Latest / Wisdom For What's Next / Beyond Being a Landlord: Real Estate Investing with John Christy, CFP®
Transcript
- Megan Jewett: hi, welcome to the next episode of Wisdom for What's Next. I'm Megan Jewitt, co-founder and wealth advisor at Craft Sage Wealth. And today we have a very special guest with us. Most of you, if you know anything about our firm, probably already know this man, but for those of you that do not, this is John Christie. he's gonna be talking with us today about real estate investing. John, go ahead and introduce yourself to everybody. my name is John Christie. Founded the firm with Megan and I'm a certified financial planner. Been in Kansas City most of my life, twenty-four years in the industry and over the course of time have found that the majority of my new clients are real estate investors, business owners often both. And For the space, so I'm looking forward to talking to you today about that, Megan. Excellent. So I just want to get right down to it. oftentimes when we are working with clients, the question of real estate comes up. Where does it make most sense to have real estate in your overall portfolio? And is real estate for everybody? in my opinion, there is a way for real estate to apply to everybody. One of the beauties of investing in real estate is there's so many different capacities in which a person can do so. they can be in as active as they want to be or as passive as they want to be. There's a lot of publicly traded securities, stocks, ETFs, mutual funds that do the investment real estate for a person, but I It's an incredibly important asset class and part of our role as a firm and as certified financial planners is helping to align clients with the appropriate allocation for their goals, their objectives, and whether or not they want to get their hands dirty in it or not. And so how would you say that real estate compares to, your typical investment stocks, bonds, other investment strategies? What are the differences between that? Well, I I think it's got elements of of both. bonds you oftentimes are and utilized when a person's looking for income and real estate can certainly do that. stocks are oftentimes utilized when people are looking for appreciation and real estate often does that as well. there's some degree of correlation between the real estate markets and and the equity markets and we saw that in two thousand eight when everything went poorly, but we also saw it after two thousand eight were both the equity markets and the know most asset classes in real estate have been on a on on a major bull run as well. so when used appropriately and judiciously it can bring elements of both stocks and bonds into a portfolio and create additional diversification and additional income sources. There's also for some of our clients some tax advantages that that can be tapped into that may not be available for them in other investment classes. Yeah, absolutely. And I think, you know, that is something that I definitely want to discuss a little bit more on Here in just a moment, but for maybe the people that are listening that are beginners in all of this, can you explain the difference between active and passive real estate investing? Yeah, certainly. mean active real estate investing has different degrees to it, but the most active real estate investors are identifying the properties that they're gonna purchase, figure out their financing. lease than themselves self-manage, decide when to sell, decide how to operate, how to improve, and and it can be pretty time consuming, so it's not for everybody. But there's other ways to actively invest in real estate. So for example, a person could buy property in a beach or a mountain town and hire a property manager to do the heavy lifting on the management. That doesn't abscond all duties. They would in that instance someone would still be responsible for things like insurance and legal and and financing. on the on the passive side, there's a a whole industry out there catered towards the passive investor. And that can be everything from a syndicated program where a real estate investment company and there's small ones, big ones, publicly traded ones, and everything in between, collects or raises capital and deploys that into different projects or makes the investment, has it ready made, and then goes and solicits investors if they want to economically participate. And then there are things like ETFs, mutual funds, and stocks that provide exposure to real estate that is completely hands-off. Do you think real estate should be a piece of everyone's portfolio in varying percentages and degrees, whether that be active or passively managed? I in our industry I I always hesitate to use the terms always, never. But I would say the overwhelming majority of the time, I I think it has a a place or at least should be a consideration. Yeah, absolutely. and so tell us a little bit about, I know have rental properties personally. and so tell us how that first came about. What made you decide to take on a rental investment and kind of your process in in getting started? So in in two thousand seven I was selling the first home my wife and I purchased and decided to rent it out instead of selling it. And I always knew I would start investing in real estate at some point and that just happened to be the right place and the right