Real estate investments can be a viable wealth planning strategy, both for their income potential and the ability to gift to future generations. But if you’re an investment property owner today, market fluctuations and the unpredictability in the economy may have you closely scrutinizing the management and operation of those properties, as well as reconsidering how you might transition them over time as part of your estate plan.
What are the right next steps? And how can you position your income-producing real estate investments so that they continue to be a beneficial part of your portfolio, now and into the future?
Here, Rebecca Sarelson, Senior Wealth Planning Strategist with Wells Fargo Private Bank, shares what all investors in income-producing real estate should consider when it comes to today’s uncertain times.
Review your management and transfer plans more often
“Many people with robust, diversified portfolios own self-managed, noncommercial real estate assets such as residential rental property,” Sarelson says. “And they usually create detailed plans for how to manage and transfer those assets.” That’s a positive.
The trouble is that many never revisit those plans once they’re created, Sarelson explains, which can cause problems when the economy shifts—or when we’re faced with a crisis, like the coronavirus pandemic.
“If you want to use property as a source of income during your lifetime as well as an asset to pass on to the next generation, you have to adjust for changing circumstances, such as tenants who are unable to pay rent or beneficiaries who are no longer capable of, or interested in, managing the asset,” Sarelson says. “You can’t set a plan and forget it.”
“Among its impacts, the coronavirus pandemic of 2020 has turned the real estate world upside down,” says Bill Nimmo, National and Managing Director, Real Estate Asset Management, Wells Fargo Private Bank. This underscores the need to review and update real estate investment plans—including the details around the possible transfer of those assets—on a regular basis.
“I think we all assume time is on our side, but sadly, many people are realizing that’s not always the case,” Sarelson says. “It’s a good reminder to ensure that we have the right people in place to step into our shoes if something happens to us, and that our long-term estate plans are still viable.”
Questions to consider when reviewing your plan
Sarelson recommends investors consider the following questions—on their own, as well as with input from their family and advisors—and let the answers help to reshape your plan.
- Who should own the property? Are you buying and selling property in your own name or using a real estate holding company or business entity for that purpose? “The options for passing property on to the next generation really depend on how you set this up,” Sarelson says. “You should consult with your wealth advisor, tax professional, and lawyer to discuss which option is best for you to help accomplish your goals.”
- How should I manage the property now? Are you in charge of collecting rent, making improvements, and managing tenants, or will you enlist the help of family members or an outside agent?
There are pros and cons to each option, but if your goal is building multigenerational wealth, get the family involved. “It’s an opportunity to guide your children and help shape their future,” Sarelson says. “One way to help ensure the property remains valuable and viable in the future is to teach them how to manage it now.”
- When and how do I want to pass the property on to the next generation? Some property owners plan to transfer property during their lifetime, while others prefer to transfer at death. Evaluate this decision periodically, as changes to tax and estate laws could impact your decision. “It does not have to be one or the other – both options can be useful,” Sarelson says.
Sarelson says it’s not a matter of if, but when, changes will be required to your plan for your income-producing real estate. Nimmo agrees that now is an important time to bring together your financial team to determine an appropriate time for your next plan review. “Among the advisors to gather are your wealth and financial advisors as well as tax and estate advisors,” says Nimmo. “In addition, a professional real estate investment manager who can provide fiduciary experience and market savvy can help investors navigate commercial real estate decisions in unexpected times like these.”
“You need a living, breathing real estate investment plan that can react quickly and appropriately to changing market conditions, family relationships, and tax and estate laws,” Sarelson says. “Your financial team can help you navigate this complexity, now and in the future.”