Latest / TaylorMade Retirement with Taylor Demars, CFP® / Should Real Estate Be in Your Retirement Plan?

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Should Real Estate Be in Your Retirement Plan? · TaylorMade Retirement with Taylor Demars, CFP®

• 0:02
  SPEAKER_01: When it comes to developing a retirement income, most of the time we hear about investment portfolios.
• 0:07
  SPEAKER_01: But what about real estate?
• 0:08
  SPEAKER_01: Many times clients come to us with questions about buying a rental property or maybe even a REIT.
• 0:13
  SPEAKER_01: So today we're going to unpack some of the pros and cons of that area.
• 0:35
  SPEAKER_02: Hey everybody, welcome into the podcast.
• 0:37
  SPEAKER_02: Thanks for hanging out with us here on Taylor Made Retirement with Taylor Demars from DeMars Financial Group.
• 0:43
  SPEAKER_02: And yeah, we're going to take an email question, Taylor, that had come in uh to the site to the team there, and thought it'd be a fun way to uh you know kind of just broach a larger topic uh around real estate.
• 0:54
  SPEAKER_02: So I'll set you up, I'll read the question, and then we can just kind of debate some different areas, maybe not just this specific one, but certainly would like to address this one.
• 1:01
  SPEAKER_02: Obviously, anything that comes into your guys' team, you know, they you guys reach back out to the person individually and and go through these things with them.
• 1:08
  SPEAKER_02: But it's a good idea to take a lot of the email questions, and we've done this before because if it's happening to one person, you know, it's happening to probably somebody else.
• 1:15
  SPEAKER_02: So you know put it out there, right?
• 1:17
  SPEAKER_02: Talk about it.
• 1:17
  SPEAKER_02: So uh should be good stuff.
• 1:18
  SPEAKER_02: How are you this week?
• 1:20
  SPEAKER_01: Doing some doing well, thank you very much.
• 1:22
  SPEAKER_01: Just uh got back in town.
• 1:24
  SPEAKER_01: We went to a conference called Future Proof in California.
• 1:26
  SPEAKER_01: So very energized with ideas to to help our business and help our clients.
• 1:31
  SPEAKER_02: Future proof.
• 1:32
  SPEAKER_02: All right, good.
• 1:33
  SPEAKER_02: And it was it was ran by AI bots.
• 1:36
  SPEAKER_01: Yeah, it was too much talk about AI.
• 1:39
  SPEAKER_02: I'm sure there's too much talk about AI everywhere.
• 1:42
  SPEAKER_02: Um so yeah, yeah, when when the fast food restaurants are now like, we've got AI, it's like, oh no.
• 1:48
  SPEAKER_02: All right, well now we've now we've jumped a shark.
• 1:50
  SPEAKER_02: Um all right, so let me set this up.
• 1:52
  SPEAKER_02: Let me read this email question that came in, and and I want to ask you a couple questions, and then I'm just gonna let you riff on on the things that you do and the team, you and the team do.
• 2:00
  SPEAKER_02: So here was the question.
• 2:01
  SPEAKER_02: Uh I've always been interested in owning real estate, but haven't actually ever pursued it.
• 2:06
  SPEAKER_02: Should I look into buying some investment property, or is it better to just buy a REIT?
• 2:11
  SPEAKER_02: So I'm guessing maybe you should explain what a REIT is uh as well for the listeners out there who don't know, and then break down this question however you'd like.
• 2:19
  SPEAKER_01: 100%.
• 2:20
  SPEAKER_01: Yep.
• 2:20
  SPEAKER_01: So this is a this is a topic we hear all the time, right?
• 2:23
  SPEAKER_01: And it's kind of a two-part question because they're asking about, hey, should we buy into our our actual real estate property or should we buy into what's called a REIT?
• 2:31
  SPEAKER_01: REIT is an acronym that stands for real estate investment trust, and it's something that often trades just like a stock, right?
• 2:38
  SPEAKER_01: You can buy and sell it, and the underlying holdings are real estate properties themselves, and they have certain tax and income unique characteristics to them that we can uh expound on.
