Real Estate and How It Fits into Your Financial Plan

Once again, this year has flown by, and my household is preparing for the start of a new school year. As we gather school supplies and get the kids’ sleep schedules back in order, we’re also taking our annual look at our financial plan.

Every year, we ask ourselves similar questions:

• Are our long-term goals still the same?
• How is our budget tracking?
• Can we fit any winter getaways into our plan for the year?
• Does our asset allocation still align with our goals?
• Are our insurance coverages adequate?
• Do we need to update any estate planning documents?
• Are the boys’ 529 plans on track?
• How are our retirement accounts progressing towards retirement goals?
• Have we supported the charitable causes that are important to our family?

As we worked through these questions, I found myself thinking about one area of financial planning that many clients view differently than other assets: real estate. This topic has always been particularly meaningful to me. Before becoming a Certified Financial Planner^®, I worked as a real estate broker in Illinois and have personally owned multiple homes and rental properties. Through those experiences, I’ve seen firsthand how real estate can shape a family’s financial future. While many people think of real estate solely as an investment, it can influence nearly every part of a financial plan. Whether it’s a primary residence, rental property, vacation home, or farmland, real estate plays a unique role in your overall financial picture.

Cash Flow

Real estate has a direct impact on your cash flow, often in ways that extend past the monthly mortgage payment or rental income. For many families, a primary residence represents one of the largest ongoing expenses through mortgage payments, property taxes, insurance premiums, maintenance and repairs.

Investment properties can provide a valuable source of income, but they also come with expenses such as upkeep, vacancies, taxes and insurance costs. Even when a rental property is not generating positive monthly cash flow, it may be paying down the mortgage balance and increasing your equity over time. Maintaining enough liquidity is also important, as you wouldn’t want to be forced to sell an investment or property during unfavorable market conditions to simply meet short-term cash needs.

Understanding each property’s income, expenses, financial structure and your long-term plans is essential to determining how it contributes to your broader financial goals.

Insurance Planning

Real estate ownership brings unique insurance considerations.

The type of property you own often determines the type and amount of insurance coverage needed. A primary residence, rental property, vacation home, waterfront property or recreational land may each require different insurance policies.

Insurance is designed to help protect against the financial impact of property damage, liability claims or other unexpected events. Generally, the greater the perceived risk, the greater the insurance cost. For example, a lake home may present additional liability concerns due to water-related activities, while a heavily wooded property may face increased risk from falling trees or storm damage.

Regularly reviewing your insurance coverage ensures your properties remain adequately protected as values and risk change over time.

Investment Planning

Real estate should be considered an important component of your overall investment strategy.

While it is certainly an asset, how it should be viewed within your asset allocation depends on its purpose. A primary residence that you intend to live in for decades may be viewed differently than a rental property that generates income or land held primarily for appreciation. In some cases, the cash flow generated from investment real estate may influence how you think about the other assets in your portfolio and the level of risk you’re comfortable taking elsewhere. For instance, if your rental property is generating a consistent amount of income, you may choose to think differently about the role your investment portfolio needs to play to support your spending needs.

Many investors focus primarily on stocks and bonds held within their investment accounts while overlooking the role their real estate holdings play in their overall net worth. If a significant portion of your wealth is tied to your home, rental properties, farmland or vacation property, your true asset allocation may be significantly different than you realize. You may also be surprised to learn that some of your equity, fixed income or alternative investments already might have exposure to real estate. Looking at all these holdings together can provide a more accurate picture of your overall diversification and risk exposure.

Real estate can provide additional diversification benefits because its value does not always move the same as the stock or bond markets. However, it is also less liquid, meaning it can take time and effort to convert real estate into cash. Understanding how real estate fits alongside your other investments can help create a more balanced financial plan.

Income Tax Planning

Real estate can create both opportunities and complexities from a tax perspective.

Rental properties may generate taxable income, but property owners can often offset portions of that income through deductions for expenses such as maintenance, repairs, insurance, property taxes, mortgage interest and depreciation.

In some situations, homeowners may benefit from favorable tax treatments when selling a primary residence, while real estate investors may be able to defer taxable gains through certain reinvestment strategies.

Real estate taxation can be complex; it is important to work with your financial advisor and tax professional to ensure your real estate holdings and transactions are being done as efficiently as possible.

Estate Planning

Real estate is often one of the most valuable assets a family owns, making thoughtful estate planning very important.

At your passing, ensuring your real estate transfers according to your wishes can help reduce confusion, family conflict, and unnecessary expenses for your heirs. This is especially important for family cottages, vacation homes, rental properties or farmland that may be intended to stay within the family for generations. While a property may have a significant sentimental value to you, your heirs may have a different perspective, financial resources, long-term goals or level of interest in maintaining the property.

Family discussions are often a great way to ensure interest in the property or financial resources needed to maintain the property. For instance, will your heirs have sufficient funds to maintain the lake home, rental property, or farmland? Addressing these types of scenarios can help to avoid future disagreements or difficult decisions.

Proper titling, trusts and other estate planning strategies are ways that can help facilitate a smooth transition of ownership.

Final Thought

Real estate is more than just a place to live or an investment piece. For many families, it can represent years of hard work, cherished memories, and a large portion of their net worth. Whether it is farmland, a lake home, or your primary residence real estate can impact your cash flow, insurance needs, tax strategies, investment allocations and your estate planning. By understanding how your real estate holdings affect each of these areas, you can establish a more comprehensive financial plan and better position yourself to reach your current and long-term goals.

As you conduct your next financial review, something we recommend all our clients do at least annually, don’t forget to give your real estate holdings the same level of attention you give your investment accounts. They may play a larger role in your financial future than you realize. As always, your client centric team at Greenleaf Trust is here to help you evaluate how your current and future real estate fits into your broader financial plan and long-term goals.