Category Archives: Investment Management

Real Estate Investments Could Potentially Lead to Steady Income

Real estate has a reputation for being a profitable albeit complex investment if done correctly. Investing in real estate has historically been an attractive asset class for those willing to take on more risk within this market segment. According to Standard and Poors, the S&P Global REIT index had 15-year annualized returns of 11.22% as of 9/30/2014. There are various methods available for investing in real estate and each has their own unique benefits and drawbacks.

Real Estate Mutual Funds and ETFs

There are hundreds of mutual funds and ETFs whose underlying holdings are real estate based. These funds may directly own Real Estate Investment Trusts (REITs) or companies that deal solely in real estate. They can provide a level of diversification and liquidity which supplies an investor with exposure to the real estate market without putting too much exposure in any one property or property manager.

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This method of investing does not present the owner with any control over the actual property and offers no direct tax benefits associated with property depreciation. Risks are inherent in all investments and real estate mutual funds are no exception. Typical risks include market risk, interest rate risk, default risk of debt-related investments and a drop in real estate values.


Publicly-traded REITs are another option for those who’d prefer not to be as actively involved in the purchase and upkeep of properties. The majority of REITs are Equity REITS where they own and operate income-producing real estate. Additionally, some REITs may offer higher dividend yields than some other investments. While they can present a diversification opportunity for a portfolio, they tend to be more narrow in their focus than an index-based mutual fund.

As with mutual funds, there are no direct tax benefits from property depreciation. The restrictions regarding liquidity can also be more expensive from a fee-perspective to the owner than divesting a mutual fund. Another risk associated with REITs is that they are largely interest-rate sensitive, which can result in higher volatility when interest rates change. Publicly-traded REIT share prices can also fluctuate wildly based on regional, national and stock market influences and trends. REITs are a complex product and investors should research the appropriateness based on their individual circumstances prior to investing.

Private Equity

In addition to REIT’s, it’s possible to further diversify a real estate portfolio by investing in a private-equity real estate fund. There are multiple private-equity funds to choose from with varying philosophies and degrees of risk. A conservative fund would typically involve lower risk equity investments in stable U.S. properties using relatively little leverage. A more aggressive fund would typically involve high risk equity investments in U.S. or international properties while using higher leverage.

Private-equity funds are traditionally only open to accredited investors and are not offered to the general public. They do not offer the liquidity and transparency of publicly-traded REITs. The fees and expenses incurred from private-equity real estate funds can be higher than one would normally expect with conventional investments such as mutual funds.

One challenge of the private equity real estate fund model is that investing strategy could be in response to capital flows rather than market conditions, with liquidating assets at predetermined fund termination dates for closed-end funds being a primary example. There are also scenarios where an asset could be sold to meet redemption demands in open-ended funds, which may result in less strategic decision making on acquisitions and divestitures. Be prepared to invest for at least 10 years before being able to realistically evaluate the success of the investment.

Direct Ownership

An investor also has the option to independently secure a property in their own name by paying in cash or obtaining a loan to purchase the asset. Buying real estate within an LLC may also offer increased asset protection. This could be a rental home or a building occupied by the LLC.

Investors who prefer to have direct ownership and control of their assets might find this strategy advantageous. However, the increased autonomy comes with a cost. A large repair or vacancy could potentially erode monthly or even annual profits. The task of researching properties and the maintenance and upkeep once purchased can easily take up a greater amount of time than anticipated. Many physicians who go that route may erode their investment returns by outsourcing these responsibilities to a property manager.

To match the diversification offered by many REITs, an individual would need to own multiple properties. A drawback of this strategy is that a lot of cash will be tied up in assets that are illiquid. Another risk is loss of money on the sale of the property or assuming full liability for any incident that occurs on the property past the limits of insurance coverage.

Risk is inherent with real estate, as with any investment. It may offer an opportunity to supplement and/or diversify income. Leveraging tax deductions and other asset protection strategies can increase the likelihood of having a consistent income stream from real estate investments. As with any investment, carefully consider the associated risks and your own financial situation before investing.

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This article was written by Larson Financial Group, LLC and provided courtesy of Paul Larson, President and CEO. Advisory Services offered through Larson Financial Group, LLC, a Registered Investment Advisor. Securities offered through Larson Financial Securities, LLC, Member FINRA/SIPC.

Information gathered from sources believed to be reliable but is not guaranteed. This is not an offer to sell nor a solicitation to buy any security or investment vehicle described herein. Diversification does not guarantee a profit or protect against loss. Consider objectives, risks and associated fees and expenses before investing. REITs and real estate investing are complex in nature. Carefully review the prospectus or other offering documents. Quoted index performance is for illustration purposes only. Indices are unmanaged and it is not possible to invest in an index itself.

