Real estate assets are alternative investments that are considered, by many, to potentially offer low-risk/high return cash flow, as well as portfolio diversification. For the average investor, real estate assets are typically found in the former of direct property ownership. The direct ownership style — buying and owning a stake in physical real estate, such as an apartment, office or retail property —is generally considered a stable investment, designed to provide regular cash flow and built-in asset appreciation.
But direct real estate property ownership also carries downsides such as unexpected expenses and vacancies.
From investors approaching retirement, out-of-market landlords, or simply individuals who would rather spend their time as they choose, there is a long list of investors who no longer wish to actively manage their real estate. While these investors may be familiar with the better-known tricks of the real estate trade, such as 1031 exchanges, many have yet to find a lower-risk, passive income solution to help sustain them through retirement.
The Challenges of Direct Real Estate Ownership
While direct real estate ownership has its benefits, it also comes with risks, the main one being responsibility for “tenants, trash and toilets.” Specifically, owning real estate requires hands-on attention and experience, which is something that an owner/investor might not anticipate, or be prepared for.
For example, the loss of a tenant could mean the owner needs to find a new one, and quickly, to ensure continued cash flow. Or, in another case, repairs to an apartment complex or warehouse might require additional capital, which could put a strain on the owner’s budget. Certainly, the owner/investor can hire an outside source to deal with finding tenants and making repairs. This, however, can put a dent in the asset’s anticipated cash flow.
Landlord expenses are only one challenge when it comes to direct asset ownership. Concentration risk (lack of diversification) and capital gains taxes upon the asset sale can also take a bite out of a portfolio’s overall value — a concept that is often overlooked. Many real estate investment property owners do not realize the level of risk they incur by having relatively high dollar amounts tied up in a limited number of assets, frequently of the same type and located within a narrow geographic area (e.x.disproportionate share of net worth in a handful of rental homes within five miles of their primary residence).
Wealth managers have been able to tailor a portfolio of traditional assets to fit an investor’s risk preferences and lifestyle goals, while leveraging available tax benefits. Until now, however, there has been a gap between sophisticated wealth management techniques and investment property ownership.
The Potential Downsides of Real Estate Direct Ownership
As an alternative asset, real estate is not treated to the same deep, consumer-focused evaluations that stocks and bonds receive. As a result, direct real property ownership can erode investment valuation and eat into cash flow — which can be especially dangerous at a time when that passive income is greatly needed. What starts out as a well-intentioned investment for future benefit cycles into a burden that might not provide as much after-tax cash flow as originally anticipated.
For years, real estate investing has led to a stalemate between the effort being poured into the properties and the cash flow provided at the end of the investment hold period. This disconnect does not account for concentration risk, capital gains taxes, landlord expenses and other costs that can eat away at asset value and appreciation. The end result is that direct property ownership can put a great deal of strain on an investment portfolio.
Wealth managers can tailor a portfolio of traditional assets designed to leverage available tax benefits, fitted to an investor’s risk preferences, and in line with their lifestyle goals. There has been, however, a profound gap between investment property ownership and sophisticated wealth management.
The Potential Upsides of Real Estate Wealth Management
The goal of Investment Property Wealth Management™ is to bridge that gap, helping investors meet their income needs in retirement while managing their risk and preserving property wealth across generations.
Programs such as IPWM™ help eliminate the downsides of real estate ownership by flipping the ownership role from real estate possessor to wealth-creation investor. IPWM™ moves real property into managed portfolios, then offers percentages of those portfolios to investors.
The potential upsides to IPWM™ portfolios include the following.
Predictable Income. Investments can be tailored to long-term, lifestyle goals — each of which aim for steady income streams and a higher degree of return certainty. In addition, sophisticated tax strategies help identify investments with specific tax advantages and risk-adjusted returns, designed to allow investors to keep more of their earnings.
Risk Management. IPWM™ manages risk through a detailed due diligence process, supported by the same in-depth, critical evaluation tactics and sophisticated asset allocation techniques used to build high-performing stock and bond portfolios. Additionally, portfolios are highly diversified, as risk is spread across institutional-quality, commercial real estate investments and products, overseen by knowledgeable sponsors.
Wealth Preservation. IPWM’s™ plan helps investors defer taxes on capital gains which, in turn, can preserve property wealth across generations. Through depreciation techniques and tax-advantaged properties, Realized enables investors to reinvest their entire principal in a portfolio that shelters their cash flows. The result is higher potential returns without traditional tax pitfalls, aiding in stronger estate planning and easier transference of generational wealth to designated heirs.
In short, funds and portfolios offered by programs such as IPWM™ can help investors realize the benefits of real estate ownership, without the challenges that come with direct asset investment.
The remainder of this book will focus on what investors can expect from participation in an IPWM™ fund.
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