I met Brent Sutherland, the author of today’s guest post, at a financial conference called FinCon. I was immediately impressed with him because he was a certified financial planner who ALSO spoke fluently about real estate investing!
Yes, that’s a rare combination. And as a result, I asked him to write a guest post to explain why most financial advisors won’t tell you to invest in real estate.
Brent is uniquely suited to talk about this subject. In addition to his financial practice, he owns 9 stand-alone rentals plus a recently acquired commercial real estate project (apartments, garages, and mobile homes).
You’ll see from Brent’s photos that he and I also share a love of travel! Real estate investing + financial independence + travel just seem to go together nicely:)
Brent is not currently taking any new financial planning clients, but you can learn more from him at ntellivest.com.
Take it away Brent!
I’ve got a hunch. If you’re reading this piece, I bet you are already fully aware of the power real estate can have in developing financial freedom.
I also bet that you know you likely won’t get any guidance on real estate investing if you visit your local financial advisor.
So, if real estate can be a powerful tool to develop financial freedom and if financial advisors are supposed to be trained to help you get your finances on solid footing, why don’t more financial advisors discuss real estate as an investment?
That’s a great question. And it’s the exact topic I’m going to dig into today!
How This Certified Financial Planner Found Real Estate
As a bit of background, I am a CERTIFIED FINANCIAL PLANNER™ professional. I have worked in the wealth management division of a large bank, the financial planning and investment management divisions of a local RIA (Registered Investment Advisor), and more recently on my own in the role of a financial coach.
In the midst of this journey, I became a real estate investor myself. I witnessed the restrictions within the structures of the traditional financial advisory business that prevent advisors from talking to clients about physical real estate as an investment.
These hurdles caused a personal dilemma for me.
How could I sit across the table from someone and talk to them about a financial roadmap and investment strategy that I was not following myself? I became professionally and morally conflicted. And that is why I ultimately branched out.
3 Reasons Your Financial Advisor Doesn’t Talk About Real Estate
You may wonder why I became conflicted. Well, it was actually 3 reasons that prevented me, and continue to prevent other current real estate savvy advisors, from talking to clients about real estate investing.
Reason #1 – The Compensation Structure
A licensed advisor can sell securities such as stocks, bonds, mutual funds, insurance products, etc. But they can not sell real estate.
And the compensation of advisors is reflective of this structure. Advisors predominantly get paid in one of 2 ways:
- Via commissions from the sale of a financial product
- Through a percentage of portfolio assets managed, aka the AUM (Assets Under Management) model
Recommending a client use their money to buy real estate would not generate any money for the advisor through either of these compensation structures. So, the odds of them recommending a client do so are near zero.
This poses a huge conflict of interest.
Reason #2 – The Education Curriculum
I am a cookie-cutter product of the traditional financial education system. I studied economics in college, went back to school for financial planning curriculum, then obtained my CFP® professional designation.
And I can tell you point blank that no where during the course of this education was I taught anything about real estate investing. REITs (Real Estate Investment Trusts) were the only real estate oriented product mentioned, but these holdings are not even close to being the equivalent of owning physical real estate. REITs are third-party managed holdings that trade and behave in much the same manner as the stock market.
To invest in physical real estate, you must build a knowledge base from outside of the traditional avenues. Most advisors take the traditional path, which makes them ill-equipped to speak towards physical real estate as an investment.
Reason #3 – The Regulatory Oversight
A licensed financial advisor who sells and manages investment products has to adhere to strict compliance standards and regulations. Regulators design these rules to help restrict unethical practices within the industry.
These regulations provide guidelines for what an advisor can give guidance on and what products they can sell. The scope of the regulations are generally restricted to licensed products. This makes it difficult for a licensed advisor to give guidance on an unlicensed product (such as physical real estate) without opening themselves up to possible regulatory headaches.
All three of these reasons are pretty big hurdles. They are also a large part of the reason I decided to leave the traditional financial planning world and work with clients in a different capacity.
I believe that a traditional approach to financial planning (and life for that matter) leads to traditional results. And I believe that real estate investing can be a major catalyst for positive non-traditional results.
3 Reasons Real Estate Investing Creates Powerful Results
I have seen real estate work magic both in my own world and in the worlds of those I have coached. Here are the 3 primary reasons why.
Reason #1 – Income Diversification is More Important than Portfolio Diversification
If you’ve ever had a meeting with a financial advisor, there is a near 100% chance you’ve heard the term diversification. This will normally be in reference to your investment portfolio holdings of stocks and bonds.
And while it is certainly important to be property diversified with your investments, it is even more important to be diversified with your income.