Sell or Rent: Deciding What to Do with Your Home

By Elaine Floyd

The decision on whether to sell or rent your home is trickier than other financial decisions because of the emotional ties you have to your home. To make the best decision possible, evaluate the income, growth, and tax advantages of selling vs. renting and how it would advance your long-term goals.

If you are relocating due to a job change or retirement, you may want to keep your present home and rent it out rather than selling it and transferring the equity to a new home or reinvesting the proceeds.

The first question to ask yourself is why are you considering this strategy? Here are some of the more common reasons:

  1. Your home has appreciated considerably and you don’t want to sell while prices are still in an uptrend.
  2. You would enjoy receiving rental income as a supplement to other retirement incomes
  3. You are not sure the relocation is permanent and want to keep the home in case you decide to move back.
  4. You want to keep the home in the family for children or grandchildren.

Understanding your long-term objectives will provide direction in analyzing the sell-versus-rent question.


If your main objective is further price appreciation, when will you know when it’s time to sell? In other words, what is your exit strategy? If you see the home as a growth investment, is this the best growth investment right now, considering your objectives and the rest of your portfolio? If you had a lump sum of cash equal to the equity in the home, would you buy this home and rent it out or invest in something else?

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The purpose in this line of questioning is to find out if you have an unhealthy attachment to the home as an investment—not uncommon when a particular asset has “been good” to you. If emotions are clouding your judgment, try viewing this asset within the context of other possible investments and ask yourself how much more you think the house might appreciate. If it’s already worth far more than you ever imagined, you might deem the house overvalued and reconsider the wisdom of keeping it.

Or it could be that your home hasn’t appreciated very much. In the event you have a loss on the home, you may be better off converting it to a rental before selling, since a loss on a personal residence is not tax deductible. Maintaining it as a rental may give the home time to appreciate. If it doesn’t, you could go ahead and sell it after renting it for a while and claim the loss on your tax return. (Be aware, however, that the IRS has disallowed loss deductions for rentals preceding a sale on the ground that there was no “profit motive” for the rental.) The property’s basis would be the lesser of adjusted cost basis or fair market value at the time of conversion and would need to be documented in order to claim the loss.


Rental income can be a good source of retirement income—as long as the numbers work. One advantage of rental income is that it generally rises with inflation. However, the ability to raise rents varies with supply and demand in the local area, and this may change during the ownership period.

If you are keeping the house for income, you will need to do a market analysis to determine the appropriate amount of rent to charge and you will also need to fully understand the costs of ownership (maintenance, repairs, insurance, and so forth) in order to determine your net cash flow. Consultation with real estate agents and CPAs may be necessary.

There are numerous online calculators that can help you decide if your home is the best source of income or if you could do better with another investment. Most calculators will ask you for the expected monthly rent, ownership costs (taxes, capital improvements, and monthly maintenance costs), and the likely sale price of the home in order to calculate the “capitalization rate,” which you can then compare with the rate on long-term Treasuries.

If the cap rate is higher than the current rate on Treasuries, keeping the home as a rental is a good deal; if not, it’s not. Make sure you are not forcing the numbers to work by assuming too-high rent or too-low expenses. Accurate assumptions are crucial to understanding the investment merits of the deal. In the end, the sell-versus-rent decision will hinge on the ratio of rents to prices in the your neighborhood. Low rents and high home prices do not bode well for a client who’s thinking of leveraging his equity for an ongoing income stream.

In addition to the ratio of rents to prices, you need to understand the tax rules pertaining to income property. Rental income is taxable; however, the following expenses are deductible from rental income on Schedule E of Form 1040:

  • Real estate taxes
  • Management expenses
  • Maintenance expenses
  • Traveling expenses to look after the property
  • Legal expenses
  • Mortgage interest
  • Insurance premiums
  • Depreciation of the building (not the land) based on a 27 1/2 year recovery period
  • Depreciation of furniture, carpeting, and appliances based on a five-year recovery period

These tax breaks may make the deal more attractive than you had anticipated. On the other hand, the above list may make you aware of expenses you hadn’t thought about when calculating net cash flow. If you are investing for income, you need to be realistic about how much that net income will be.

Temporary rental

If you aren’t sure that the relocation will be permanent and you want to have the option of moving back into the home, renting it out for a period of time may be a good solution. However, you should keep an eye on the calendar and, if you’re going to sell, do it within three years in order to qualify for the $250,000 / $500,000 capital gains tax exclusion. According to the rules, even if a home has been converted to a rental, sellers can qualify for the capital gains tax exclusion if they’ve lived in the home as a principal residence two out of the five years preceding sale. Be sure you allow enough time to get the house on the market, sold, and closed before the three-year window closes.

