One Financial Advisor’s View on Real Estate Investing

Welcome to the show, Brent.

Marco, thank you for having me. As you know, I’m a follower of your podcast, so it’s an honor for me to be on it.

I appreciate that. I’m glad to have you on because you’re really the first financial advisor I’ve had on the show. Sometimes, we poke fun at financial advisors and really at their expense, which is because of what they do, what they say, and what they sell. I think there’s a certain place in the world for financial advisors. At the same time, I don’t necessarily agree with everything they sell and the advice they’d give. Let’s begin with you. Tell us who you are and exactly what you do, please.

How Brent Sutherland Began His Career as an Investor

I am a financial advisor. I know that can be more of a dirty word, so to speak, in the real estate investment community. That’s specifically because most financial advisors you talk to do not recommend that you invest in real estate assets. I’m a little bit of a different breed. My evolution happened because really I was looking at what some of my clients were doing in their own world that was very lucrative for them and I tried to apply it to my own individual situation. Really, it spawned me want to try to do things a little bit different in the planning arena as well.

I started about twelve years ago. I went through the accounting, taxes, planning. I also went into investment analysis. I jumped into working with individuals one-on-one with their financial picture. Now, it stood out to me pretty clearly early on that there were certain individuals who really had it together. I wanted to dig into those individual clients and just see exactly what it was that they were doing. I noticed, after evaluating them to a higher degree, that there was a commonality between those individuals that were really successful and those that weren’t. I had noticed that the ones that were very successful were those that, one, either have started the business for themselves and grew that business to be very successful, or two, over time, they had grown a significant portfolio of real estate assets. Now, what happened in both these situations is those businesses or the real estate provided a nice stream of cash flow to them that allowed them to have independence in both their lives and in their finances. I think that showed through in the way they carried themselves in everyday life.

Now, this, of course, intrigued me. I wasn’t at the point in my career to start a business per se at that point, but I did want to dig in and learn a little bit more about real estate. I started educating myself. I was reading books, going to online sources, and then listening to podcasts such as this one. It still took me a little while. I think every new investor goes through that analysis paralysis mode, which I was stuck in for a little bit. Once I bit the bullet and bought that first property, really once you get that first rental income check comes in, it hits you. You’re like, “This is almost magic. This actually works.” The snowball effect kicked in. That one property turned into two, turned into three, turned into four. Now, I have eight properties underneath my belt. I’m eager to purchase more.

What happened is, through this process, I’m excited about what I’m doing in my own personal financial economy. Yet I’m sitting across the table with clients. I’m advising them on their finances. I’m really giving them guidance that is conflicting with what I’m doing in my own world. I felt a bit like a hypocrite. Maybe even worse when you’re excited about something like this and you are investing in real estate. Everyone who does invest in real estate knows what this bug feels like. You want to share that with people. I felt really bad. I couldn’t share that energy with my clients and tell them about real estate and try to get them involved just because the structure of the company I was at did not allow it. Unfortunately, that happens with a lot of advisors out there.

It really forced my hand. I had to go out, start my own business so I can structure my company a little bit differently so I didn’t have the conflicts of interest. I can open up a whole new world to clients and show them, “Take that step toward real estate and maybe this will paint a better picture and a better path for you going forward.” That’s where I am today. I guess you can say I’m an evolved advisor, advisor 2.0, at this stage.

You’re somewhat unusual as a financial advisor because you love real estate, you believe in it, you invest in it. That separates you from a lot of other financial advisors, probably most of them. The fact that you have accumulated a portfolio of eight properties now, you see the benefits. You’re enjoying it as an asset class. You’re taking the benefits from it as an investment. I can see the dilemma, the stress of sitting in front of your clients, other investors, and wanting to talk to them and share your own personal experience with real estate, yet you might have one or both hands tied behind your back because of the brokerage of the company that you’re affiliated with.

Obviously, you like real estate. Do you want to talk about why you like real estate? Talk about the importance of it and the reasons. Maybe, if you don’t mind, just take us real quick at a 50,000-foot level of one of your investment properties because I know one of them that you purchased was $85,000. So talk about that.

What’s So Good about Having Real Estate Investment Property

1. Passive Income

I’ll just go into why I believe in real estate as an investment. First and foremost, it’s that creation of passive income. It sets the foundation beneath you where you just have this sense of financial security that not many other investments can provide you. There’s this sense of financial independence where you can achieve that much early in life that sets in. It’s completely accurate. If you look at the financial services industry in the planning arena, there’s this rule of thumb out there. We call it the 4% rule. In essence, what it’s saying is, by the time you hit retirement, if you start pulling up about 4% of your portfolio assets and then adjust that for inflation each year going forward, that should be able to sustain you throughout your retirement.

