If investment property has been part of your portfolio during your earning years, you may want to reevaluate this allocation as you near or enter retirement. Do you want to be less involved but still have some exposure to real estate? Do you want to continue to be actively involved but need to change the makeup of your real estate portfolio? There are many options to consider. Here, Ryan Urech, Southwest Region Vice President of Real Estate Asset Management with Wells Fargo Wealth Management, discusses how to evaluate your real estate strategy as you reach this life stage.
Wells Fargo Conversations: Why should we reevaluate investment properties as we near or enter retirement?
Ryan Urech: We believe it's important to reassess your objectives as you enter retirement to make certain that financial assets and real assets are positioned to help meet investment goals. In particular, you should review the strategic objective of your real estate, how it will be managed in retirement, and how it will operate once the next generation takes control. Far too often we see poor estate planning, which has the potential to burden the beneficiaries of the real estate holdings should a transition event occur — death, divorce, or illness. It's prudent to assess the role of real estate in your portfolio and set realistic monitoring parameters.
If I want to be less involved but still have exposure to real estate, what might be some good options?
Urech: Exposure to private real estate continues to be a valuable diversification tool because it has the potential to offer the following benefits:
• Potential for strong income returns
• Low correlation to other financial assets
• Potential for unique tax benefits
However, most privately held real estate requires hands-on attention and, at times, can be very time consuming and labor intensive. This is the primary reason you may want to hire an experienced real estate advisor to help manage the investment in a fiduciary capacity while you still maintain control. I would caution that an advisor, or asset manager, is different from a property manager. An asset manager is responsible for the decision-making responsibilities to help drive value and maximize cash flow. A property manager is assigned a certain number of tasks, such as finding tenants and taking care of routine maintenance and upkeep of the property, and is typically paid a fee regardless of performance.
What's a smart strategy if I want to continue to be actively involved but need to change the makeup of my real estate portfolio?
Urech: We encounter many situations where owners have a concentration in a single piece of real estate, which can be a substantial allocation of their overall net worth, causing potential risks should the local real estate market retract. To help combat this problem, we have been able to develop customized investment programs that reinvest funds, especially in 1031 Exchange transactions. Our team is positioned to access acquisition opportunities in a timely manner to create a diverse portfolio of real estate assets in multiple geographic locations. I would also note that the acquisition market is very competitive and the IRS 1031 Exchange rules are very constrictive. By hiring an experienced investment manager, investors can maintain passive ownership of real estate while leveraging institutional quality advice to complete the acquisition of replacement properties.
When might it be best to simply liquidate investment property?
Urech: The real estate markets are fast-paced and constantly changing, much like the financial markets. The time to exit is ultimately determined by the particular owner's circumstances, which could include whether or not their risk tolerance has changed. Unfortunately, there is no steadfast rule for when to sell an investment property. The best strategy may be to actively manage the real estate investment and consider macroeconomic fundamentals and capital market activity. Our team actively monitors fundamentals such as GDP drivers — population growth, job growth, rental growth, and leasing momentum. While it's difficult to predict how a particular real estate market will behave or when a market has reached its peak pricing, we do feel that having active oversight of the capital markets is the most strategic and effective avenue to execute an advantageous exit strategy.
What other factors should I consider when establishing my real estate investment strategy?
Urech: Each investor has a certain set of objectives as they begin to plan for retirement. Real estate can strongly complement a total portfolio approach to investing and preserve wealth into one's golden years. We suggest first determining the objective of the real estate — income, growth, or both — and risk tolerance. As retirees leave the job market or sell a business, the amount of risk investors take should be adequately evaluated to help determine what type of real estate is appropriate. Smart real estate planning evaluates the overall market condition, the phase of the economic cycle, the supply of capital, and demand drivers. Lastly, an estate plan that outlines how the real estate will be managed and limits liability through appropriate legal structures should also be on the list when executing real estate planning assignments.