Updated March 2017 — Planning specialists will often espouse the importance of a diverse investment portfolio — and that may include owning real estate and other assets along with equities and fixed-income investments. And while most people know what it’s like to own a home, and the work that it can entail, fewer may understand the complexities of owning part or all of an investment property or portfolio, says Bill Nimmo, Senior Vice President – National Director of Real Estate Asset Management at Wells Fargo Private Bank.
The asset allocation of an investor’s well diversified portfolio may have real estate as part of the asset classes included. Within that real estate bucket, an investor might have public real estate — such as shares in real estate investment trusts (REITs). An investor might also have private real estate — such as commercial, multifamily, and other investment properties owned directly by the investor.
While the decision to buy a property for private use — as a primary home or a vacation home — is often a personal one, the decision to purchase an investment property has more to do with what you hope the investment may accomplish. Are you looking for steady income or something that could be rehabbed and increase in value?
Private real estate
There are two big differences between private real estate and other investments.
First, real estate is illiquid. It takes time to buy or sell, so, unlike stocks, moving money in and out of owned real estate takes time. And if the economy turns, or the local real estate market tanks (or skyrockets), it’s often difficult to react quickly.
Second, private real estate — whether it’s a second home or a commercial building — requires management. Some responsibilities include paying taxes and insurance, handling repairs and maintenance, interacting with tenants, and making strategic decisions about the property.
“Real estate is a very emotional kind of holding: people tend to feel strongly about the real estate they own.” — Bill Nimmo, Senior Vice President – National Director of Real Estate Asset Management at Wells Fargo Private Bank
These unique aspects of real estate can be handled by an individual investor, but it can often take a great deal of time. And because every market, from the West Coast to the Midwest to the Southeast, is different in terms of its cycles and star-performing assets, having access to someone who specializes in knowing the markets often is a necessity.
Nimmo says Wells Fargo Real Estate Asset Management manages a variety of real estate assets for clients — from even single-family homes to complex commercial holdings — thus alleviating the burden of those responsibilities. Assistance with decision-making is one of the most critical resources they provide. “It could be decision-making ranging from when to buy or sell or whether to lease, to how much to invest in capital improvements,” Nimmo says.
Managing a property goes beyond day-to-day tasks: a strategic approach involves the long-term view. “It is important to consider the future value of the property and the stability of your tenant base and income stream, whether or not the potential return from the asset is likely to stay strong over the long run,” he says, and also how it fits into your overall financial plan.
Property and estate planning
Owned real estate also may require some additional thought around estate planning.
Leaving real estate assets to heirs, Nimmo says, may offer them tax advantages. “If you sell a property, you or your estate may owe taxes on any capital gain. However, when someone inherits real estate, it gets a new basis value equal to its market value at that time. That could lower — or even eliminate — taxes on any capital gain when the property is sold.”
But once heirs own the property, other challenges can arise.
“What we find is that illiquid assets, be it businesses or real estate, often cause conflict in families when they are inherited by the next generation,” Nimmo says.
This is especially true when a property or portfolio of properties are passed to multiple heirs. Some beneficiaries, for example, may want to sell the real estate immediately, while others may be content to receive ongoing income from the assets. Your Wells Fargo Private Bank relationship manager can help heirs navigate those kinds of challenges, but those issues also should be anticipated and planned for when developing an estate plan, Nimmo says.
“Real estate is a very emotional kind of holding: people tend to feel strongly about the real estate they own,” Nimmo says. “Our goal is to help clients look at the asset objectively, consider their full range of options, and make an informed decision that matches their financial goals.”