In essence, what that means, that 4% rule, is you have to look at your expenses today and multiply that by 25. That’ll give you the 4%. If you save that amount of money, then you should be able to retire. It shouldn’t be too difficult to find a property that’s going to give you maybe 8% cash-on-cash return. It will generate passive income back to you. Already, just looking at 8% versus the 4%, you’re having the amount of time that you would normally, under the traditional sense, have to save for retirement to get to that point that gives you that financial independence number. That alone is very, very powerful if you just think of that. You might be saving for 30 years under this traditional sense. But if you start investing in passive assets, such as real estate, that can give you a larger cash flow back in your pocket, you could have that amount of time that will take you to that point where you can either establish your own business or just sit back and enjoy family, friends, or whatever you want to do in life. I think the power in just that passive income, it really tells a good story by itself.

Now, as far as my own properties, I had one that I outlined on my website. It was an $85,000 purchase. That property was giving me $1,150 in rent in return. After all expenses, that’s including setting aside some money, some escrow money for future capital expenditures, that property was giving me about a 12% cash-on-cash return. I gave you an 8% figure just to compare versus that 4%, but that’s 12%. Try finding that anywhere else in any kind of traditional investment vehicle and you’re going to have to be taking on so much risk. That structure’s probably going to be leveraged. Again, it’s just going to provide this roller coaster of a ride for you going forward. Property does not do that for you.

2. Appreciation of Investment Property

Once you start adding in the tax benefits, hopefully, there’s some appreciation in the property. Someone else is also paying down your principal. That real return almost doubles to about 24%. In the investment industry and from my stance looking at the traditional sense of what investments can provide you in rate of return, that’s just astronomical. That’s something you can only really receive through real assets such as real estate. I think everyone needs to take a look at it.

I think if you were to talk to many of your clients or people that are invested in Wall Street, and you told them about 12%, 24%, 32% total rates of return, they would say, “That’s too good to be true. That’s unbelievable. What kind of a scheme is that?” You just don’t see those returns out there with paper assets.

Why Investors Need Better Financial Education

Not at all. It’s a shame that this is not promoted more. The thing is, too, everyone needs to understand that there’s this education that needs to go into before you purchase. That you need to understand what you’re actually buying. That’s something that you do with Norada, with your clients, too. Make sure that the property they’re buying actually fits their goals. I’m very much a cash flow-oriented investor when it comes to real estate. Other people out there, I know they play the appreciation game. I much prefer cash flow.

Make sure you buy that property that’s going to give you that cash flow in return. Those returns will pile up for you. That 12% cash-on-cash figure, that might be on the high end, but I think you can find those properties out there. I encourage people to educate themselves and do your due diligence up front. You won’t have to worry so much in the long run about whether or not this is going to be a lucrative property for you.

That’s true. Education is critically important. When you’re getting started, that first property might not be overly exciting. The first couple of months of that first property is not overly exciting. Getting a check in the mail for $200, $300, $400 each and every month, that’s great, but it’s only a starting point. When you start to magnify that across multiple properties over time and you see your rents going up, your cash flow going up, your net worth increasing, then it starts to become more and more exciting. I like to tell investors, look at what the real rates of return are day one. Make sure the deal makes sense. Then look back a year from now, two years from now, five years from now, and see what you’ve created in terms of cash flow, the size of your portfolio, your equity growth. Then it becomes really exciting and starts to make sense. It’s just a matter of education, doing it, and time for it to compound and grow on you.

Let’s take some time and talk about financial advisors and why they really don’t discuss real estate investing. I understand the conflict. Drill down into that a little bit because I want to understand it better but I want the audience to understand why, if they’re talking to a financial planner, a financial advisor, anyone in that space, why they’re not having these conversations about investment real estate.

Why Financial Advisors Don’t Include Real Estate in Your Investment Strategy

I love to dig into this one because this one is really a hot button topic for me. I’ve seen what works out there. I’ve seen what doesn’t work. I see people doing things the incorrect way. Really, there are a lot of advisors out there, some of them are crooks. I think it’s just like any other industry. You have to be aware. I think the reason why advisors, in general, do not give advice or do not recommend real estate as a holding is really just because the traditional compensation structure does not allow for it. It’s not lucrative for these advisors to recommend that clients go into real estate holdings because it’s not going to pay them anything back in their pocket. For example, if you look at probably the two largest compensation structures that are out there for financial advisors. This is a little bit more old-fashioned, but it still exists, unfortunately. You have that commission-based compensation structure.

