Making Real Estate a Core Pillar of Your Multigenerational Wealth Strategy

You may be familiar with the “Great Wealth Transfer” – the estimated $84 trillion in assets that are expected to change hands over the next 20 years. This transfer of wealth is one of the most significant factors affecting today’s high-net-worth households and its impact is expected to increase in the coming decades.¹ The transfer of real estate assets will play a substantial role since 24% percent of this wealth is tied to real property in the form of primary residences, vacation homes, rental properties, and commercial assets.²  

Advantages of building wealth with real estate

Real estate investments may offer opportunities to generate income during your lifetime and potentially create a lasting legacy by passing valuable assets to future generations in a tax-advantaged manner. However, it can also involve risks such as property value fluctuations, liquidity constraints, and ongoing management responsibilities. Despite these risks, real estate investments can provide:  

1. Equity growth: As mortgages are paid down and property values appreciate over time, owners build equity that can be leveraged or passed on to future generations.
2. Passive income: Depending on market and occupancy conditions, rental properties and commercial real estate may provide ongoing cash flow that can be used to supplement primary income or be reinvested or saved.
3. Inflation hedge: Property values and rental income tend to rise with inflation. As the cost of goods and services goes up, property values and rents generally follow suit, helping to offset the loss of purchasing power.

Diversification: Adding real estate to an investment portfolio may help manage  portfolio risk by increasing diversification across asset classes with the goal of enhancing overall returns while reducing volatility

1. Tax advantages: Real estate offers numerous tax benefits through strategies like depreciation and property-related deductions. Additional tax-saving strategies that may be available include: cash-out refinancing, bonus depreciation for rental properties, and 1031 exchanges that allow owners to defer capital gains taxes by reinvesting sale proceeds into another income-producing property.

Active vs. passive investing

There are many ways to invest in real estate. Depending on how involved you want to be in managing your real estate portfolio, you could choose an active or passive approach – or a combination of the two. 

Examples of an active approach to investing in real estate include buying a house to use as a short-term vacation rental, owning long-term tenant-occupied properties, or renovating and flipping houses for a profit. Purchasing and managing commercial real estate is another example.

An active approach allows investors greater control and influence over lease terms and conditions, as well as the timing of a purchase or sale. Active investors typically collect rental income, build equity as property values appreciate, and reap important tax benefits. The downside of an active approach may include high up-front costs, significant time spent conducting due diligence and managing properties and paperwork, ongoing maintenance expenses, and lack of liquidity, among other considerations. Keep in mind, you may be able to outsource some of these tasks for a fee.

Passive real estate investing, on the other hand, requires far less time and effort on the part of investors. Typically, a third party performs all of the work for you, from property selection and due diligence to the timing of the purchase and sale of individual holdings, property management, ongoing bookkeeping, tax reporting, and more. Passive real estate investors may also experience lower upfront costs and increased liquidity. 

As a passive investor you should expect to split profits with other investors and fund managers and share any tax benefits. Some of the ways to invest in real estate as a passive investor include:

• Real estate investment trusts (REITs), which allow investors to earn a share of the income produced by a real estate portfolio without having to buy, manage, or finance property themselves.

• Real estate funds that allow investors to purchase shares in a mutual fund or exchange-traded fund (ETF) that invests in REITs.

• Crowdfunding, where real estate platforms connect investors with real estate developers or project sponsors who are seeking funding for property acquisitions, renovations, or new construction projects. 

While real estate can be a powerful tool for preserving generational wealth, it can also present challenges. Real estate is relatively illiquid, requires upkeep, and can be difficult to divide equitably among multiple heirs. Market fluctuations, tax implications, and family discord can add further complexity when passing these assets to your heirs or the charitable organizations you support. That makes it important to work closely with qualified legal, tax, and financial professionals to develop a strategy tailored to your needs and objectives that reflects your goals, timeframe, risk tolerance, and need for liquidity.

An experienced wealth advisor can help ensure that your real estate strategy is aligned with your overall financial plan and wealth management goals and take the lead in coordinating and implementing the advice you receive from your other advisors.

To learn how your team of independent wealth planning professionals at Return on Life^® Wealth Partners can help you and your family pursue the Return on Life^® you desire, contact us today for a free consultation.

About Return on Life^® Wealth Partners

Return on Life Wealth Partners is an independent Registered Investment Advisor (RIA) founded in 1994, with headquarters in Cleveland. The team provides comprehensive wealth planning services to individuals, families, and business owners. By examining clients’ lives before their money, Return on Life^® aligns its advice with clients’ values. This personalized approach also extends to the institutional and corporate retirement plan services available through 401(k) Prosperity^®.

¹Cerulli, Associates, JAN 2022, https://www.cerulli.com/press-releases/cerulli-anticipates-84-trillion-in-wealth-transfers-through-2045.

²Business Insider, NOV 2023, https://www.businessinsider.com/real-estate-investment-market-mortgage-rates-baby-boomers-down-payment-2023-11.

Important information

This blog post is for informational and educational purposes only and does not constitute investment, legal, or tax advice. Return on Life^® Wealth Partners is an SEC-registered investment adviser. Registration does not imply a certain level of skill or training. The views and opinions expressed are those of the author(s) and do not necessarily reflect the official policy or position of the firm. Any strategies discussed may not be suitable for all individuals and are not guarantees of future results. Investing involves risk, including the possible loss of principal.

Tax laws and regulations are subject to change, and strategies outlined may not be suitable for all individuals or entities. You should consult a qualified tax professional regarding your specific tax situation before implementing any tax-related strategy.

Real estate investments, including REITs, funds, and crowdfunding, involve risks such as illiquidity, property value fluctuations, management fees, and market or economic conditions. Investors should carefully review offering materials and consult with qualified legal, tax, and financial professionals before making any investment decisions.

Investment advisory services are offered through Planned Financial Services, LLC, dba Return on Life^® Wealth Partners, an SEC-registered investment adviser. For additional information and disclosures related to our firm and services, please visit https://www.returnonlifewealth.com/additional-disclosures.

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