Why Don’t More Financial Planners Recommend Clients Invest in Real Estate?

by | Aug 15, 2023 | Accredited Investor, Blog, Real Estate Investing | 0 comments

Whether you are new or an experienced investor, you most likely are fully aware of the power of real estate investing. With the right investment decisions, real estate can help you achieve financial freedom. It is a known fact that real estate investing is one of the best ways to build wealth in a tax efficient way.

Real estate assets have helped a lot of the wealthiest people in the US achieve that status. And yet licensed financial advisors won’t talk to you about real estate investing, despite the fact that it’s their job to help you reach your financial goals.

Your financial adviser may not talk about things like real estate holdings, multifamily investing, and the tax benefits of owning real estate. Even if they do, they may consider it an alternative investment.

If you are interested in real estate investing, it is worth discussing why financial advisors avoid talking about it.

Why Don’t More Financial Planners Recommend Clients Invest in Real Estate?

Most people want financial freedom. In order to reach that, they are willing to hire financial advisors to help them develop their financial strategy and get their finances on solid footing.

Choosing the right financial advisor is important because they can provide expert advice based on your current financial situation and goals.

Knowing that real estate investing is one of the most profitable investment products in the market, a lot of real estate investors wonder why their financial advisors don’t discuss it.

There are actually a few reasons for that. Brent Sutherland, a certified financial planner and real estate investor, offered his unique perspective on the topic:

“I have worked in the wealth management division of a large bank, the financial planning and investment management divisions of a local RIA (Registered Investment Advisor), and more recently on my own in the role of a financial coach. In the midst of this journey, I became a real estate investor myself. I witnessed the restrictions within the structures of the traditional financial advisory business that prevent advisors from talking to clients about physical real estate as an investment.” [1]

Sutherland owns nine standalone rentals as well as a recently acquired commercial real estate project. He said that most financial advisors have a conflict of interest, and this is only one of the reasons why they don’t discuss real estate much with their clients. Let’s take a closer look.

The Compensation System for Financial Advisors is Broken

The current compensation system for financial advisors does not reward them for convincing clients to get into real estate. Basically, they do not get paid off of real estate transactions, and this discourages them from pushing this particular investment type for their own clients.

A licensed advisor may sell securities like stocks, mutual funds, bonds, and insurance products. However, due to their compensation structure, they cannot sell real estate.

Advisors generally get paid in one of two ways: either they get commissions from the sale of a financial product, or through a percentage of portfolio assets managed. The latter is also called AUM or Assets Under Management. [1]

If they recommend that their client spend their money on real estate, it would not generate any money for the financial advisor through either of these compensation structures. The odds of them doing so are therefore very low. This is considered a conflict of interest.

Licensed financial advisors who sell and manage investment products also have to follow strict compliance standards and regulations. This is to prevent unethical practices within the industry.

These regulations give guidance on what financial advisors are allowed to sell. These are generally limited to licensed products, which makes it hard for them to recommend physical real estate, which are unlicensed products. [1]

This is one of the biggest hurdles that are preventing them from working with clients on real estate investing.

Lack of Training & Knowledge from Brokerages

Another factor that contributes to this phenomenon is the fact that the traditional financial education system does not cover much about real estate investing. Real estate investment trusts (REITs) may be discussed as one of the real estate-oriented products, but these are more similar to stocks than owning physical real estate. [1]

If an advisor wants to learn about real estate investing, they will have to learn about it on their own. They will then have to find a way to monetize that advice.

The fact that financial advisors have to build this knowledge from outside of traditional avenues keeps them from straying from this conventional path.

The Solution: Flat Fee-Based Financial Advisor

Flat fee-based financial advisors are professionals who offer their services on a flat fee basis, instead of the traditional commission-based structure. This fee structure means that clients pay a fixed amount for the services they receive, regardless of the size of their investment portfolio or the specific investment products they choose. [2]

Working with flat fee-based financial advisors can offer several benefits. For starters, flat fees provide transparency and clarity regarding the cost of financial advice. Clients know exactly how much they will pay before they even start working with the advisor.

It also avoids the potential conflicts of interest that may arise from a commission-based compensation structure. Flat fee advisors don’t earn commissions on financial products they recommend, so they can focus solely on providing advice that aligns with their clients’ best interests rather than being influenced by potential product-related incentives.

While the flat fees charged by different financial advisors may vary, they typically range from $1,000 to $10,000 per year or $4,000 to $10,000 for a standalone engagement. [2]

It is natural to assume that there will be hidden fees or some kind of undisclosed compensation when working with flat fee advisors. However, with a true flat fee advisor, there are no hidden fees or commissions.

Any additional costs will be related to the investments themselves or insurance coverage that you decide to purchase.

Benefits of Investing in Real Estate

Real estate investing can create powerful results, allowing you to reach financial freedom faster. If you choose your assets wisely, you can enjoy excellent returns, tax advantages, diversification, and a strong cash flow.