That’s an advisor, really a salesman, who goes out and they recommend products for their clients. But when they sell these products to their clients, they get a nice fat commission in return. The problem here is there are so many conflicts of interest. You never quite know whether that product’s in the best interest of you, the client, or if it was just in the best interest of fattening their wallet. There again, if you’re ever talking to someone, if you’re ever seeking guidance and you find out the advisor that you’re looking at is working off the commission structure, I would just highly recommend searching for someone else because there’s just way too many conflicts to overcome there.

The other compensation structure, this is probably the more predominant one, is the assets under management model, the AUM model. Basically, what this entails is that someone invests your money, so liquid assets that you do have, they’ll take your cash, put it into a pool, a portfolio of investments such as stocks, bonds, etc. They’ll manage that money for you. More traditional assets, more the stocks-to-liquid types of investment structures. What they do is they’ll charge a percentage fee based on the total assets that they’re managing for you. Typically, this fee averages about 1%. If you have a half-a-million-dollar portfolio, that advisor’s going to get paid about $5,000 a year.

This is better than the commission-based compensation structure for sure. But what happens here, too, is there’s still not much incentive for the advisor to recommend you go out and purchase real estate or other types of vehicles that don’t fit nice and tidy within that portfolio that they’re going to manage for you. You have to keep these things in mind when you’re looking at advisors.

Most Common Compensation Structures for Financial Advisors

Commission-based Model – Most financial advisors don’t recommend real estate as part of your investment strategy because they don’t receive anything in return for it.
Assets Under Management Model – Financial advisors make money by investing your money in a pool of investments, similar to real estate investment trusts or REITs.

There was a gentleman I worked with at a prior firm. He always told me, “In business, if you’re looking to understand the motivations behind the people you’re dealing with, always look at the money flow, the money trail.” His exact quote was, “The money trail never fails.” If you want to see what the motivations are of who you’re working with, just look at their compensation. If it doesn’t line up or there are some conflicts, maybe take a step back and continue your search. You don’t want to jump into something where the vision and the values aren’t aligned with what yours are.

Is there such a thing as a financial advisor that’s paid on performance?

There is in the hedge fund industry. They called it the Two and Twenty Rule, where they charge 2% no matter what. If they earned a profit for you, they took 20% of those profits. Now, that’s a pretty hefty fee. It’s gone by the wayside now. The industry is leaning more towards a very transparent model, which is either an hourly fee or just a fee per service that the advisor is going to perform for you.

What about the level of knowledge that these financial advisors have or don’t have?

When it comes to real estate investing, unfortunately, it’s very minimal. That’s just a function of the traditional education system that we have in place. I’m a child of the traditional financial education system. I’m a certified financial planner/practitioner. I’ve been through the course work. There was not a single item that addressed real estate investing or how to invest in certain locations, looking at economic conditions of a certain area. That’s just not something that’s taught. Unless an advisor is proactive and goes out and tries to educate themselves on the subject matter, really, chances are that person that you’re going to deal with, if you’re looking at a financial advisor, looking to go to someone for guidance, it’s going to be very, very minimal.

That reminds me of the traditional and public school systems today. There’s very little, if any, financial education. That’s one of the most important things we should be teaching our kids, yet it’s completely lacking from the school system. It’s up to the parents to educate their kids on money. That’s a big problem, too. Let’s face it. Most adults really don’t have a good financial education. Even if they do, it’s often an old-school mode of thinking. Save your money. Save for retirement. Go to school. Get a good job. Save for the long-term. Those things don’t work today.

It is sad. Probably the biggest hurdle I see with most people I work with is they just don’t even have a budget. It comes down to sometimes just as basic as knowing what your expenses are, what your income flows are, and what your outflows are. A lot of people don’t have that. One thing I wanted to touch on about the education of the financial services industry is that I do have hope that maybe the future is going to be brighter for some of these professionals that are coming up and through the educational system. I noticed there’s a couple of undergraduate programs that focus on financial planning that have added in a concentration, if the student so chooses, to focus on real estate investing. That’s really new. It’s just come on to the marketplace. I hope that becomes a more common occurrence in some of the universities across the country, to be determined.

Income Diversification vs. Portfolio Diversification

The two biggest reasons why financial advisors don’t discuss real estate investing is there’s a conflicting compensation structure. It’s really just not in their best interest. Second is a lack of knowledge or a huge lack of knowledge. I know you talk about diversification. You separated it into income diversification versus portfolio diversification. What’s the difference and why do you say one is more important than the other?