• 2:47
  SPEAKER_01: But in essence, it's it's for someone who's looking for not actually having to buy a a roof and a door, but still get exposure to the rental income.
• 2:55
  SPEAKER_01: Gotcha.
• 2:55
  SPEAKER_02: So now, and I my understanding, and correct me if I'm wrong here, Taylor, is there's public REITs and there's private REITs, and there's totally different on how they work.
• 3:02
  SPEAKER_02: But I know a lot of times people will say, hey, you want to buy into the you know to the strip center where the new Walmart and 20 other stores are going, you would be buying into a REIT sometimes if it's not like financed or whatever the case is.
• 3:14
  SPEAKER_02: Is that kind of accurate?
• 3:15
  SPEAKER_01: Agreed.
• 3:16
  SPEAKER_01: Yep, yep.
• 3:16
  SPEAKER_01: You're you're you're beating me to the punch.
• 3:17
  SPEAKER_01: But they're public and private.
• 3:19
  SPEAKER_01: No, you're this is exactly where our my mind was going, is not all REITs are not are created equal, just like not all stocks are created equal, but public REITs, REITs are liquid, and they do have some fair long-term returns, right?
• 3:30
  SPEAKER_01: Past performance is no guarantee of future results, but they're they're they're their long-term performance is somewhat in line with the S P 500, around 10 to 11 percent.
• 3:38
  SPEAKER_01: Um, and and and and as and that comes with pros and cons, right?
• 3:42
  SPEAKER_01: One of the cons is that they they fall just like stocks.
• 3:45
  SPEAKER_01: I mean, back in 2022, when we had the most recent kind of semi-sustained barrier market in the stock market, REITs were on average down around 25%.
• 3:54
  SPEAKER_01: Um, and the overall broad market was down around 19% in 2022.
• 3:58
  SPEAKER_01: And what I think some people don't realize is that you know they're they're hungry about owning real estate, but don't forget there is exposure in the SP 500 as well, right?
• 4:08
  SPEAKER_01: Depending on what companies you're buying or not buying.
• 4:11
  SPEAKER_01: So there may be some overlap, right?
• 4:13
  SPEAKER_01: Just like people get excited about buying NVIDIA.
• 4:15
  SPEAKER_01: Well, NVIDIA is already making up most of the overall stock market if you're buying an index fund anyway.
• 4:19
  SPEAKER_01: So being keeping in mind that you have what you may already own in that sector is important too.
• 4:24
  SPEAKER_02: Uh so in this kind in this context of this person's question, if you know somebody's like, hey, I'm thinking about a REIT or I'm thinking about investment property, to me, like they feel like vastly different questions, right?
• 4:34
  SPEAKER_02: Do you want to own a home down the street that you're responsible for, or do you just want to invest in something?
• 4:41
  SPEAKER_01: Right, right.
• 4:42
  SPEAKER_01: And and um let me back up one moment, Mark, because I I need to flesh out that that non-traded read, non-public REIT uh alternative.
• 4:49
  SPEAKER_01: But yeah, the the difference between the the public, like I said, is it's liquid, right?
• 4:53
  SPEAKER_01: Buy and sell like a stock.
• 4:54
  SPEAKER_01: The the the non-traded are are private.
• 4:56
  SPEAKER_01: And so they don't have a mark a public marketplace where you could say, hey, I want to s I don't like this because it's not doing well, or I need money in a pinch, right?
• 5:03
  SPEAKER_01: Exits can often take 10 plus years, right?
• 5:05
  SPEAKER_01: Your money is locked up for better or worse.
• 5:08
  SPEAKER_01: You you can't get redemptions, um, and and that's before we even start talking about the fees uh can get into the double digits.
• 5:15
  SPEAKER_01: Um it's but of course the the lure of that is all the reasons that people say real estate is the the next thing since best thing since sliced bread.
• 5:23
  SPEAKER_01: Yeah.
• 5:24
  SPEAKER_01: Um but it that that for my clients in retirement planning, I am not a fan of locking up their money in something that isn't accessible.
• 5:31
  SPEAKER_01: It's just something, even if it's non-quantifiable about having access to money for for a pension retirement income.