This is because the largest financial risk for most of you is the loss of your primary source of income, which is typically in the form of a day job.
Unfortunately, this is also a decision that is usually in the hands of others, leaving most of you powerless with the outcome. And considering that Americans are notoriously bad at saving money, a loss of income leaves many households in a state of peril.
When you have multiple sources of income, you don’t have to fear this same situation. If you lose your job, your other income streams can help to pay the bills and get you through that tough time.
This is the type of financial security that portfolio diversification alone cannot provide.
If you continue to expand your income streams, you eventually reach a point where you no longer need to rely on a day job (and someone else being in charge of your well-being). This is the point of financial freedom; the ultimate form of financial security!
Reason #2 – The Math Simply Works in Favor of Cash Flowing Real Estate
Financial planners have a commonly accepted principle for when you have reached the point of financial independence. It’s simply when the total of your retirement savings/investments has reached 25 times your annual household living needs. This is referred to as the Four Percent Rule.
In other words, the rule states that if you need $40k to live on, you should aim to save a total of $1 million for retirement. This gives you a reasonable chance to withdraw $40k/year (adjusted for inflation) for life and without your assets running dry.
The four percent rule is a fine approach. But I will argue that quality, income-oriented investments can improve upon this picture. And here’s the simple math as to why.
If you need $40k/year to live, you could alternatively invest in assets that generate an 8% cash-on-cash return. This is a very reasonable assumption. And it means you would only need to save a total of $500k (instead of $1 million). Yet, your investments would still meet your annual household living needs.
Of course, there are miscellaneous factors that will impact your exact timeline (returns, taxes, inflation, etc.). But with your savings requirement halved, it’s rather clear to see that you can reduce your timeline to financial independence by focusing on cash flowing real estate.
Reason #3 – Real Estate Investing Creates Better Financial Habits
I used to have many conversations with young people about compound interest. It can have a powerful effect your money over the course of 30 years. But nearly every single time, I also witnessed their eyes glaze over mid-conversation.
This is because a long-term time horizon is a tough sell to the majority of human beings. We like the here and now because it is real and tangible.
This is where investing in real estate wins over many people.
You can achieve and feel the results almost immediately.
Property improvements are visible and tangible.
You can cash, spend, and invest rent payments. Today! Not 30 years in the future.
I’ve found that investing with near-immediate results usually generates energy and enthusiasm in a person that cannot be achieved through traditional means. Positive financial behaviors unearth themselves. And these behaviors are the heart and soul of achieving ultimate success with personal finance.
Conclusion
If approached in a smart and strategic manner, there is no question that real estate can be a wonderful investing tool. It can help you develop financial security and boost your path towards financial independence. And it can happen much sooner than traditional investing alone.
Just don’t expect to get this advice from a licensed financial advisor!
Thanks for taking the time to share with us Brent! Brent can be found online at ntellivest.com.
If you have any questions or comments, please leave them in the comment section below. We’d love to hear from you.
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Mandiso Mhlongo says
Hey Chad. Much appreciated for the information man. What can I do if I would need assistance from financial advisor? Must I consult Brent?
How long must I study the real estate strategies before I invest in real estate?
Brent Sutherland says
Hi Mandiso. Will jump in here to let you know that I saw your email and am happy to have a conversation, help in any way I can. Will reply back shortly!
David Rocci says
Great info! Do you have a template or model on ntellivest.com that you recommend for forecasting retirement needs that include rental real estate? Also, how do you feel about buying real estate with self directed IRAs? Lastly, based on the example provided, would you ever advise someone to pull money out of a traditional retirement vehicle to purchase real estate?
My generation has seen two major stock market crashes and a housing crisis with bank bail outs. No one I know believes social security will pay when it’s our turn to retire. A lot of people I talk to have no idea what to do with their money.
Thank you for this practical and transparent insight to the challenges faced by investors and the traditional advisor role.
Thank you Brent! And thank you Coach Carson!
Brent Sutherland says
David, thanks for reaching out! These are tremendous questions. It is obvious you are thoughtful and strategic with your finances. There are indeed challenges we’re facing in the current economic environment. But on the bright side, there is also more access to opportunities than ever before!
To your questions.
I do utilize a couple of spreadsheets for projecting cash flow on real estate holdings for my client reviews. I usually blend this with another sheet for growth projections on their traditional portfolio investments. But to this point, I haven’t created a shared template with my approach. This just might be my catalyst to do so!