I’m sure the audience here have had conversations with a financial advisor. Maybe you currently do have a financial advisor. I can guarantee you, every conversation you have with that advisor, the term “diversification” is going to come up. In a general sense, it’s going to come up in reference to the portfolio that they’re managing for you. They’re going to say, “You need a certain percentage of your portfolio to be in equities, stock market.” Within that equity course in your portfolio, you want to have a certain amount in US assets. You want to have a certain amount in international assets. On the bond side as well, you want to diversify between the holdings there. That’s fine. You need to have diversification in your portfolio. But if I take a step back and I look at someone’s full financial picture, where are the real risks?

Now, most of the time, a person loses a job, or their spouse loses a job, or there’s a health event where they have to step away from work. That’s the biggest risk to them. If you lose that W-2 income, who cares whether or not the portfolio you have with that advisor is well-diversified or not? You’re going to be in trouble. I think if you can establish in your life other sources of passive income that are supplementing what your day job is providing you, you’re going to be much better off if you do have to face a catastrophic event or some kind of health event. You can protect and provide for you and your family no matter what the situation or what curveball life deals you. That primarily is probably the biggest risk that most people have—is just loss of income. Generating these little side hustles in real estate and other things are going to provide you the security that you need to go forward if something does come your way.

Warren Buffett says that diversification is really just protection against ignorance. A lot of people called diversification “diworsification” because you’re actually worsening your position by spreading yourself across multiple investments or multiple assets in the hopes that some of them do well when others don’t. The reality is if you can focus on a few that you know will do well and you understand, you’ll actually be further ahead down the road than you will be just trying to diversify across multiple assets. I’ve also heard it said that a lot of financial planners will suggest diversifying across a bunch of paper assets or investments because they really don’t know where any particular investment is going to be in six months or twelve months from now. They flat out don’t know because they don’t have any control over it and you don’t have any control over it. It’s really just a hope that you’re going to pan out better a year from now by diversifying across different assets than you will be if you just stick to just one. Is that true?

That’s very true. To provide a little bit of honesty and color to that answer too, I think it’s a way for advisors to cover their tail a little bit too. Down the road, you’re spread so thin that not everything’s going to perform poorly, but not everything is going to perform great either. You always have a story to tell. You’re never going to be tanking, but you’re never going to be hitting home runs either. It’s just a way of covering your rear end sometimes to that extent as well.

That makes a lot of sense because, at the end of the day, they can’t tell exactly which stock or mutual fund is going to be a good or a strong investment for you. They just tell you to buy a bunch of them. They know that some won’t do very well, but others will. At the end of the day, you’re still average or maybe less than average. I’m not sure.

More times than not, less than average. An issue I see with a lot of advisors too, they charge on the assets they’re managing. Oftentimes, they have to justify their fees, so they feel like they need to trade to show that they’re doing some things. Sometimes they just don’t stick with the time-tested just-buy-and-hold strategy. They’re turning the portfolio more than it needs to turn. Again, that has repercussions towards the downside on performance within the account. That justification of your fees sometimes works against you as well.

Why Investors Need to Diversify Their Income More than Their Portfolio

I’m not sure if you answered this, but why is income diversification more important than portfolio diversification?

I think just because if you’re looking at where the risk really lies, if someone were to lose a job, that’s going to really bankrupt them and really set a situation up where they might not have money to provide for their family. It really just provides more of a stressor than portfolio diversification ever will. You could be 100% in the S&P 500. Over the long term, that investment’s probably going to be decent. But if you lose your job and you don’t have any other sources of income, that provides a catastrophic event for you and your family. I think you need to diversify your income streams. Make sure you have more coming in than just what your W-2 is providing you. Really, you might go to work and your boss might decide, “I don’t want you working here anymore.” That’s completely out of your control. Why not set up some more streams that you actually own, that you do control? If that event ever were to happen, there’s something there. There’s something there at least to pay the bills.

What I hear when I think about income diversification versus portfolio diversification—to me, having a portfolio, whether it’s stocks, bonds, mutual funds, or real estate, often what that leads to is capital gains. In other words, it’s equity growth over time. That’s all well and fine but that equity doesn’t pay the bills. When you look at income diversification, what we’re really talking about is cash flow. That’s synonymous with income. Talking about having a check in the mail every month. That is what you can take and use today. It’s tangible and you can actually pay your bills and cover your living expenses and live your lifestyle. Income diversification just means you have multiple sources of income. You have that cash flow coming in every month. I would agree with you that cash flow is king. Having that income, at least immediately, it’s better than having that portfolio growth and that portfolio diversification.

