What Are Financial Planning Tools for Real Estate?

Posted Jun 1, 2023


Technology has completely changed the way financial advisors and wealth managers help their clients reach short- and long-term financial goals.

Technology has brought new levels of transparency and added deep insight into investing in public equities markets. Data analytics and big data can help financial advisors spot changing market trends, identify potential investment opportunities that align with a wide range of client risk profiles, instantly assess portfolio performance, and maximize the window to enter and exit investments.

Technology has disrupted the real estate industry as well, and it goes well beyond the customer relationship and lead management platforms used by realtors. The same technologies that are helping brokers sift through public equities investments and align potential investments with their client’s financial objectives are being applied to real estate investing. The movement even spawned a new buzzword, “proptech,” for property technology.

Let’s take a closer look at how investors are using financial planning tools for real estate investments.

How Technology Has Disrupted Real Estate Investing

Traditional financial planning involves creating a holistic investment plan that’s tailored to each client’s objectives and tolerance for risk. Financial planners and wealth managers will create a comprehensive snapshot of each client’s financial situation and craft a variety of investment plans that are designed to reach different financial goals.

Financial planning typically includes the following elements:

  • Retirement planning
  • Tax planning
  • Estate planning
  • Investment planning

Financial planners also may work with clients to help them fund their children’s college education, insurance planning, and philanthropic endeavors. In order to better serve their clients with such a wide range of services offered, financial planners often turn to sophisticated technology solutions to help them aggregate different financial strategies into comprehensive financial plans with varying degrees of risk and potential returns.

Now let’s tie this back into financial planning tools for real estate.

Performing due diligence for potential real estate investment properties historically involves scrutinizing a host of common metrics, including cap rates, net operating income, asset valuations, and conducting a comparative market analysis on the sales of similar properties in the market. Other factors that can greatly influence if a deal will pencil on an investment property include the asset’s need for upcoming repairs, closing costs, and other transaction fees, ongoing building operating costs, insurance and taxes, property management expenses, and more.

Compiling, analyzing, and making direct comparisons among potential investment assets is extremely time consuming and requires a high level of investor sophistication. However, the same financial tools that advisors are using to compile data analytics for potential public investments are being deployed in the real estate sector. These solutions can help real estate investors gauge potential risk, rebalance and diversify their portfolios, reporting, planning, and document management while saving an infinite amount of time.  Certain online marketplaces, meanwhile, have automated the analysis and due diligence aspects of potential investment properties so investors can jump right in and sift through properties that match their investment criteria without doing any legwork themselves.

These tools can help place everyday investors and wealth advisors with little experience in real property assets on the same ground as highly sophisticated real estate investors. Here’s why you might consider using these tools to help your clients add real estate to their investment portfolios. 

How Your Clients Can Add Real Estate to Their Investment Portfolios

Investors seeking portfolio diversification through alternative assets have often turned to real estate. Real estate investments can offer your clients many potential benefits, including:

  • Tax-advantaged income and deductions
  • Low or no correlation to movements in public equities markets
  • Recurring income
  • A tangible asset
  • Hedge against rising inflation

Clients can invest either directly or indirectly in real estate. Direct property ownership offers more tax advantages, as well as the most control over their investment capital. Other ways to invest in real property include through real estate investment trusts or by selling an investment property and completing a 1031 exchange into a Delaware Statutory Trust or tenancy in common.

Applying Financial Planning Concepts to Real Estate Investing

As noted above, wealth managers and financial advisors can apply financial planning concepts and technology to create multiple real estate financial plans from which your client can choose. 

Creating a real estate financial plan requires you to work closely with your clients to understand their current financial situation and investment objectives. Topics to discuss include:

  • Basis, equity position, and income generated from any current investment properties
  • Goals for their real estate investments, including income generation, asset appreciation, or both
  • Investment preferences, such as asset type, class, and geographical region
  • Tolerance for risk
  • Capital allocation

This information can be aggregated to craft unique investor profiles, and real estate financial planning tools can help you match those profiles with potential investment opportunities. You can create highly custom alternative investment plans for each of your clients that are specifically suited to their specific goals.

Best Practices for Helping Clients Invest, Reinvest, or Diversify Their Real Property Holdings

Applying sophisticated financial planning tools to the world of investment real estate is a relatively new concept. Still, there are many best practices that financial advisors can follow when attempting to tailor real estate offerings to suit their client’s needs.

Here are four ways advisors and wealth managers can leverage the expertise of a specialized tax-advantaged portfolio management company to apply complex financial tools to real estate investment opportunities. These practices can help advisors better meet their client’s financial objectives by managing risk, reducing exposure to taxation, and preserving wealth.

  1. Portfolio modeling. Proprietary financial modeling tools can help clients make the transition from direct property management to owning professionally managed portfolios of passive CRE investments from a diverse range of sponsors, property types and asset classes, and geographical markets. Advisors can offer clients multiple turnkey 1031 investment opportunities and allocations that address each investor’s goals.
  2. Independent due diligence. Multiple teams compile and deliver rigorous data-driven due diligence reports for all investment offerings.
  3. Collaborative portfolio construction. Portfolios can be custom-crafted to match each investor’s financial goals, income needs, tolerance for risk, 1031 exchange situation, and investment preferences.
  4. Increased investment options. Advisors gain access to DST offerings from a wide range of pre-vetted sponsors.

These practices can help advisors bridge the gap between traditional wealth management and investment real estate.

Putting it all Together

By leveraging technology and financial planning tools, financial advisors can help investors make more informed decisions about potential real estate investment opportunities.

Financial planning tools for real estate can help ensure your client’s real property investments are continually aligned with their investment strategies and financial goals. They can help your clients manage risk, create stable cash flows from monthly rental payments, increase potential returns, and define exit and entry strategies.

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.

Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.

No public market currently exists, and one may never exist. DST programs are speculative and suitable only for Accredited Investors who do not anticipate a need for liquidity or can afford to lose their entire investment.

Costs associated with a 1031 transaction may impact investor's returns and may outweigh the tax benefits. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities.

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