

Held a discovery meeting
Put together a real-life financial plan
Planned for their kids’ college
Budgeted for a mortgage
Started saving money for their retirement
Helped with the investment decisions
Found the size of loan they could afford

Today, the family has grown. They are investing successfully and looking forward to new opportunities for future financial success. Plus, now that they have a house, they have plenty of room for their incredible collection of Star Wars memorabilia.

Jessie grew up in a family with a lot of financial stress. It seemed like her dad was always taking a new financial risk, and he would either strike it rich or they would “feel broke,” seemingly without any notice. Needless to say, Jessie was a little shaken by her upbringing and wanted security from her investments. When we met, she was considering becoming a landlord. Her friends bragged about their success renting their second home through an online short-term rental company. They offered her a pro-rata share of a new property they were considering. Jessie had recently inherited some money and was looking for a way to invest it wisely. But she was skeptical and scared of ruining a friendship. We:

Completed a fun and safe discovery meeting
Really got to know Jessie’s relationship with money
Helped her to invest a number of IRAs and other accounts that she had accumulated but been afraid to change over all these years
Discussed the pros and cons of real estate investments
We helped her understand and set up a proper legal entity to reduce her personal risks
We talked about real-life situations we see on a regular basis with other clients—not just the rosy stories, but some horror stories too, so that she could feel more confident
We put a second set of eyes on her insurance, loans and other financial documents

Jessie purchased a rental property close to home. She loves the regular income. She avoided purchasing too large a property with her friends, and they remain close. Jessie has the rest of her assets in place for a long-term, real-life financial plan. She loves the relationship she has with her financial planner!

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