Should You Invest in Real Estate?

Written by Rob Copeland | 13 June 2019

Real estate is often peddled as a get-rich-quick investment—and that lures some people in, and it turns some others off.

The truth about real estate is that, like stocks and bonds, it can be a solid investment as long as you do your research and have clear expectations. I've owned residential and commercial rental properties for years, and I've sold properties as well. I'm often asked for advice on the subject, including my thoughts on real estate's pros and cons.

Let's start with the pros. One attractive aspect of real estate investing is that it's leveragable: Banks will lend you money at good rates and high loan-to-value percentages against real estate. And that means you can get a lot of exposure with relatively little up-front cash.

You could finance $400,000 or a $500,000 property, for example. That's something you can't do with stocks: In the latter case, a lender might only allow you $150,000 on $100,000 of stocks.

The takeaway is that real estate's leverage nature dramatically increases its potential for both risk and reward as an investment. For example, a 10% return on that $500,000 property is $50,000 (minus borrowing costs). But if you have a negative return on your real estate investment, that's amplified by the leverage.

Investment real estate also involves two major tax advantages: the ability to deduct all expenses and to depreciate the asset. The result is that the taxable income winds up being lower than the actual income.

What about the cons? One drawback is real estate's illiquidity. You'll always be able to sell your shares of a blue-chip stock instantly. But many a real estate investor has been caught in a declining market, leveraged up to their eyeballs and unable to find a buyer for a property whose repair costs are adding up. Worse, your loan might be due; you're unable to refinance because your loan is underwater, and you can't find a buyer to take the property off your hands.

Owning rental real estate can be a large commitment of your time and energy. I don't buy a property unless I can gross more than 12% or 14%, and earn a net profit hopefully above 6% or 7%. Plan on doing a lot of the minor repairs yourself in order to keep expenses down and maximize your profit.

A few words of advice potential real-estate investors. First, always make sure to have an "out." For the reasons explained above, you want to be able to sell a property when necessary. So before buying, think about how to ensure there will likely be a market for your property. For example, I decided to buy a house in the Nashville area that is near high-rise condominiums with limited parking. In that case, I'm betting that the folks in those condos will eventually want to move up into a more comfortable situation that is nearby. They are some of the potential buyers for my property.

I'd also recommend that you make sure any house you buy to renovate and resell has plenty of easy "comps." It might sound enticing to fix up a big, old house and find an appreciative buyer. But in practice, it's often difficult to sell such a property, because there's little basis for determining a fair price. Better to buy a house that's surrounded by plenty of others that are similar to it.

It's also a good practice to seek out properties that seem likely to rise in value because of an outside, driving event or trend. Examples might be a home in a so-so area that is set to improve because the city or town is planning to invest in the area. When municipalities build sports and entertainment arenas, for instance, blighted property that's held down home prices is often removed in the process. Or maybe the neighborhood is heading into a good cycle, where homeowners are tearing down old houses and building new ones.

One final point about real estate: Don't put all your eggs in this basket. Smart investors diversify across different asset classes in order to hedge the risk of any one of them crashing. And remember that real estate, because of the loan leverage, is a high-stakes game. It can make or break you, and takes a lot of patience.

Please don't hesitate to get in touch if you'd like to discuss real estate or other types of investments.

Don't Sweat the Trade War

Written by Rob Copeland | 10 May 2019

The recent breakdown in trade negotiations between the U.S. and China, followed by President Trump jacking up tariffs, spooked the stock market—sending the S&P 500 down 2.5% May 6 through 9. In a nutshell, the market had become too complacent, assuming that a trade deal would happen and ignoring the risk that talks would run off the tracks.

Our countries' trade dispute needs to be settled, both for reasons of fairness and because the old saying—nobody wins a trade war—is true. I believe it's most likely that the parties will ultimately reach an agreement. The tariffs, the rhetoric and the posturing on both sides are calculated attempts to gain leverage that can be translated into bargaining power.

Both China and the U.S. need a deal, if only for political reasons. President Trump has signaled that he will run for re-election in 2020. He'd spin any agreement into a win for the U.S. and use it to gain support.

Chinese president Xi Jinping is presiding over a fragile economy, one that continues to be weakened by the trade war. By contrast, the U.S. economy continues to be strong. Translation: the heat is on Xi to get a deal done, while Trump can afford to be patient and hold a hard line—which is why he increased to 25% tariffs on $200 billion of Chinese goods on Friday.

A deal will get done, I believe, and China will make sacrifices to secure it because it needs the American consumer to buy its exports. Once a deal is struck, sectors that sold off over trade fears, including industrials and technology, should rally.