If you’re looking to retire earlier, if you’re looking to have a little bit more financial independence earlier in life, most of the time, your portfolio assets are tied up into some of these products and these IRAs, these retirement vehicles, which have rules in place that don’t allow you to pull money out early. You have that hurdle going against you as well. When you develop these cash flow streams that are current, that are happening now—we talked about this earlier—that just provides the opportunity for you to achieve that financial independence number, that year, that threshold much earlier in life.

Brent, sometimes I get into these conversations with people. I’m thinking of one person in particular. He’s my cousin. We get into these debates of what’s better, investing in the stock market or investing in income real estate. He’s pretty much a paper guy. He likes the paper assets. He’s a speculator. He likes to roll the dice and go for the home run. He doesn’t like that slow and steady growth. You’re an interesting guy to ask this question because you have your feet on both sides of the line here. What would you say are the advantages of positive cash flow real estate over the stock market? I could probably answer this for you, but I want to hear it from you.

First and foremost, I alluded to this a little bit earlier too, I think with cash flow positive real estate, if you’re focusing on the cash flow that’s coming back in your pocket, those returns are much more in your control than what you’re going to see if you throw your money into the stock market. Those returns, over the long haul, if you are one of these people that are really disciplined and you put your money into maybe in emerging markets stock fund, which has a lot of volatility, but if you hold it for 20 years, maybe you’ll get a pretty decent return. You know what happens with most people? It’s just human nature. We have emotions that go into money like that. When you’re playing the appreciation game, you’re playing, “I’m going to put in money now, a thousand buckTs. I want this to grow over time.” You’re constantly monitoring those prices. That just causes such a stress on you that you start acting irrationally.

More often than not, most people make just the wrong move at the wrong time. They’ll sell when things are extremely low and they’ll buy when there’s enthusiasm in the marketplace. Just to help counter that and help yourself, just a little bit of a foundation to not succumb to those mistakes, you’ll focus on cash flow. Focus on those returns that are going to be more steady. They’re not going to be as volatile. Even if you’re looking at real estate as an appreciative asset, as opposed to cash flow, chances are the real estate market is going to be a lot more stable than the stock market. Over time, you’ll probably have a lot greater chance of hanging in there and seeing your wealth grow as opposed to taking yourself whenever things go poorly and you do sell and give into emotions.

Most paper assets like stocks are more about the capital growth, the capital gains, than it is about cash flow. Whereas with real estate, you have cash flow. Two of the biggest things that I like about real estate is, one, you have the ability to leverage and leverage up to 80% of that acquisition because banks are tripping over themselves to lend you that money, assuming you have good credit. You can leverage up to 80% of it with other people’s money and only use 20% of your own. Leverage is a big factor because you can’t get that in other asset classes. The other big thing too is, with real estate, you have these amazing tax benefits through depreciation over 27 and a half years that you can’t get with most other investments. The only thing that I know of that comes even close is investing in oil and gas investments. I think even exploration offers some great tax benefits. Outside of that, real estate really has become the most attractive asset class in my opinion.

That’s what helps you achieve those returns that look almost impossible. Really, you factor in the tax benefits. You factor in the fact that someone has leveraged your money. Then someone else, the tenant, is going to be paying down that loan, that leverage that you put into the property. You achieve those 25% rate of returns on a piece of property just due to those factors. That’s something that you just can’t find in the more traditional stock bonds investment market.

Investors and Planning for Retirement

Here’s another thing that we didn’t even bring up. A lot of people are forced to invest in the stock market or Wall Street or various paper assets because of their IRAs and particularly with their 401(k), which is more often than not through their employers. Their employers offer them a 401(k) plan. They may be forced into it but they can opt into it. Typically, that’s where they become trapped. They’re putting some of their hard-earned dollars into these 401(k) plans. Maybe there’s a match by their employer and that is just more of a carrot and stick to keep them trapped in this 401(k) money trap. Now, they don’t have a choice. They have to invest in what has been “authorized” by their HR department to invest in. What are the issues there?