As a real estate investor, you can make money through rental income, appreciation, and profits that are generated through additional services on your property. [3]

One of the main advantages of investing in real estate is the ability to generate rental income. By purchasing a property and renting it out to tenants, you can earn a regular stream of income. This can provide you with a stable cash flow, which can be particularly beneficial for long-term wealth building and retirement planning.

As you pay down your mortgage and build up equity, your cash flow may only strengthen over time.

Real estate also has the potential to appreciate over time, meaning the value of the property can increase. Historically, real estate has generally increased in value, although there are no guarantees. By investing in properties located in desirable areas or emerging markets, you can potentially benefit from property value appreciation. With a good investment property, you can turn a profit once it is time to sell. [3]

Investors can also enjoy various tax advantages. For example, you can deduct expenses related to the property, including mortgage interest, property taxes, insurance, repairs, and maintenance. Additionally, depreciation allows you to deduct a portion of the property’s value over time, reducing your taxable income. Tax benefits can significantly improve your overall investment returns.

Additionally, you may be able to defer capital gains by using a 1031 exchange. [3]

Finally, real estate investing is also a great diversification tool in an investment portfolio. It has a low correlation with other asset classes like stocks and bonds, meaning its performance may not move in tandem with the broader financial markets. Including real estate in your investment portfolio can help reduce overall risk and increase potential returns.

If approached strategically, real estate can be a wonderful tool for generating income, building your wealth, and achieving financial freedom. Investors can build a portfolio of income-generating properties over time. Eventually, their rental income may exceed their expenses so they can cover their lifestyle without actively working.

The Best Investing Strategy for an Accredited Real Estate Investor: Multifamily Syndication

Despite its benefits, real estate investing is not perfect as it has several limitations. For example, owning real estate is a very hands-on experience. In order to make sure your property becomes profitable, you need to play the role of landlord, which is a huge responsibility. You have to manage tenants, collect rent, handle emergencies, and pay for repairs. If you have no experience with property management, this may be a challenge.

Managing rental properties can be time-consuming and may require expertise in tenant screening, property maintenance, dealing with vacancies, and handling legal and regulatory requirements. Property management can be difficult for investors who do not have the necessary skills or choose not to hire a professional management company.

Even purchasing a real estate investment property in the first place is very capital intensive. Real estate investments often require a significant amount of capital upfront. Purchasing properties, financing renovations or improvements, and covering ongoing expenses can require substantial financial resources.

It takes a lot of money and effort to reap all the benefits of real estate investing, especially if you go for a multifamily property like an apartment complex.

The good news is that there is an alternative that is available to accredited investors. No need to do extensive research on how to become a landlord.

Multifamily syndication allows investors to pursue real estate investing without the headaches that are usually associated with it. This is the best investing strategy for anyone who is looking for a true passive investment.

A multifamily syndication deal involves pooling your funds with several investors to purchase one large multifamily property. This solves one of the biggest problems with multifamily real estate investing, which is the high cost of entry.

With a syndication deal, you don’t have to buy the property all by yourself. Syndication allows accredited investors to participate in large real estate deals without having to pour in as much capital as they normally have to. [4]

A syndicator serves as the general partner and puts the deal together. They look for the real estate investment property, formulate the business plan, build the legal structure, and look for passive investors who will provide most of the capital needed for the syndication.

These deals are usually structured as a limited liability company (LLC) or a limited partnership (LP). [4]

Multifamily syndication is the most popular type of syndication although this deal can be done with almost any kind of real estate. This is because multifamily properties have plenty of units that can generate rental income on a regular basis. They are known for their strong, reliable cash flow.

Passive investors usually share in the profits and losses of the investment and, depending on the deal structure, a share of the capital appreciation upon resale. And because the syndicator is also in charge of property management, investors do not have to worry about running the multifamily property. This makes it a truly passive investment. [4]

Why Accredited Investors Choose BAM Capital for Multifamily Syndication

The only work you have to put into a multifamily syndication deal is doing your due diligence and researching potential syndicators to work with. We recommend working with a syndicator you trust.

For accredited investors who are looking for a trustworthy and reliable syndicator for multifamily investments, work with BAM Capital. This Indianapolis-based syndicator has over $700 million AUM and 5,000+ units. It is known for its consistent track record and strong Midwest focus. [5]

BAM Capital prioritizes properties that are Class A, A-, and B++, particularly multifamily real estate investments that have proven upside potential and in-place cash flow.

BAM Capital’s award-winning approach creates forced appreciation while also mitigating investor risk. This syndicator’s goal is to help accredited investors grow their wealth through multifamily syndication. [5]

As a vertically-integrated company, BAM Capital can handle every step of the syndication process. They will guide you every step of the way. BAM Capital will negotiate the purchasing of high quality multifamily real estate and also handle property management and renovations.

No investment is without risk. Make sure to consult your investment advisor or speak to a BAM Capital investment team member before making any financial decisions.

For accredited investors who want to enjoy the passive income and all the other benefits of being in a multifamily syndication, look no further than BAM Capital. Schedule a call with BAM Capital and invest today.