time. that started a hamster wheel that hasn't stopped since and so I since sold that property but utilized a ten thirty one exchange to buy another investment property with the earnings off of that but it much like what I was mentioning earlier Th there were varying ways of investing in real estate. I felt like I have the time and energy and knowledge to take a more active role. with that said, I also have some passive real estate investments as well. So active versus passive is not either or, it's it's and or can be and for any particular situation. And Talk to us about trying to balance the percentage of your overall portfolio that is liquid, obviously in cash and other type of investments, but then also illiquid that's tied up in property, right? Like a lot of times when we work with clients, it's not uncommon to see real estate investors have most of their retirement assets or planning or future planning tied up in real estate. So how do you try to balance between the two different Asset classes. and that's a very individualized question that for any particular person could have variant answers. We have clients that have never owned a stock or a bond or a mutual fund. They are one hundred percent real estate focused and don't know anything besides that. that's probably too extreme for majority, but yeah, again, there's no such thing as an always or a never. but i and and that that active versus passive changes over time. there will certainly become a day where I don't wanna actively be involved in the space and will hope that most, if not all, of my real estate investments are passive. but for right now, I it it it's a it's a blend and a and a combo that candidly can adjust with the wind or macroeconomic situations or individual circumstances. So the the main thing is I think for for your listenership is that people need to have a a thoughtful conversation with whomever their advisor is to make sure that they don't find themselves out of balance, especially when it comes to liquidity. illiquid real estate often outperforms liquid real estate investments and there's real value in having portability and flexibility of of liquidity. Yeah, absolutely. so talk to us a little bit about ten thirty one exchanges. So this is something that John specializes on within our firm and is a go to resource to a lot of families, business owners, whatever that may look like, in regards to when it comes time to selling a property, taking a look at the overall tax position and cash flow of said property. What is a 1031 exchange and how are they utilized? Well 1031 exchange is a section of the Internal Revenue Code. it's been on the books for over a hundred years. There's been some changes over those years and there's a lot of misperception about what it does and doesn't do. But at its core, Section 1031 allows a person or an entity or a group of owners to sell. investment property and if they follow certain rules that can be a little intimidating at first but having executed on dozens if not hundreds of of ten thirty one exchanges it's it's becomes quite simple. so I would encourage people not to let the those considerations take a pause but it allows the investment property to be sold and any tax on the gain or if a person has depreciated property they have what's called depreciation recapture which is yet another tax all of that can be tax deferred if they follow the the 1031 exchange rules at a high level. Those rules are it has to go from investment property to investment property. So a person can't sell a an apartment complex and ten thirty one exchange that into a house that they're gonna live in full time. but they can exchange for all sorts of different types of real estate, including land, in certain cases mineral rights, sell storage units, Departments, office, industrial. There's a wide wide variety of real estate options available. And going back to the active versus passive conversation, a person can sell actively managed real estate and go passive with it or the other way around or whatever suits them at that time. at a high level, the rules that have to be followed is once they have sold their investment real estate property, they have to have engaged with a qualified intermediary. That's incredibly important, that holds the money at the time of the sale. The IRS disallows a 1031 exchange if a person takes constructive receipt of the asset. So you don't want to take hold of the money. The qualified intermediary holds it on your behalf. And that starts a clock in which the investor has 45 days to identify new replacement property as well as it starts another clock that they have 180 days to close on that property. It sounds more complicated than it is and certainly as a firm we in enjoy and often help our clients through that process. Is it also a vehicle that you find people use to for instance, I'm just thinking of the farmer who has farmland that they've worked all these years, but they have, you know, kids that live out of town and have their own careers and own families, and they're not gonna want to come back and farm this land. Is that a way for the heavily appreciated farm owner to ten thirty-one exchange to be creating an asset that maybe is more digestible and more effective for their legacy? Is that an estate planning tool essentially or can be? Absolutely. We we see a lot. lot in