Realized recently attended the InvestmentNews Retirement Income Summit and had the opportunity to sit down with Mary Beth Franklin for a fireside chat during the event. We shared our insights on using real estate as an asset class while planning for retirement and ways advisors can help their clients create income-producing strategies using their existing real estate holdings. Here’s some of what we covered.
What Are the Advantages of Real Estate Investments for Retirees?
One of the biggest challenges for retirees is finding investments that strive to replace the income from a previous job. By investing in professionally managed commercial real estate, investors can seek an income stream without the hassles associated with direct property ownership. In addition, real estate is historically not directly correlated with traditional asset classes, so it can provide a hedge against inflation depending on the type of real estate. In a rising interest rate environment, certain types of commercial real estate, like multifamily properties, can be beneficial because they can keep pace with inflation and interest rates as they allow for regular rate increases from their tenants.
As an advisor, if your clients have real estate in their portfolio, they may be asking questions about what to do with their investment properties as they approach retirement. At Realized, some of the questions we consider when building their investment portfolio include:
- How can we use real estate to create tax benefits for investors?
- How can clients use depreciation to help shield the income from their investment properties and pursue more after-tax cash flow?
- How can investors set up their real estate as a way to pass along wealth to their heirs?
For investors who already own investment properties and want to move to passive, hands-off investments, one solution to consider is a Delaware Statutory Trust (DST).
What Should Advisors Know About DSTs?
A DST gives investors fractional ownership of commercial real estate starting at approximately $25,000, which is much less than investing in a large-scale commercial property directly. DSTs are also 1031 exchange eligible, which means that investors can sell an existing real estate investment and put those proceeds directly into a DST without having to pay capital gains taxes.
DSTs allow investors to diversify their portfolios as investors can purchase fractional ownership into different properties that may be located throughout the country. The properties in a real estate portfolio are chosen with the investor’s risk tolerance in mind to help them pursue their income needs and goals. For example, a commercial rental property backed by investment-grade credit might be appropriate for a conservative investor, while a multi-family residential property in a growth market might be suitable for someone with a higher income.
Another potential benefit of DSTs is that they are professionally managed. Investors don’t have to worry about the day-to-day operations of the trust the way they would with a traditional property. This may be an advantage for retirees looking for hands-off investments that still have the potential to generate current income.
The average holding period for a Delaware Statutory Trust is 5 to 7 years and they are considered illiquid during the holding period, so it’s important for advisors and investors to determine whether this will align with the investor’s needs and goals.
For advisors looking for solutions for how to manage their clients’ real estate wealth, DSTs may be a solution. After investing in a DST, there is always the opportunity to invest back into direct real estate, but investing in a DST may be a way for advisors to create a tax-management strategy that strives to provide income for their clients.
