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Financial Planning for Real Estate Investors

Financial Planning for Real Estate Investors

June 07, 2022

If you’re a real estate investor, developer, or landlord, understand that your financial planning needs are unique. Generally, you must be strategic how you run your business and manage your money. If you are a real estate investor, the following financial planning tips may benefit you in the years to come.

Build and maintain cash reserves

It's a good idea to design a financial plan that helps you build adequate cash reserves. The reserves act as an emergency fund for your real estate investments, enable you to save for down payments, offset the cost of vacancies and repairs, and help you stay afloat if your tenants can't pay you. In addition, a cash reserve can help cover the costs of mortgages, taxes, insurance, and maintenance when cash is short.

Create a risk-management plan

With a risk management plan, you can predict financial risks early on by identifying ways to avoid them or reduce their impact. To create a robust and effective risk management plan, you’ll need to choose the proper legal structure, invest in the ideal insurance plan, and take advantage of various financial ratios like cap rates and vacancy rates. Your legal, insurance, tax, and financial professionals can work together as your 'risk-management team' and assist you in creating a risk-management plan for your unique situation.

Reduce Taxes

No matter how many properties you have, minimizing your tax burden as much as possible is crucial. While it’s best to speak to a CPA or tax professional first, you may want to contribute to a tax-deferred retirement account like a Roth IRA, Roth 401(k), Solo 401(k), or SEP. Another option is to depreciate properties on your income taxes. Your tax professional is a resource for you on these options and how each impacts your tax situation.

Know how your real estate investments impact college planning

If you have children, planning for college is likely on your radar. As a real estate investor, you should know that rental property income counts as part of your total income and may affect how much your family has to pay for college expenses. How your business is structured may also impact financial aid. Be sure to discuss college planning with a financial professional long before your children have to fill out a FAFSA.

Consider your estate plan

Due to complex real estate laws, a thoughtful estate plan is imperative. When you design your estate plan, you may want to use a family limited partnership as a real estate holding company. This strategy is ideal if you'd like to consolidate the management of your real estate investments, increase liability protections, or transfer wealth properly to the next generation. Having your assets in an Irrevocable Life Insurance Trust (ILIT) is essential. It provides cash to pay for real estate taxes or organize the acquisitions of properties between family members. Consult your legal professional regarding estate plans, laws, and ILITs as you start your estate planning or review the one you have in place.

Consult Your Financial Professional

A financial professional can help you achieve financial prosperity as a real investor. Together we’ll help you review your financial situation and determine the ideal strategy for your unique goals. Contact us today to get started.

Important Disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by Fresh Finance.

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