agriculture and other aspects of real estate where effectively going from active to passive is via 1031 exchange is is as much of an estate planning tool as anything else whether it's the person that has however many single family rental homes or farmland or whatever it's pretty unique for the for the children or the heirs to have interest in that that business. And in some cases the even the capability to do it. if if someone has a a portfolio of real estate that they actively manage and the kids don't live in town, it's not even realistic oftentimes for for them to be in a position to take that on. And so a a big part of my practice within the the firm is walking folks through what those options are. And ironically, with the run up in land prices, we're often seeing the farmer that's ready to retire that doesn't have tremendous interest in the in the land. keeping it in their estate, they can actually increase their income because other aspects of real estate create higher yields than than land does right now. So it can solve a lot of things. It can create income, it can solve estate planning considerations, it can create tax efficiencies. So there's a high degree of flexibility and application for certain Yeah, I agree. So talk to us a about another buzzword in this space. and if you're not nerds like us, it's okay. This is, I promise you, a buzzword. But Delaware Statutory Trust, what are those and how are they utilized within the 1031 space? So a a Delaware Statutory Trust is one of the passive real estate vehicles out there. the significance of Delaware is favorable trust laws at the state level. You don't have to invest in Delaware, you don't have to go to Delaware, you don't have to know how to spell it. just know that it's utilized because the the state of Delaware has favorable trust laws. So effectively a DST as they're often referred to is one of the passive vehicles that qualifies for 1031 exchange and can be a a great fit, especially if someone is trying to diversify a portfolio or create different income streams. you see them in all geographies, all different types of sectors, and can be a a great tool where the the individual or the family that's trying to unload of the the headache of whatever it is they're managing or solve for that estate planning tool can ten thirty one and create passive income. So if someone is thinking about utilizing a 1031 exchange, who should they talk to? What professionals should they seek out prior to engaging in this endeavor? Well, we are often the first call for that, but ultimately we recommend in addition to us, there's certainly the qualified intermediary and there's the tax professional is a key part in that. Depending on the type of replacement property. If if they're going from actively managed to actively managed property, there's probably real estate agents involved. If they're going from actively ma managed to passive properties, then we would go to our underwriting liaison on all of the different passive options that are available. and we work with a a different firm who solely focuses on looking at all the different passive investment options out there and kicking out about 80 to 85% of what's available in the marketplace and working with the you know the top quartile or so to where effectively somebody could build out their own passively managed portfolio. But certainly every real estate transaction has its own set of uniquities and sometimes there's legal involved, other times there's you know, other professionals at the table, but a big part of of our practice is being the hub that makes sure the right folks that need to be at the table are at the table. Absolutely. And I think that can be said for a lot of things that are clients and people we work with encounter, right? we're the hub for a lot of things. We're the hub with the CPA. We're the hub with, you know, legal and estate planning and all of these other things. So I don't know oftentimes if people think of us being involved in real estate transactions, but I think this absolutely proves that, you know, whether you're actively investing or passively investing in real estate one way or the other, this is something that should absolutely be a conversation with those professionals. Well and I think it's worth noting that and I want to say this as appropriately as possible, but our industry as a whole is not good in this space. I mean we get business from people that own other wealth management firms because they just don't know the space or we hear things from clients or prospective clients that effectively translate to they have an advisor who says, Call me once the deal's done and give me the money to go invest it. Right. At best, at worst maybe they're getting sold a product that they have no business buying or don't understand and seen far too much of that too. So it you know we certainly take a lot of pride in that it's a space we understand and and support. I agree. you touched on this earlier, but I want to highlight this one more time because I've heard you say it a million times. What is the biggest mistake someone can make when they're trying to do a 1031 exchange? Take constructive receipt of the funds. Thank you very much. If people if people take nothing else from this conversation, if you're considering a 1031 exchange, you must inv involve the qualified intermediary. sale