Leaving it to heirs

As more young people get priced out of the housing market, you may want to keep your home for your children and grandchildren, renting them to the kids or to unrelated tenants. This is also a good tax-planning strategy because your heirs will receive a step-up in basis when they inherit the property. Remember, if you are renting the house to family members at below-market rates, you may only deduct expenses to the extent of the actual rent received (i.e., you can’t claim excess losses).

Analyzing the investment merits of a principal residence converted to a rental property is slightly trickier than analyzing any other investment because of your emotional connection to the property. You’ve enjoyed living in the home, made money on the home, and now want to keep the home as an investment. But as with any investment, it must be evaluated on the basis of its economic merits in light of your personal objectives and taking into account the property’s prospects for income, growth, and/or tax advantages.

As director of retirement and life planning for Horsesmouth, Elaine Floyd helps advisors better serve their clients by understanding the practical and technical aspects of retirement income planning. A former wirehouse broker, she earned her CFP designation in 1986.

Elaine Floyd is not affiliated with Larson Financial Group.

IMPORTANT NOTICE: This reprint is provided exclusively for use by the licensee, including for client education, and is subject to applicable copyright laws. Unauthorized use, reproduction or distribution of this material is a violation of federal law and punishable by civil and criminal penalty. This material is furnished “as is” without warranty of any kind. Its accuracy and completeness is not guaranteed and all warranties expressed or implied are hereby excluded.

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Advisory Services offered through Larson Financial Group, LLC, a Registered Investment Advisor. Securities offered through Larson Financial Securities, LLC, Member FINRA/SIPC.

Copyright © 2015 by Horsesmouth, LLC. All Rights Reserved

Gravel Road Investing

By Jim Parker, Vice President DFA Australia Limited

May 20, 2015

Owners of all-purpose motor vehicles often appreciate their cars most when they leave smooth city freeways for rough gravel country roads. In investment, highly diversified portfolios can provide similar reassurance.

In blue skies and open highways, flimsy city sedans might cruise along just as well as sturdier sports utility vehicles. But the real test occurs when the road and weather conditions deteriorate.

That’s why people who travel through different terrains often invest in a SUV that can accommodate a range of environments, but without sacrificing too much in fuel economy, efficiency and performance.

Structuring an appropriate portfolio involves similar decisions. You need an allocation that can withstand a range of investment climates while being mindful of fees and taxes.

When certain sectors or stocks are performing strongly, it can be tempting to chase returns in one area. But if the underlying conditions deteriorate, you can end up like a motorist with a flat on a desert road without a spare.

Likewise, when the market performs badly, the temptation might be to hunker down completely. But if the investment skies brighten and the roads improve, you can risk missing out on better returns elsewhere.

One common solution is to shift strategies according to the climate. But this is a tough, and potentially costly, challenge. It is the equivalent of keeping two cars in the garage when you only need one. You’re paying double the insurance, registration, and upkeep costs.

An alternative is to build a single diversified portfolio. That means spreading risk in a way that helps your portfolio capture what global markets have to offer while reducing unnecessary risks. In any one period, some parts of the portfolio will do well. Others will do poorly. You can’t predict which. But that is the point of diversification.

It is important to remember that you can never completely remove risk in any investment. Even a well-diversified portfolio is not bulletproof. We saw that in 2008–09, when there were broad losses in markets.

But you can still work to minimize risks you don’t need to take. These include unduly exposing your portfolio to the influences of individual stocks, sectors, or countries—or relying on the luck of the draw.

An example is those people who made big bets on technology stocks in the late 1990s. These concentrated bets might pay off for a little while, but it is hard to build a consistent strategy out of them. And those fads aren’t free. It’s hard to get your timing right, and it can be costly if you’re buying and selling in a hurry.

By contrast, owning a diversified portfolio is like having an all-weather, all-roads, fuel-efficient vehicle in your garage. This way you’re smoothing out some of the bumps in the road and taking out the guesswork.

Because you can never be sure which markets will outperform from year to year, diversification can help increase the consistency of the outcomes and help you capture what the global markets have to offer.

Add discipline and efficient implementation to the mix, and you may get a structured low-cost, tax-efficient solution.

Just as expert engineers can design fuel-efficient vehicles for all conditions, astute financial advisors know how to construct globally diversified portfolios to help you capture what the markets offer in an efficient way while reducing the influence of random forces.

There will be rough roads ahead, for sure. But with the right investment vehicle, the ride can be a more comfortable one.

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All expressions of opinion are subject to change without notice in reaction to shifting market conditions. This content is provided for informational purposes, and it is not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.

Dimensional Fund Advisors LP (“Dimensional”) is an investment advisor registered with the Securities and Exchange Commission.

Copyright © 2014 by Dimensional Fund Advisors LP. All Rights Reserved