Oftentimes, if someone has caught that real estate bug, they’re going to start thinking creatively about where they need to save to buy more properties. The first conversation piece that comes up is, “My work retirement plan. I’m saving this amount here. I’ve been saving diligently over the years. What do I do now?” There is an incentive there provided by your employer for you to save into that plan. Generally speaking, they’ll give you a match up to a certain percent. Let’s just say, an example, maybe they’ll match up to the first 5% that you contribute to your 401(k). What I tell people to do, and this can be up for debate as well, but I say, that’s going to be free money even though you’re tying it into a product that you can’t access that money really theoretically until probably age 59 and a half. That’s going to be free money that can grow for you over time. At least, take that 100% return that they’re giving you. As soon as you hit that point, where they’re not going to match, let’s start thinking creatively about other ways we can save to buy those other products, to buy that real estate that you’re looking at. If you have the free money on the table, I always advise to take it, but then at that point, when you have that cut-off, then start refocusing your savings on other vehicles.

The problem with these retirement plans is there’s very limited flexibility. The income is taxable on withdrawal. You’re forced to be in the plan up to a certain age and then you’re forced to withdraw it by another age, which I think is 71 and a half.

Even though there is this forced savings into these plans, if you’re one of these people who are looking at stepping away a little bit earlier from the normal retirement age—say, you’re targeting 50—if you do have your money tied up into qualified plans, such as an IRA, there is an IRS code that’s Rule 72(t) that allows you to set up that annuity before age 59 and a half. In essence, you’re taking required minimum distributions before the preset age. As long as you continue to take them, they won’t charge you that penalty. In essence, the way I like to look at that is this is another pool of assets that you can annuitize at some point down the line. That’ll be another source of passive income to supplement what you have in your real estate portfolio and other items as well.

That’s all good advice, taking the match because that’s 100% return. It’s free money even though it’s trapped until 59 and a half. I’ve been trying to convince my next-door neighbor about this because he’s heavily invested in his 401(k). You have no insurance. There’s nothing to cover you or protect you from a stock market crash. If you’re driving a car, you have insurance to protect you there. If you have a house, you have property insurance. You have insurance, but you can’t assure yourself in a 401(k).

Second, the taxes work against you. When you do eventually draw that money out, regardless of what your return is, you’re taxed as ordinary income, not as portfolio income or even passive income. You’re going to get whacked. The thing is a lot of financial advisors will say, “That’s okay because you’re going to be in a lower tax bracket when you retire.” I hate when I hear that because that’s assuming that you plan to live a lesser lifestyle when you retire than what you’re living today. I want to live a more expensive lavish lifestyle when I “retire.” I don’t want to be in a low tax bracket because I have a low income. I want to have a high income. I want to go and enjoy myself. The third thing too is that 401(k)s seem to be good for people who are unknowingly planning to be poor when they retire because of what I just said when it comes to the taxation.

I hate that general assumption that you’re going to go into retirement. There’s another rule of thumb that’s used in the planning industry. They call it the 80% rule. They just automatically assume that when you hit retirement, you’re going to spend about 80% of what you were bringing in. I don’t want that to be the case for myself. I don’t want that to be the case for my clients. I want you to live a life in retirement. When you do step away hopefully sooner than the traditional retirement age, I want you to be able to enjoy yourself, take an extra vacation. Do some things to help out your family. Give to charity. Do what you want to do. Set the foundation. Set that framework up early so that you can enjoy yourself later. I don’t like that theory that gets floated around there as well. It drives me a little bit nuts.

Let’s move on to a couple of questions that you actually emailed me that were frequently asked questions that you get from your clients when it’s related to financial planning and real estate investing. One of them is, “Should I stop investing my 401(k) and direct all my savings towards real estate holdings?” I think you just touched upon this. Do you have anything else you want to add to that?

What I said previously probably hits the spot here. If you do get a match at work, it’s crazy to give up that free money. I would suggest, save up to the match and then start saving elsewhere. I think there are some other opportunities out there that are just going to help you diversify your income streams. Just start thinking a little bit more creatively about where you want to direct your money after you hit that match.

Risks You Have to Look Out for as a Real Estate Investor

What are some risks posed by real estate investing that you won’t find in more traditional stock and bond markets?

Pretty much with any investment, you put your money into it. Really, with any purchase, you put your money into it. There’s going to be some risks involved. You could buy this nice TV that you’re looking at and you’ve been researching for a while. I remember reading just earlier this year, there was a study done that more Americans spend more time each year researching their next TV purchase than they do their financial future. I think that’s horrible. We need to get on a different track there. With any investment, there’s going to be some risk. With real estate, there’s obviously some risks too that are a little bit different than the traditional stock and bond market. I think probably the biggest risk you’re looking at is the liquidity risk. When this money goes into a real estate purchase, you have to think about this as being a long-term holding. With stocks, with bonds, with any mutual funds you’re going to buy, you can generally turn those over pretty quickly. If you do need the money, an emergency pops up. With real estate, think of this as a long-term holding. It’s not something that’s going to be as liquid as might be the case in the standard portfolio.