• 5:37
  SPEAKER_01: But going back to your your your prior point, yes, the the whole thing, the whole reason this topic comes up is people are just seduced by the allure of real estate.
• 5:45
  SPEAKER_01: And and I'm not saying it's the boogeyman or automatically a bad deal.
• 5:48
  SPEAKER_01: I think it's key to unpack what are the you know the cons or the the what's the catch, if you will.
• 5:54
  SPEAKER_02: Yeah, what do you want it to do like any other investment?
• 5:57
  SPEAKER_02: What do you want or need it to do or accomplish, right?
• 6:00
  SPEAKER_01: Exactly, right?
• 6:01
  SPEAKER_01: Whatever it is, whatever it comes from, at the end of the day, it we want it to achieve the the same core objectives.
• 6:06
  SPEAKER_01: It doesn't change our planning philosophy or methodology, and and uh and and part of that is to get you know the best rate of return for the least amount of risk, minimal expenses, and and something that's liquid, right?
• 6:16
  SPEAKER_01: That we can be able to generate into income.
• 6:18
  SPEAKER_01: And so that's where rental income, you know, owning an actual door or an actual property comes into play because people say, hey, I can you make you make money in three ways by owning a rental property.
• 6:28
  SPEAKER_01: First is the rental monthly income itself, second is the appreciation of the property over the long term, you hope.
• 6:34
  SPEAKER_01: And third is to be able to write off, you know, on your taxes and depreciation and such, right?
• 6:39
  SPEAKER_01: Uh so it definitely has some, I'll call it sexy benefits that people get attracted to.
• 6:44
  SPEAKER_01: But for each of those three benefits, I like to outline the three biggest cons, which are the three Ts, as I refer to them, being toilets, taxes, and tenants.
• 6:53
  SPEAKER_01: And and they may be self-explanatory, but spot on, spot on.
• 6:56
  SPEAKER_01: At the risk of saying the obvious, you know, I had a client who uh who was in Maui at the beginning of this year, owns a couple rental properties, and he was getting phone calls, you know, while he was at the beach, and and and and he lives in um uh Missouri, so very different time zone.
• 7:11
  SPEAKER_01: And he was getting calls about leaky faucets and problems going on at the property that couldn't wait, right?
• 7:16
  SPEAKER_01: And so that that's that's the that's the issue is you've got to take care of those toilets, you've got to take care of those maintenance issues all for the city.
• 7:22
  SPEAKER_02: And so if he doesn't have a property management team, he's now on the beach making phone calls to local, you know, whomever, plumbers and whatnot, to get out there and fix some things, right?
• 7:32
  SPEAKER_02: Yeah, and that's that's the oh sorry, go ahead.
• 7:34
  SPEAKER_01: No, I was gonna say that that's the that's the first antidote I hear is oh, I'll just hire a property manager.
• 7:39
  SPEAKER_01: Well, now you just create another another layer uh that you you hope best case scenario goes well.
• 7:44
  SPEAKER_01: They're charging likely 10% of your gross revenue.
• 7:47
  SPEAKER_01: Um, but at the same at the end of the day, they they're they're just a middleman and they still will go to you for decisions, right?
• 7:53
  SPEAKER_01: They'll they'll be the first line of defense, and in a best case scenario, and and worst case scenario, they're they just make the problem worse.
• 7:59
  SPEAKER_01: So gotta take care of the toilets and then the taxes, right?
• 8:02
  SPEAKER_01: So people kind of overlook the, you know, just because you're you're grossing X number of dollars per month, don't forget about what the actual tax implication is for, you know, on obviously the property taxes on the property, but the income taxes and so on.
• 8:15
  SPEAKER_01: Um, so that can return reduce a return more than you think.
• 8:18
  SPEAKER_01: And then the tenants, right?
• 8:20
  SPEAKER_01: I've heard too many horror stories from clients that uh make me want to get into real real estate myself.
• 8:26
  SPEAKER_01: There are many people that make it successfully, but the issue is is when you're in a rent real estate property, your eggs, call it a$300,000,$500,000 property, you have all those eggs in one basket, right?