The subject of buying real estate in a self directed IRA is loaded, probably best suited for an article in and of itself. I will say it largely depends on your personal objectives. A lot of people (especially young people) are interested in real estate for it’s ability to grow their income. If held in an IRA you still have to abide by IRA rules that restrict withdrawals before age 59.5. This is something to keep in mind. If simply looking to defer all potential taxes on your holdings, a self directed IRA could be considered. But keep in mind that real estate is already a fairly tax-advantaged holding outside of an IRA. If not careful, you could face a situation that’s kind of like putting a refrigerator inside of another refrigerator.
Depending on the individual’s goals and objectives, there are indeed some instances where pulling money out of traditional retirement accounts makes sense for the longer-term outlook. But it needs to be strategic and thoughtful, otherwise the tax and penalty hit can be too much of a hurdle to overcome.
Chad Carson says
Love the questions and Brent’s answers!
Brent, that spreadsheet would be awesome. Maybe we could work together on that.
Regarding self-directed IRAs, I have used them some in my own case. I prefer buying notes (i.e. loaning money) because the interest is not taxed inside the IRA. I’ve also bought tax liens for the same reason.
But I also keep an ever-larger portion in equities. At my age (39), I look at my own retirement accounts as a 2nd layer of retirement savings. My real estate is the first. So, I don’t plan on needing the retirement funds anytime soon. And more and more, I don’t want to spend all my time managing them. So, passive, low-cost index funds are a natural choice with that long time horizon.
Joe Farley says
As a long time real estate broker/investor I can state that this information is accurate, easy to understand and extremely important. The value of it will separate the doer from the masses and will lead to wealth creation in a big way. It is fairly simple but must be done the right way. I am grateful that this was shared by a financial planner who many people rely on for financial wisdom and management. Well done!
Brent Sutherland says
Really appreciate the feedback Joe! We’re all in this together so keep doing what you’re doing to help make this a more honest and prosperous world.
Keith Herrington says
I agree completely. I am a longtime Real Estate Broker and I have investments in equities as well as real estate. Rental income is a great alternate source of income when the market is slow and commissions are down. Plus like you said, in so many words, it give you a lot of bang for your buck (income compared money invested.) You don’t have to be a financial genius to do some basic calculation for return – just start.
Chad Carson says
Well said! I agree.
Mirketa says
Nice blog, thanks for sharing
Remy says
This is an informative post. I had no idea about the regulations and how they could discourage financial advisors from real estate.
Could you elaborate on Real Estate is Powerful Reason #2?
“If you need $40k/year to live, you could alternatively invest in assets that generate an 8% cash-on-cash return. This is a very reasonable assumption. And it means you would only need to save a total of $500k (instead of $1 million [under the 4% rule]).”
This isn’t a conflation of the 4% safe withdrawal rate (on stocks that historically return 7-8%) vs an 8% real estate return? Is this comparison based on real estate not really facing volatility and buy-and-hold cash-flow at that 8% rate?
Could you explain how an 8% cash-on-cash return is “a very reasonable assumption”? It would be helpful if you could illustrate with a quick example what that would look like. Ex. A $500K property would need to return $80K/yr (=$6,700/mo), and if 50% of that revenue went towards expenses, that would be an 8% return. Those numbers don’t seem realistic in most markets. If it’s cash-on-cash return based on financing, could you provide numbers? Would there be a tradeoff in added risk? And how would you evaluate the added risk from leveraged real-estate returns against that hypothetical $1M stock market portfolio?
Thanks in advance for any additional explanation and analysis you could provide!
Brent Sutherland says
Great questions Remy! Thanks for reaching out.
Certainly, not all markets can easily achieve an 8% cash on cash return (especially coastal regions). But there are plenty of markets (midwest and south) that can. As requested, here is an example to show the numbers put to work.
Let’s assume we have a $150k property that just meets the 1% Rule and generates $1,500/mo in gross rent. Assuming a 25% down payment and a 5% interest rate on a 30 year loan, P&I would be $603.92/month. Other expenses that will reduce income could be an assumed $1,800/yr (1.2% of FMV) in RE taxes, $750/yr in insurance (0.5% of FMV), $1,800/yr in property mgmt (10% of rent), and $2,700/yr in maintenance/vacancy (15% of rent).
Less the mortgage and all related expenses, the projected net profit each month on this property should be $308.58/mo or $3,702/yr. With $37,500 as a down payment and an estimated 4% in anticipated closing costs ($6,000), the total assumed outlay for this property should be $43,500. This equates to an 8.5% projected cash on cash return each year.
Leverage does create some added risk. That’s why it’s important to conduct due diligence when evaluating properties/markets to help ensure that your numbers will hold. The last thing you want is to be underwater each month on an investment property. But I would argue that RE returns can be much more predictable than the stock market since there is an element of control.