otherwise there is no exchange to be had and we have a lot of sad stories of phone calls that we've received from people that found that out or got misinformation from their brother-in-law and Thanksgiving dinner is sure to be awkward when you listen to the brother-in-law and six figure tax bill. Correct. Because there is no un unwinding that, right? Like once you take receipt of the proceeds. It's over. It's over. There is a new ish part of the tax code called a qualified opportunity zone, which is also a real estate investment that if a person does take constructive receipt of the funds, they are still eligible for some tax favorability invested in a QOZ or what's now called QOZ two point and that that may be a satisfactory outcome for rather see our clients weigh the pros and cons of a ten thirty one exchange versus a QOZ investment before the sale rather than being you know backed into the QOZ corner when it might be the best solution but might not have been. But If someone's listening and they have made that mistake, there's actually six months from the date of sale for a person to invest in a in a qualified opportunity zone and still qualify for that tax favorability. Good to know. If that's you, call him. a couple other quick questions I just wanted to ask you, just out of my own curiosity. Have you ever made a real estate purchase that you've regretted? I I have. and generally it's not because it was bad, but it was because something else became available soon thereafter that might have been more optimal. And, you know, but we can all anybody that has any investments, right, with the rearview mirror, like why didn't we all put all our money in Nvidia, you know, ten years ago we'd You probably wouldn't be doing this podcast. You'd be doing a podcast on s sailboats or what it's like to live in the mountains. Designer shoes. It would be on designer shoes. Well very good. Do you like my footwear today? Your your flip flops are great. but so but I mean, by and large, I think th the key is getting going and knowing there's gonna be some absolute home runs and then there's gonna be some singles and doubles and that's okay. Then Yes, I would agree. And I think that is applicable in many areas of life, that's for sure. what is advice you would give, just generic advice, nothing specific, but advice you would give somebody that is considering purchasing their first rental property? I I think there's a difference in active real estate investors between what I dub to be intentional and unintentional. And if someone's just gonna have a single family house, in a way they're an unintentional real estate investor and I I think that the time and the hassle and w you know, we'd recommend they set up an L L C which then means they have another tax return. And so if someone's looking at it from a one and done standpoint, we might invite them to think more along the lines of of passivity. you know, there's also merit to trying it out, seeing how it goes and pivoting from there. So I certainly don't wanna discourage anyone from doing that. but I think it's also important for a person to know that it's you know a as we often say, the the th the three Ts, toilets, trash and tenants, the problems with those generally don't happen at nine A. on a Monday. It's usually at eleven PM on Memorial Day weekend, you know, when you start running into things. So, people need to consider the lifestyle aspect of it. And, certainly, you know, there's it real estate can be a wonderful wealth creation tool, but people have to decide whether or not the the risk, the headache and the additional complexities it brings is worth it for you know, again for me personally and for the majority of of clients it it is but we've also had people come to us saying how do I get rid of these things as tax efficiently as possible too. So but you know certainly I guess if if someone's giving it real consideration, I I think I would say, I mean be judicious but don't wait. Don't you know don't be thinking about it in five years. Absolutely So John, really appreciate your time today. Thanks for coming on the podcast. As always, you're very helpful and knowledgeable on a lot of things. so we'll be sure to have you back in the future. But if somebody wants to get a hold of you to speak to you in more depth about any of the things we discussed today or has a question, especially in regards to real estate, how do they get in touch with you? Well, thank you for having me. this has been a lot of fun. I hope you'll have me back. but we can be found online, craftedsage.com. phone, we have fax machine, we have the socials, Instagram, YouTube, the Facebook, and Facebook. Make sure you guys got that. So anyway, we're I'm not a prolific user, but I know a lot of people are. So I think we can be found. Excellent. thank you again everyone for tuning in today's episode of Wisdom for What's Next. As always, stay tuned. We've got more happening all the time around here. I've got more guests Already scheduled and are excited to be on the show. As John mentioned, you can find us on any of those mediums. And if you have something that you want me to talk about or you have questions that you want me to answer, please, please reach out on our contact us page on craftandsage.com and submit those questions for me. I'm happy to get those answered. Thanks for tuning in.