Had a wonderful conversation this morning with a very smart new client. She and her husband have recently come on board, and now have a Purposeful Plan, which has already been at least partially put into play. A good portion of their Plan will be executed via the wife’s self-directed IRA. They already own a rental property which is now on the market, with the intent to effect a tax deferred exchange (1031).
One of the things ‘Connie Marie’ wanted to do, was consult with a financial planner to see how much of her funds might be invested in stocks, mutual funds and the like, and how much in real estate. The point of this quest was to discover if diversification would be an issue. As I said already, Connie is one very smart lady, helped further by her occupation, which is banking. She’s no stranger to financial goings on to say the least.
Here’s the gist of our conversation.
There’s a reason I’ve only worked with two financial planners in over 40 years. Though most of them are good folk, dispensing honest info to their clients, they’re blind to real estate cuz it’s not on their shelf — they can’t make money tellin’ their clients to get some. On the other hand, it’s been our policy at Brown and Brown since inception, about 33 years ago, that our advice would always be based solely upon what was best for the client — whether it benefits us or not. That often results in either no business for us, or business for someone else who has a product more beneficial to our client’s particular needs. It’s the right thing to do.
Frankly, about half the time our advice to investors is not to do anything — they’re fine for now.
Those who call with self-directed plans, often wonder, as Connie did, what the long term factors are for real estate vs stocks and various mutual funds. Here’s what I told her in a nutshell.
1. Even as a real estate guy, I tell folks the truth — Wall Street can do wonders for a portfolio if you know exactly what you’re doing. The key, in my opinion, is what happens when things turn sour? The average 55 year old American worker with a 401k has less than $60,000 in their plan. They better have a rich uncle — or know someone who understands real estate income property.
2. With real estate, downside scenarios don’t hafta mean disaster. With stocks? Well, try losing 30-50% of value quickly and see what yer left with. It ain’t funny. If your Plan’s real estate investment was paid for in cash, you’re still cash flowing very well, even if rents went down and vacancy rates rose. Stocks? Their dividends were pretty anemic when times were good. If you put 35-50% down at acquisition, and had been using the cash flow (plus any other ‘In-Plan’ cash flow to whittle down the loan balance), you’re just that much closer to retirement income as a reality. Stocks/Mutual Funds? Hardly.
3. When your Wall Street assets drop in value, the following 1-3 years or longer are spent on the equity growth treadmill. All you’re doing during that time is playing catch up — that is, if the market allows it. Little or no income, and zip, zero, nada progress towards your ultimate goal of a secure retirement income. For those readers investing in your own name in real estate, you already realize that a cash flow property still cash flows when values fall — cash flows that are nicely tax sheltered, not a small thing. Stock dividends? Naked to the tax man.
4. The diversification argument falls on deaf ears here. I’ll quote Warren Buffet who’s been saying this for decades: “Diversification is for those who simply don’t know what they’re doing.” Your self-directed Plan exists for one Purpose: To generate a magnificently abundant retirement income. Ask yourself — How many retirees do you know first hand who’ve retired well on the income from their Wall Street investments? (Crickets)
5. Of the two, only real estate can grow its own equity through enough cash flow to retire any debt you may have taken on at acquisition — without penny number one in appreciation. Your real estate can, and will, not only grow your original cash investment to 3-7 times it’s original amount, but it can and will generate the amounts of cash flow you’ll need upon your retirement. Again — without a penny of appreciation…ever. Show me a stock that’ll match that statement. (Crickets getting louder)
When done through either Roth IRAs or Roth type Solo 401s, the result is even better, as the ultimate payouts at retirement are tax free. Ask your buds where they’d be today if their 401s at work had instead been self-directed IRAs or Roths? If they’d started 8-10 years ago they’d either be free and clear, or a few short years away, depending upon the strategy they were able to afford.
Thanks for the inspiration Connie Marie.
I hope this was helpful. Gimme a call, cuz as usual, I need a fix. 619 889-7100. Have a good one.