Real Estate’s Role in Your Financial Plan

Aug 23, 2022

Real estate is all too often the black sheep of your portfolio – overlooked, but still valuable as it has a multi-faceted role in financial plans. Your primary residence, or residences, are a huge portion of the overall net worth of many clients must be factored into a proper financial plan. While too much real estate exposure can leave you susceptible to situations like the housing crisis (see 2008, Financial Crisis), too little can leave a hole in your portfolio, missing the positive diversifying attributes of a valuable asset class.

The point being that incorporating real estate into your long-term financial planning is another tool in an investor’s toolkit to diversify assets and improve the composition of your total portfolio. When doing so, it’s helpful to approach the process with an unbiased, holistic outlook.

Not Just an Investment; Living, Investing, Or Something Else Entirely?

Our homes are more than numbers on a page or inputs into a portfolio. They have sentimental, emotional value. Primary residences where you may have raised a family, your vacation home steps from the beach, or property with a dream come true view of the mountains all mean more to us than money. But for financial consultants, that emotional attachment is the rub.

Behavioral biases can cloud decision making, and when not properly accounted for, can adversely impact a financial plan. The first step for investors is to appreciate your real estate interests for exactly what they are. Do you own these properties for a specific utility and purpose? Residences fall into this category. Or are these investment properties seeking rental income or growth? Either answer is fine, but the most important first step is clearly understanding what the goal is of each particular ownership interest. The second step is to work with a financial professional to get a clearheaded opinion on your real estate assets, helping you determine the investment and tax implications of continuing to own what you own, or in buying what you are considering purchasing.

For example, owning a second home in certain states can have both lifestyle and tax advantages, but it could also leave your portfolio with too much risk in one specific asset class. Or how financing a vacation property may make more sense than cash offers when mortgage rates are low. Alternatively, ownership interests in income or investment properties may be delivering value for you today, but are you fully considering the downsides of having so much of your net worth tied up in a particular city, region, or economic trend?

These are all valid questions and depending on the size of your real estate exposure, they may very well be some of the most significant issues you need to wrestle with in the construction and maintenance of your financial plan.

Continue reading…

Real estate is multi-faceted when it comes to elevating your financial plan and diversifying your assets. That doesn’t mean there aren’t downside implications of it. We outline factors to consider before deciding to downsize or to purchase a second home in The Pros and Cons of Owning Two Homes.

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