I hope this is helpful!
Sam says
Amazing the way you laid this out and so easy to understand. I think I’ll subscribe. Definitely interested in learning more as I start my real estate investment Journey.
Mirketa says
Thanks for sharing such an informative blog
Peter Evering says
Certainly you have revealed the real picture of licensed financial advisors. I myself had this experienced. Well I did not knew the minor details about why the advisors don’t let us invest in real estates. Thank you coach for this realistic depiction of why we should chose to invest in real estates.
Brent Sutherland says
Thanks for the comment Peter. I’m glad this post was helpful!
David Rosenberg says
I am 62 years old retired in Mexico. 75% of my assets are in RE and the balance in securities. Brent if you are taking on new clients in the future or can make a referral to another CFP. who can help devise an exit strategy for my RE holdings please let me know. Thanks
Brent Sutherland says
Thanks for reaching out David! Although I can’t speak specifically to your situation here, I’d be happy to have a chat with you. Feel free to book an Intro Call through my site (https://www.ntellivest.com/workwithme) at a time convenient for you.
Frank Borland says
Hi, I have invested in real estate both through IRA and cash/loans. Anyone know of a financial advisor who can review the portfolio for planning forward.
Thanks
Michael says
Thank you for sharing get information!
Ruthie says
How can I go about finding a financial advisor that knows 1) the stock market; 2) real estate; 3) retirement planning?
I’m 60 years old, have an IRA that won’t be enough for retirement, but is enough to convert to 2 rental properties, cash buy. I’m wondering whether to do that. (I do have some knowledge of rental management.)
Chad Carson says
Brent from the article is the only one I know who does both real estate and other types of assets. Hopefully he has some space at some point!
Buying rentals with a self-directed IRA is definitely an option. Have you considered loaning the money instead? I interviewed an expert on it a while back: https://youtu.be/7yH-VTQMQ7k
Samantha says
I would love to hear more about the loaning part. Where can I learn this?
Thanks a ton!
Brent Sutherland says
Hi Ruthie,
I realize this is a late reply, but feel free to reach out to me through my website if you’re still needing assistance and would like the name of a financial planner who also understands real estate (I am not practicing anymore). Thanks!
Ross says
I subscribe to Brett’s ntellivest newsletters and really enjoy his point of view – I am curious to hear his thoughts on DSTs as solutions for 1031 exchange needs. As an RIA you have this securitized option available to you as the broker dealers do. I realize these are more for passive investors vs. the active investors who would want to hold direct real estate. As far as I know, the DST is the only choice for an exchanger who wants to be a passive owner…
Kelley Financial says
This is a wonderful article stating about the financial advisors who invest in real estate. This article is attracting mostly everyone in the world. Such illustration that anyone can understand it easily and I am sure many people will come to read this in future.
Brent Sutherland says
I know this is a bit of a late reply, but just wanted to thank for your your comments. I’m glad it was helpful!
Victor Vickery says
Thanks for sharing your valuable thoughts with us.
Brent Sutherland says
Thanks for the feedback Victor! Am glad this information is useful.
Victor Vickery says
Amazing Work!!
StartingNow says
I am starting to work with a Real Estate Investment Advisor that I found online. She has quoted me her fee. She will help me sell my single family home rental property and get a better rental property to increase my cash flow. She will work will real estate broker/agents and facilitate the 1031 exchange. What is the average one time fee of a RE Investment Advisor whether a fixed fee or a percentage of the value of the property.
Samantha says
Hey there! Did you ever get an answer to your question? How have things worked out for you so far?
Brent Sutherland says
Hi StartingNow,
I was operating in a different capacity (more of a traditional full scope financial planning model). It appears you are working with a 1031 exchange expert here. Unfortunately I can’t speak to the average fees charges to help facilitate this process.
I will say that I would certainly lean towards someone who charges a flat/fixed fee and not based on the FMV of the property. This is the fair route and the work involved would be no different.
Michael Buffington says
Brent,
Question: I bought rentals back when the market was slow (9 S.F.R properties). They are all paid for now. The issue is, they have gone up in value faster than rents have increased. I currently have about $400k in loan debt on a primary home. Here is the question: Should I sell 2 rental properties and pay off my primary property?
Brent Sutherland says
Hi Michael,
Kudos on the 9 rentals! It sounds like they have been treating you well. It’s tough to make a judgement call on your question without knowing more info about all the moving parts in your financial picture. This is something a real estate savvy planner could help you determine. Unfortunately I am no longer practicing (am in RE full time now), but I do have the name of someone who could help. Feel free to reach out to me through my website if you’d like more info.