For investors, the key is to avoid panicking and making impulsive decisions. Ignore the posturing and the heated rhetoric. Stocks will always have good days and bad days. But in the end, they've historically rewarded those investors who have exercised patience.

Reaching Your Goals Vs. Spinning Your Wheels

Written by Rob Copeland | 12 April 2019

What's the difference between people who accomplish big goals in life and those who muddle along? Based on my nearly 20 years as a financial advisor, the answer is clear: Successful people are those who not only have a vision, but who work with experts who can help them create and execute a plan.

Achieving big life goals usually means creating the means to pay for them. And that is where the guidance of a financial advisor is crucial. A good advisor will work with you to create and follow a financial plan, which you should think of as a roadmap to your goals.

The difference between building wealth and failing to build wealth boils down to understanding your cash flow and making smart decisions about your money. This is right in a good advisor's wheelhouse. An advisor should help you pinpoint unnecessary spending and maximize your savings.

And with that savings, he or she can help you achieve superior investment returns. Vanguard, the mutual fund company, estimates that investors who work with an advisor enjoy additional net gains every year of around 3%.

Whether it's retirement, college funding, a big purchase or another important goal, your advisor will be able to tell you exactly how much money you need to save, and how you need to invest it, so that you can successfully fund the goal.

It's critical though, that you work with a qualified financial advisor. Literally anyone can hang out a shingle and use the title "financial advisor." It's wise to make sure that your advisor is registered with the Securities and Exchange Commission or financial regulators in their state as a fiduciary. Fiduciary simply means that the advisor cannot put his or her own financial interests ahead of yours.

Bear in mind that "advisors" are distinct from "brokers," who are investment salespeople and are registered with FINRA, the regulator for brokers. Brokers earn more by selling you certain products. Advisors are paid a fixed rate, and so they don't face this conflict of interest.

Make sure they don't have complaints against them and that they have the experience in working with others similar to you. A good place to start your research is by going to the SEC site, entering the advisors name and finding their Form ADV (Part 1 only).

Don't hesitate to contact us with questions about your financial goals or about selecting a financial advisor.

The Biggest Mistakes Investors Make

Written by Rob Copeland | 12 March 2019

Why is it that so many of us, even those with stable careers, end up in poor financial shape?

In a recent study, the Federal Reserve Bank of St. Louis found not only that most Americans had saved little or nothing for retirement, but that only the top 10% of households had savings greater than $310,000. Even $300,000 or $400,000 isn't enough for a comfortable retirement for many people.

What's going on? As a financial advisor, I've reviewed hundreds of people's financial situations over the years. And it's clear that self-inflicted financial damage is taking a major toll. In other words, many of us are making costly mistakes that sabotage our financial futures. I've seen three of these mistakes over and over again:

--Cashing out your 401(k) when switching jobs. It can be tempting to dip in to your employer-sponsored retirement plan when you leave a job. But doing that can set your retirement savings way back. If you're below retirement age, and cash out $10,000 from your 401(k), for example, you could up paying $3,000 in taxes and early-withdrawal penalties. Worse, the lost compound-interest opportunity on that $10,000, over 40 years, could be about $450,000. If you need money between jobs, there are better solutions, such as taking a personal loan or rolling the money into an IRA within 60 days.

--Avoiding tax planning until the end of the year. Investors are happy when they're able to sell a large position and take profits. But that turns to disappointment when they are hit with a big capital gains tax, and when the additional income pushes them into a higher tax bracket. There are ways around these unpleasant surprises, but the key is to do tax planning earlier in the year. One solution involves tax-loss harvesting: selling stocks that have done poorly and don't figure to turn around any time soon, thus reaping tax losses that can be used to offset capital gains elsewhere.

--Not raising your retirement contribution as your earnings increase. This is a common trap that 401(k) participants fall into. They get pay raises over the years, and become accustomed to higher and higher standards of living. Yet they keep their contribution percentages the same, which leaves them unable to continue their accustomed lifestyles in retirement. Often, people don't recognize that they've got a retirement-funding shortfall under a last few years of their career—and that leaves them in a position where they need to sock away 15% or 18% of their earnings every year in order to catch up.
The bottom line is this: Don't think that having a good income and contributing to your retirement plan will necessarily guarantee you financial success in the long run.

To make smart decisions and avoid the kinds of mistakes discussed above, it can help to have a good financial advisor review your situation and guide you as you navigate your finances through the years. Don't hesitate to contact us with questions.