• 8:38
  SPEAKER_01: Yep.
• 8:38
  SPEAKER_01: Imagine if you had the very best company stock in the world and you put a half a million dollars into it.
• 8:43
  SPEAKER_01: I don't care if it's the best company in the world.
• 8:45
  SPEAKER_01: I am still concerned about that over concentration in a single position, right?
• 8:49
  SPEAKER_01: And that's what a real estate property is.
• 8:51
  SPEAKER_02: And then if those eggs start damaging the walls and ripping up the carpet and having their dogs in the house, you know.
• 8:56
  SPEAKER_02: Anyone who's ever been uh a single or a you know property investor or you know owned a second home and and rented it out knows it can it's a crapshoot.
• 9:05
  SPEAKER_02: You might get you might get a great tenant for a while, and then you might get a really nightmare, a big nightmare, too.
• 9:10
  SPEAKER_02: So you know.
• 9:11
  SPEAKER_01: Yep, it cuts both ways.
• 9:13
  SPEAKER_01: So that's that's what I mean by tenants, is is you got you gotta make sure that you yeah, don't have somebody who's ripping up the house.
• 9:19
  SPEAKER_02: And I have heard horror stories, and you know uh, we had one of those ourselves literally when we moved from one place, moved from a military town, rented it out, you know, military town, you take a little bit of a risk, and and we got burned.
• 9:31
  SPEAKER_02: So yeah, yep, it had to be.
• 9:33
  SPEAKER_01: And needless to say, that just makes all the numbers and the the investment allure of it go down the drain, right?
• 9:38
  SPEAKER_01: Very true.
• 9:39
  SPEAKER_02: Uh and maybe So how do you how do you evaluate that then?
• 9:42
  SPEAKER_02: So, you know, obviously this was from a client, right?
• 9:44
  SPEAKER_02: So obviously you guys probably called them in to you know sit down and do you know the one-on-one breakdown.
• 9:49
  SPEAKER_02: Do you start how do you kind of start looking at um that situation and that question by kind of reviewing their overall portfolio as it stands now and then what it could look like to add this wrinkle?
• 9:59
  SPEAKER_01: Right, 100%.
• 10:00
  SPEAKER_01: I mean, if if we're trying to compare apples to apples here, I of course can't guarantee an outcome on the investment portfolio side, but but we have a level of confidence as to what we can expect.
• 10:09
  SPEAKER_02: And we look at the Well you can't guarantee that somebody's gonna rent a house either, right?
• 10:13
  SPEAKER_02: I mean, you could also, that's another thing.
• 10:14
  SPEAKER_02: It could sit empty too.
• 10:15
  SPEAKER_01: So right, yeah.
• 10:16
  SPEAKER_01: And so we have a spreadsheet, a pretty beefy spreadsheet we build out to get all the inputs, right?
• 10:20
  SPEAKER_01: The same way that we would evaluate a stock to know if it's a good thing to buy.
• 10:23
  SPEAKER_01: We want to get all the nitty-gritty of data from the client.
• 10:25
  SPEAKER_01: And that's another catch that people don't even account for all the numbers.
• 10:29
  SPEAKER_01: I had one client who was so gung ho about his Airbnb when I actually accounted for the costs, including the cost of him, his own wife being that the the housekeeper, like the maid, she wasn't valuing her own time because she, well, it's free, right?
• 10:42
  SPEAKER_01: But if you actually put a price on what it costs her to be doing that service, right, they quickly realized that they were upside down on a month-to-month basis on the property.
• 10:50
  SPEAKER_01: And uh so they were considering selling it on the spot right there.
• 10:55
  SPEAKER_01: Yeah, and so I I'm not I'm not here to try and shoot down an investment property objectively, but we gotta make sure we don't have garbage in, garb garbage out and just hear what we want to hear.
• 11:04
  SPEAKER_01: And so running the numbers through our spreadsheet to say, hey, objectively, is this good a good investment?
• 11:09
  SPEAKER_01: And let the numbers decide because because of the amount of risk, like I mentioned, of the number of you know, eggs in one basket for all the reasons I described, uh, you you deserve, you better expect a much better rate of return on that rental property than uh a comparable uh investment in in the stock market, right?
