Simplifying Elder Real Estate: Navigating Complexity for Lasting Investment Success

A&I Wealth Management > Blog > Elder Planning > Simplifying Elder Real Estate: Navigating Complexity for Lasting Investment Success

“I want to make an investment in real estate, but I don’t know how it would affect my financial plans.” So begins many conversations at A&I Wealth Management.

We help you align your investments with your values, goals and relationships. Real estate is often a big part of that decision. And, as we age, our needs and desires with investment real estate often change.

Navigating Property Management Challenges in Retirement

Toilets, trash, tenants: these are some of the tasks required of a rental real estate owner. Buildings depreciate over time, and they often require work. Murphy’s Law says that the work required will happen often at inconvenient times, on a weekend or in the night. As a landlord, you may want to take on some of that work yourself. But as you age, it becomes increasingly complex and risky to do the work yourself. If you offload this work to a property manager, it can reduce your stress but may increase your costs. And, as you age, it can become increasingly difficult to manage the property manager. You may ask, “are they taking advantage of me?” This leads to further risk mitigation, discussed next.

Risk Mitigation Strategies for Aging Real Estate Investors

Owning real estate comes with certain risks. The liabilities of tangible property include personal and property hazards. If a hailstorm hits, or if a pipe bursts, or if something else breaks, this risk can be expensive. But worse, sometimes a personal risk could be even more expensive. If a person trips or falls, or if something were to cause personal injury, a lawsuit could lead to a long, drawn-out, stressful experience. Especially as we age, we have a decreasing capacity for stressors like this. 

Insurance is the best financial mitigator of risk. You will want to make sure to include the proper amount of umbrella insurance with your plan. Consider legal protections, like a trust or corporate ownership of the rental real estate. Setting up an LLC is fairly inexpensive, but it does require ongoing tax filings. Legal protections can help mitigate risks of real estate ownership.

As we age, you may need to include other people in the decision-making process. Questions to consider include, “Who can I trust? Who wants to help me?”

Strategizing Expected Income Increases

Real estate can provide steady income as well as capital appreciation. This income can increase over time. Work with your financial planner to come up with a forecast of rent income increases. Work these into your financial plans. Rent increases can offset inflation and can provide stability. On the other hand, as we age, we can have disruptions in income, discussed next.

Preparing for Expected and Unexpected Disruptions in Income

Income from rental real estate requires renters to pay on time. Unfortunately, renters may sometimes be late with their payments. Sit with a professional financial planner and brainstorm situations when you might expect to have disruptions in rental income. Weather events, personal events, and more might make your list. After the recent pandemic, many landlords have become more aware of disruptions in income. The future is a lot safer when you can create realistic expectations. Then, plan for an emergency fund to address these issues.

As you age, you may find disruptions in income are more than a financial hassle. We lose our desire, and capacity, to manage unpleasant business situations as we age. You may ask yourself, “Who needs this hassle?” Consider putting together a plan today for what you would do if and when your tenant situation becomes “untenable.”

Elder Planning: Simplifying Real Estate Ownership

As we age, real estate ownership becomes more complicated. Our homes need to be senior safe. Our mobility, mental and emotional faculties decline and our ability to manage complexities decreases. Consider who will help you manage your investment real estate late in life. Are they willing and able? What happens if something happens to them? Develop a Plan B, and a Plan C, if you are going to maintain rental real estate in your more fragile, elder years.

Estate Planning for a Seamless Transition of R/E Investment

One of the considerations for all real estate owners is estate planning. Who will inherit the real estate? Do they even want it? Sometimes the decision is clear: one of the children is clearly interested. The estate plan can be complex, however, as fairness issues must be addressed across any other inheritor. 

Some parents transfer the home to a caregiver. This can be a way to pay for the child who stayed with the aging, dying parent. Some of the best advice is to clearly discuss your intentions well before the end of life. Although avoiding the topic seems easy now, it can be costly to the family health if you do not discuss it with your children when you are mentally sharp. Sometimes families are torn apart by miscommunications. And the tax costs, and tax benefits, of real estate are also important, as discussed next.

Tax advantages and disadvantages of investment real estate for the estate

Real estate has unique tax advantages. When passed on as part of the estate, real estate can get a step-up in cost basis. If the deceased purchased a property for a low price, but the fair market value of the property on the date of death is a high price, all of the gains are tax-free to the inheritor. 

Investment real estate has a second advantage. While the investor is renting the property, they can take tax deductions for all sorts of expenses. They can depreciate the assets. They can expense costs associated with running the real estate business. Upon death, all of these costs are forgiven. The inheritor does not have to recapture the tax benefits of the deceased.

Disadvantages of real estate are also important to note, and at the top of the list is complexity. Upon selling the real estate, the various tax advantages must be realized. An inheritor may want to sell the property quickly to avoid the complex tax planning issues of owning investment real estate.

Conclusion

As we age, it behooves us to simplify. Owning real estate becomes increasingly complex as we lose faculty. The decisions we make later in life may not be the same ones that we make today. A good, long-term financial plan allows for flexibility and accounts for different risks, rewards and disruptions to real estate income. Planning for an elegant exit is often the best way to maintain the property while you age.

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    About the author

    Karl Frank, Certified Financial Planner ®, MSF, MBA, MA, is the President of A&I Financial Services LLC, a local business that specializes in wealth management, insurance planning, and retirement planning. Karl cares for business owners and the businesses that care for them. Learn More about Karl.