When you’re investing in paper assets, I often refer to it as push-button investing because you could literally do it within seconds.

That causes bad behavior. It really does.

You have another one here. “I spent 15 years into a retirement plan account, but recently shifted my priorities to passive income and early retirement. What can I do with all that money tied up in these accounts?”

First, you need to look at the account structure. First, I’ll congratulate anyone who’s at this point because that does mean that you have gotten into real estate and you’ve gotten excited about it. You start to think more creatively. I applaud you for that. Many clients do, when they get that bug, they want to start pulling money out of their retirement accounts to fund the next real estate purchase. Make sure you step back, understand the rules that are in place there. Generally speaking, you’re going to have two types of retirement vehicles that have rules attached to them. You’re going to have the Roth IRA or you’re going to have the traditional IRA. The traditional IRA, generally speaking, is going to say that you can’t take money out until age 59 and a half. Otherwise, you’re subject to a 10% penalty in addition to the income tax that you’re going to have to pay on those distributions. If you have a $100,000 IRA, after the 10% penalty after the taxes, that might turn into a $65,000 cash holding. That’s a significant drop in account value.

What’s different with the Roth IRA, if you’re working with Roth IRA, you have a little bit more flexibility. With the Roth, anything that you contribute into a Roth account, let’s just say over the past ten years maybe you’ve saved an accumulative amount of $50,000 into your Roth, and the account value now since it’s grown, maybe will be about $75,000. You can always take out that principal, that contribution amount that you contributed to that account, penalty-free and tax-free. That $50,000 that you contribute to your Roth account, you can pull out free and clear and use towards other purchases. I’ve done that with clients. I’ve done that myself. That’s something just to keep in mind. There’s a little bit more flexibility with the Roth IRA, if you have one of those in hand, than there is with some of the other retirement vehicles.

Where Can Real Estate Investors Find a Financial Advisor They Can Trust?

What kind of advice can you give our audience that are working with financial planners and financial advisors right now and they’re looking to branch off, switch, or maybe just expand into real estate investing. What kind of advice can you give them in working with their financial advisor?

This can be a tough one. A lot of times, people have a long relationship with their financial planner that they’ve been working with. If that financial advisor is not willing to recommend that they go into real estate assets or think a little bit more creatively, and that’s the direction that you want to hit as an investor, I think you just need to be honest with yourself. Step back, evaluate whether or not their values are lining up with where you want your future to hit. If not, sometimes that separation is warranted.

I will tell people, if you’re on the fence and you’re looking for guidance and you want someone to help you put that financial chaos that you have in your world in some organized fashion but you want someone who can speak intelligently about real estate investments, there’s an organization and network that I’m a part of. It’s called NAPFA, National Association of Personal Financial Advisors. The thing about this organization is it’s a fee-only model. Advisors that are using that commission-based or using that AUM-only based can’t be a part of this organization. It opens up the advisors to thinking a little bit more creatively. Within this organization, there are actually some people who specialize in real estate investments.

In order to try to find someone locally maybe that you want to work with or speak to about helping you with your financial planning and also is on that trajectory towards putting you in real estate, you can go to their website. They have a Find an Advisor search tool under there. They actually have a box under the advanced search where you can check real estate investments. It will link you up with someone in your local neighborhood, hopefully, that has some specialization in real estate. There are not a lot of us out there. I think there’s a few. You might surprise that there are some other people out there fighting the good fight.

Which is what makes you quite different, because as far as I know, financial advisors or financial planners cannot get compensated on the real estate side, if they’re making any recommendations in terms of real estate, unless of course they’re licensed within their state. There are certain exceptions to the rule. That just basically says that there’s no financial benefit to them recommending that you, as a client, go out and build a portfolio of real estate. Is that true or am I wrong there?

Absolutely true. If someone is charging just fee per-service and they’re charging by the hour, they should really have no incentive to dismiss someone’s interest in real estate. Hopefully, it would be the case that if someone’s really looking honestly and objectively at your accounts and your financial positioning, if you want to take that real estate route, if they can’t provide you the expertise to help you out, then they should probably at least refer you to someone else that can.

That’s the best scenario. They’re actually looking at you as a client and looking out for your best interests regardless of what the recommendations are. That’s a per-hour fee or a retainer fee of some sort.

That’s becoming a growing trend. I hope it does continue. It helps take all the conflicts of interest off the table, which is what we need more of.