• 11:29
  SPEAKER_01: In stocks and bonds, right?
• 11:30
  SPEAKER_01: Because you should be awarded for that amount of risk.
• 11:33
  SPEAKER_01: So we're not looking to say, oh, it can make just as much as your stock market portfolio might.
• 11:37
  SPEAKER_01: It's a matter of saying is the risk premium being satisfied, right?
• 11:42
  SPEAKER_01: Because if if it isn't, then they it may look like they're still making money on paper, but they're they're not being awarded for the amount of risk they're putting into it.
• 11:50
  SPEAKER_01: Does that make sense?
• 11:51
  SPEAKER_02: Yeah, no, for sure.
• 11:52
  SPEAKER_02: All right.
• 11:52
  SPEAKER_02: Well, any any other thoughts on this?
• 11:54
  SPEAKER_02: Did we cover it?
• 11:55
  SPEAKER_02: Is there some things we also should touch on here?
• 11:57
  SPEAKER_01: Yeah, so I mean, obviously, this is a big topic around investment properties.
• 12:01
  SPEAKER_01: I think at the end of the day, a real estate is is another sector, right?
• 12:04
  SPEAKER_01: Just like tech or utilities or precious metals, etc.
• 12:08
  SPEAKER_01: It's just another uh area that could be offered for diversification.
• 12:12
  SPEAKER_01: So if people aren't willing to, and I consider it a full-time job, if to buy themselves a job to get a rental property, a REIT could be an alternative that's worth considering.
• 12:22
  SPEAKER_01: Um, but obviously not being, you know, jumping in all the way in and maybe dipping your toe in with uh a 3% exposure of your portfolio as kind of the starting point for a new asset class, right?
• 12:32
  SPEAKER_01: If people aren't in it already, to get familiar with what the the returns are and the costs and such and the impact of their plan.
• 12:39
  SPEAKER_01: So I'm not trying to shoot down any of these objectively.
• 12:41
  SPEAKER_01: I think it's just worth looking at it wide with uh eyes wide open.
• 12:45
  SPEAKER_02: Absolutely.
• 12:45
  SPEAKER_02: All right.
• 12:46
  SPEAKER_02: Well, as always, if you've got some questions, need some help before you take any action, please reach out to qualified professionals like Taylor and the team.
• 12:52
  SPEAKER_02: If you're already working with them, then you're probably already doing that.
• 12:55
  SPEAKER_02: But if not, if you've gotten this podcast from a friend or just found us online or whatever the case might be, make sure you're having a conversation about something like this or anything else again before you take some action.
• 13:05
  SPEAKER_02: And the team is here to help with that retirement readiness roadmap to see maybe if rental property in your future does it work well with your overall portfolio.
• 13:14
  SPEAKER_02: Everybody's situation's different.
• 13:15
  SPEAKER_02: So to get yours, simply call them or go online and get started today.
• 13:20
  SPEAKER_02: You can find all the information you need at demarsfinancial.com.
• 13:24
  SPEAKER_02: That's demarsfinancial.com.
• 13:26
  SPEAKER_02: You can click on the could we be a fit uh button there and get started.
• 13:30
  SPEAKER_02: You can also check out the tools, tips, and resources as well as subscribe to the podcast and check out Taylor's YouTube channel as well.
• 13:37
  SPEAKER_02: So lots of good information there at demarsfinancial.com.
• 13:40
  SPEAKER_02: My friend, thanks for breaking it down, buddy, as always.
• 13:43
  SPEAKER_01: Hey, my pleasure.
• 13:44
  SPEAKER_01: Thank you, Mark.
• 13:44
  SPEAKER_02: We'll see you next time here on Taylor Made Retirement.
• 13:46
  SPEAKER_02: Again, don't forget to subscribe to us.
• 13:48
  SPEAKER_02: That way you catch new episodes when they come out.
• 13:50
  SPEAKER_02: And we will see you next time.
• 13:51
  SPEAKER_02: Again, if you need them, they're online, demarsfinancial.com.
• 13:54
  SPEAKER_02: We'll see you later.