Who Should and Shouldn’t Invest In Real Estate
We often get asked: Should I invest in multifamily real estate? It’s a great question and really depends on your unique situation. Diversifying your investment portfolio with real estate holdings is a great strategy, but for some people its simply not a great investment choice. Let’s break it down with three people, Luca, Julianna and John.
Luca is 31 and just got married to the woman of his dreams. He’s an accredited investor along with his wife (They make $300,000 combined income per year) and have been saving for retirement and a house. Luca has $100,000 sitting in the bank that he’s desperate to get working for him. Luca’s short term goal of buying a house doesn't line up with a medium term real estate investment though. A real estate investment probably isn’t going to be his best choice right now. Real estate investments are not very liquid and usually have a business plan or an investment period associated with them. If Luca invested his $100,000 and then found a house, he would be in a pickle.
DId you Know, Your Spending Power Has Decreased by 18% Since 2020? The average good/service that cost $100 in 2020 now costs $118!
Julianna is 40 and married with three kids. Julianna makes $225,000 per year and is an accredited investor. Julianna rents in the city and loves to go out to eat but hates getting the bill. Most of Julianna’s $300,000 in savings is in the bank. She’s taking advantage of the higher interest rates and put $100K into a 4.5% CD through Chase. Her friend invests in real estate projects through DXE Properties, but she doesn’t understand why. After all, she can make 4.5% by just keeping her money in the bank! Julianna could benefit from diversifying her cash into investments. What Julianna doesn’t understand is she’s actually losing money and opportunity. Over the past few years she lost spending power as her money in the bank wasn’t earning her anything and inflation ran wild (18% since 2020). Now she is earning well on her 4.5% CD for 6 months but these high yield CD’s only last while the FED is tightening and quickly disappear thereafter. To make her money work for her, Julianna put $50,000 into a CD, invested $100,000 into real estate and $100,000 into low cost index funds. She has $50,000 in cash, $50,000 accessible within 6 months and $200,000 invested. She now has diversified investments and can hedge against inflation with her real estate investments. If she made 7% on her stocks and 12% on her real estate, that $200,000 would be worth $2.25 million when she was ready to retire at 65! Better yet, she could take the $2,250 earned in CD’s for a year and spend it on nice dinners without feeling guilty!
John is 62 and just finished putting his kids through college. John is an accredited investor by having $1 million net worth (excluding his primary residence). He finally has some breathing room and wants to get more into investing. Like Julianna, John has a friend who invests with DXE, but he doesn’t want to sell his stock portfolio and has all these old 401K plans from previous companies. He decides for these reasons it doesn’t make sense to invest in real estate, he’s wrong. In fact, investing in real estate could help diversify his portfolio and offset some taxes on his stock gains. Real estate assets are depreciated and several provisions in the tax code allow for expensing things like carpet, appliances, vinyl flooring through cost segregating and bonus depreciation. All of these ‘paper’ losses can be used to offset passive gains like those from selling stocks. Therefore, by investing in real estate, John not only diversifies his portfolio but could take advantage of advanced tax strategies. What John also didn’t know was that he can also invest in real estate through his old 401K rollover plans. These plans can be ‘self directed’ allowing him to use these tax differed funds to invest in real estate projects (as long as he’s a passive investor).
Real estate investing strategies don’t fit into everyone’s investment portfolios. Differing stages in life and differing goals could make it a compelling opportunity for your friend and a horrible idea for you. For those who want to take advantage of advanced tax strategies, want to hedge against inflation or diversify their investments, real estate could be a great fit. Talk to your financial advisor and schedule a call with DXE to figure out if its’ right for you.
Note: DXE Properties, LLC is not a financial advisor, past results don’t predict future returns, all investors should consult with their financial advisors and CPA to come up with the right plan for them.