My last question here is a little bit of a crystal ball question because I don’t know what your thoughts and feelings are in terms of where we’re going with the equities market. I’m still scratching my head and a little surprised to see that we have seen the amount of growth in the stock market at these super-inflated levels. I think there’s a big correction coming. My question to you is this: what advice would you give to those people that have large holdings and therefore a large exposure in the stock market today?

You’re definitely right. If you look at historical valuations, right now, we’re sitting at a premium of roughly 20% to 35% in the US markets. International is a little bit more fairly valued. You could shift some of your focus there. Honestly, I have no objections to taking a little bit of those profits off the table. Obviously, you can’t time markets. I’m not here to tell you to time markets. If it makes you sleep a little better at night, and you want to pull just a little bit of those profits off the table, maybe cut back and hold about 25% in cash. If it makes you feel better, I have no objections to doing that. I encourage people just to at least have that conversation with their advisor. Does it make sense to take a little bit off the table right now, since we are at such high levels? Honestly, if it comes back to the fact that you’re going to be less stressed by doing so, then absolutely that’s the right move to make. It does scare me. These valuations right now do scare me a bit.

We’re getting calls from people who have hundreds of thousands if not millions of dollars parked in various paper assets. Those are stocks, bonds, mutual funds, and to some degree, some notes. They’re looking to make a shift. They want to make a shift into hard assets, be it precious metals, be it whatever. Real estate is the best hard asset out there because it generates regular income. We’re seeing more and more people thinking about it and talking to us about it. I’m glad that people are waking up and making moves in this direction.

I hope that continues.

Brent, thank you for your time. This has been great. I’m sure we can drill down and talk about all kinds of things related to this and maybe we’ll do that down the road in the future here. For now, can you tell our audience where they can find you and how they can get more information about your company and what you do?

Probably the best way to get in touch with me, if you want to see more about what I do, is through my website. My company is called Ntellivest.com. I have my services. I have a lot of good resources out there too if you want to look. I think I have you referenced on my site for real estate investment as well. There’s a lot of good information there. If you want to schedule just a call with me, I’m always happy to talk to anyone. Currently, I’m only registered in the state of Pennsylvania to work with clients here. But I’m looking to expand that. I’m always open to just having a conversation. I love this stuff. I love talking about it. If anyone has any questions or just wants to talk further, just curious, feel free to reach out.

Brent, thank you for your time. We will be talking to you again soon.

Marco, thanks for having me. This has been fun.

I appreciate it. Thank you.

How often do you have financial advisors open up like that and just expose the truth? It doesn’t happen very often because most of them are tied to the compensation. Really, that’s a conflict of interest. I think it’s not in the best interest of the investor, their client. It’s in the best interest of the financial advisor. Most people don’t have a financial education. When it comes to investing and building a solid retirement, they blindly turn their money over to people who they believe are financial experts. These are people like financial planners and financial advisors and bankers and stock brokers.

The reality is that real investors don’t park their money and they don’t do it lightly. They move their money. It is a strategy known as the velocity of money. True investors always keep their money moving, acquire new assets, build on their portfolio, and then acquire even more assets. Only amateurs park their money. This is the whole concept of saving. As Robert Kiyosaki says, “Savers are losers.” The reason they’re losers is because parked money gets eroded and eaten away by inflation.

There are much better ways to invest for your retirement. If you have a good financial advisor, good for you. If you don’t, maybe you should start asking questions, some hard questions, and seeing who really they’re looking out for. Everybody requires some financial education. I encourage you to continue to build that financial education. Learn about everything you can. You don’t have to be an absolute expert. Just be literate. Have financial IQ. You could build on your retirement plans and build your financial freedom and increase your cash flow.

That’s it for today’s episode. If you have any questions for me about real estate investing, you can submit them to me at PassiveRealEstateInvesting.com. Just click on Ask Marco. If you want a free strategy session because you’re thinking about getting into real estate investing or you want to diversify your existing portfolio or build your existing portfolio, by all means, reach out to us and set up a free strategy session with one of our investment counselors. Just go to our website at NoradaRealEstate.com. While you’re there, if you haven’t downloaded our free report, The Ultimate Guide to Passive Real Estate Investing, be sure to download that eBook. It’s a 40-something-page paper that covers all of our investment strategies and philosophies in a very concise way. If you’re new to the show, remember to subscribe. If you subscribe, you’ll just know about each episode as they come out every week. That’s it. We will see you next week on our next episode.

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Editor’s Note – This post was originally published in April 2017 and has been updated for quality and relevancy.

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