Don’t Let HNW Clients Trip Over Real Estate Opportunities

A recent Spectrem Group study found that one in four investors with a net worth between $1 million and $5 million said they would invest in real estate. What’s more, our annual Wealth Advisor Confidence Survey™ 2019 found that nearly 90 percent of CPAs and wealth advisors are expecting a stock market correction within 12 months. Not surprisingly, many high net worth (HNW) investors are seeking opportunities outside of equities and fixed income. Several of our clients were interviewed by the national media last week about the do’s and don’ts of investing in real estate. Here are some excerpts:

According to Matt Topley
, Chief Investment Officer of Fortis Wealth (Valley Forge, PA), The most common mistake HNW investors make when it comes to real estate is thinking they can do it themselves. “It is a common behavioral failure of investors to think they can easily understand real estate. In most cases, HNW people earn money due to their expertise in a particular professional field. The trouble occurs when then try to park that money in real estate.  Most of the time they fail due to lack of industry knowledge and inability to execute as a landlord.  It’s not because they aren’t intelligent,” added Topley.

Blake Christian, CPA
  a tax partner of Long Beach, California-based HCVT, LLP said the most common misconception for HNW taxpayers who are new to real estate investing is “believing that the inevitable early year tax losses (associated with depreciation, interest expenses and other costs) will be eligible to offset their other income items such as wages, interest, dividends, etc.” For taxpayers making more than $150,000 a year, Christian said “such losses are generally phased out and then suspended until the time the taxpayer has net profits from other ‘passive’ activities, or at the time the investment is disposed of.  Taxpayers making less than $100,000 can claim up to $25,000 of “passive” real estate losses on an annual basis, noted Christian. “The $25,000 maximum loss is phased-out for Modified Adjusted Gross Income between $100,000 to $150,000 for joint filers,” he added.

Topley’s colleague, Randy Hubschmidt, who oversees Fortis’s real estate fund, said clients tend to get started investing in commercial real estate by investing with a friend or family member that has identified a “Can’t Miss” opportunity. “They tend to underestimate the risk of the transaction and therefore, they are not sufficiently compensated for the risk they are taking. More often than not, HNW people tend to learn the hard way that they would have been better off to have had their money professionally managed–and with much better liquidity and flexibility,” added Hubschmidt.

Experts say another common oversight is taxpayers with profitable real estate have neglected to do a Cost Segregation Study. Christian said such studies “allow property owners to claim shorter depreciable lives (i.e. more annual tax depreciation) on certain components of the building – e.g. hardscape and landscape (15 years), special electrical/ plumbing/ etc. (5-7 years) and other non-structural tenant improvements.  These studies can be performed now and apply retroactively to 2018 tax returns,” added Christian.

Topley said another common error he see is HNW investors settling for public REITs just because “REITs they have a high correlation to the stock market.” As a result, Topley said the investor’s “goal of diversification becomes skewed.” The best option for HNW investors is doing private real estate deals with well qualified operators, Topley said. “This gives them a low correlation to public markets, passive tax efficient income, and most importantly it hands off the process of owning private real estate to the experts who know how to do it,” added Topley.

Conclusion

Also, make sure you clients are getting compensated adequately for the risk and relative lack of liquidity that real estate entails vs. other asset classes. As Fortis’s Hubschmidt pointed out: HNW people tend to look at deals and compare the return on those deals to what they think they could get in the market. “That usually means publicly traded stocks. What these investors underestimate is the premium for illiquidity that they should demand from their real estate investment,” added Hubschmidt.   We’ll share these and other media hits from HB clients in our end of month newsletter.

#Fortis Wealth #HCVT, #Blake Christian, #Randy Hubschmidt, #Matt Topley
#Commercial real estate  #real estate investment mistakes  #alternative investments



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