Warning signs flash in most advisors' eyes when retired clients enter their office with visions of creating extra income streams from real estate ventures.
“Plenty want to walk into that trap. We do not indulge them,” says Lynn McIntire, principal of Cadent Capital in Dallas, an independent affiliate of Raymond James Financial Services. If prospective clients “are not open to discuss the traps that are inherent about that then we never invite them to be a client,” she says.
McIntire believes that unmonitored marketing and advertising in the real estate industry open doors for less than fair disclosure. At the same the time, she suspects real estate assets appeal to retired clients often because those clients think they understand such investments since they own homes.
Rich Arzaga, however, largely disagrees with the notion that retirees should avoid real-estate generated income. Rather, Arzaga, the founder and CEO of Cornerstone Wealth Management in San Ramon, Calif., embraces real estate investments for his retired clients.
“I think there is real opportunity to help these people out,”Arzaga says about retirees investing in real estate. He teaches a course in real estate and financial planning at University of California, Santa Cruz. Other advisors say “no” to clients’ proposed real estate investments because the advisors “don’t know that asset class.” But, he says, “It’s a real disservice to clients.”
Arzaga encourages his retired clients to consider real estate investments for income but he presents them with some caveats. For starters, he insists they invest in a property that will lead to cash flow, even if costs for a professional property manager enters the picture. Why? As retirees, they have to assume at some point they won’t want to or remain capable of managing the property themselves.
His other rule: “Don’t get too greedy. I tell them don’t overallocate on the asset class.” That threat exists, Arzaga says, because “once they see the magic” of an income stream from a real estate property, retirees will seek to repeat that success again and again.
He also warns his retired clients to treat real estate investments, “like a business.” What does that mean? “Don’t fall in love with the property or the tenant,” he says.
But if retirees follow those rules, he says, real estate ownership can offer them income-producing opportunities and also chances to manage tax bills by deducting mortgage interest and property-related expenses.
Miriam Rozen, a Financial Planning contributing writer, is a staff reporter at Texas Lawyer in Dallas.