Zach Abrams Writes Guest Influencer Blog for Guggenheim Commercial Real Estate Group
Wednesday, March 21, 2018
The private sector real estate business has inherent complexities unique to other privately-held businesses. Associated with this distinctiveness are problems and opportunities, which magnify as the business develops and grows.
The more the business grows, the more critical it is to pay close attention to the owner’s personal financial affairs. Unfortunately, though understandably, the business is what generally gets all the professional attention, when in fact the owner’s financial affairs have become a business of its own. As this happens, the integration of business and personal financial affairs becomes critical to averting problems and maximizing opportunities. Below are some thoughts on how to gain the understanding of your personal financial affairs necessary accomplish this:
- Consolidate Affairs: By their nature, private sector real estate business owners have a variety of complex entity structures with a multitude of investors. Most can describe the provisions of these entities, few understand all the implications, and almost none have the required grasp on how each individual entity interacts as a business, which impacts both their personal financial and estate plan. To get a more complete picture, start by creating wiring diagrams to detail each real estate entity: location of property, legal/voting rights of control, partners and % ownership, buy-sell provisions, whether their ownership interests are held in trust, among other provisions critical to understand how everything comes together for the business owner, spouse and heirs. Creating a sound financial plan and predictable and estate plan is impossible in the absence of this perspective.
- Pro-Forma Analysis for the Non-Professional:
While private sector real estate business owners have detailed financial models for their investments, those who are strictly investors are oftentimes left analyzing a detailed and at times confusing pro-forma. Working with an advisor to deconstruct the deal assumptions (normalizing optimistic assumptions if necessary) and review the entity ownership agreement (e.g. capital calls or personal liability) can assist the investor in discovering the risks of various deals and subsequently assess the viability of an investment.
- Replacement Income: When it comes time to sell a property that will not be or only partially 1031 exchanged, the question becomes how the income from that property will be replaced. It’s often not easy to replicate in the initial years; however, investing in high quality companies that grow their dividend can provide a growing revenue stream and capital appreciation over a long enough time horizon, which could come close to mimicking the yield of the real estate. Complimenting those quality dividend growth stocks with fixed income, MLPs, high yield equites, and the like can help provide higher initial yield as well as portfolio diversification*.
- Personal Financial Statement: Taking into consideration the above and all other financial details, a personal financial statement consisting of a balance sheet and cash flow can be put together. This top down look at your financial affairs and the moving pieces should form the basis of your investment decisions – both in real estate and elsewhere. This analysis can provide perspective on (but not limited to): real estate concentration and subsequent asset diversification*, implications of buying or divesting of a property, retirement, personal liability, investment portfolio risk, guidance on other large purchases, and long-term financial goals and objectives.
The views and opinions expressed herein are those of the author and may or may not represent the views of Capital Analysts or Lincoln Investment. Articles are not written or produced by the named representative and the information has not been verified. There is no guarantee as to the completeness or accuracy of the content. Quotes and remarks have been excerpted from conversations with the interviewer and may have been taken out of context. All remarks are hypothetical in nature and are intended to be informational only. They should not be regarded as investment advice, performance claims or testimonials. This is not a solicitation, recommendation or endorsement of any investment, investment strategy, tax strategy or legal advice. There is no guarantee that any strategies discussed will result in a positive outcome or the achievement of financial or retirement goals. A plan of regular investing does not assure a profit or protect against loss in a declining market. You should discuss any legal, tax or financial matters with the appropriate professional. All investing involves risk and no investment strategy can guarantee a profit or protect against loss, including the potential loss of principal.
S&P 500 Index is an index of 500 of the largest exchange-traded stocks in the US from a broad range of industries whose collective performance mirrors the overall stock market. Investors cannot invest directly in an index. Past performance is no guarantee of future results. Neither asset allocation nor diversification guarantee a profit or protect against a loss.
You should be aware of and carefully consider the following points before determining whether alternative investments are appropriate for you. Alternative investments include, but are not limited to, investments in hedge funds, fund of hedge funds, CTAs, private equity funds, real estate funds and managed account platforms. Alternative investments are very speculative and are highly risky. Alternative investments are not regulated. They may employ speculative and risky investment strategies. They may have limited liquidity and carry high management fees. They may have little or no operating or performance history. Past performance is no guarantee of future results. There are no guarantees of profit.
A commodity is a basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers. When they are traded on an exchange, commodities must also meet specified minimum standards, also known as a basis grade.
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About the Writers
Zachary Abrams
Manager, Wealth Management & Portfolio Analysis
CFP®
Nathan Creviston
Manager, Wealth Management and Portfolio Analysis
CFP®, ChFC®, RICP®
Rob Holub
Chief Investment Strategist
CFA, CFP®
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Aggregated Portfolio Data as of 12-19-2023.
S&P 500: a stock market index that tracks the performance of 500 of the largest publicly traded companies in the United States
Vanguard U.S. Dividend Growers: measure the performance of U.S. companies that have followed a policy of consistently increasing dividends every year for at least 10 consecutive years. The index excludes the top 25% highest-yielding eligible companies from the index.
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