Are you a real estate agent with a client who continuously asks you about selling their investment property but just can’t decide what to do with it?
It isn’t uncommon for this huge decision to weigh on folks for months or even years. Understandably, it can leave them paralyzed in determining the best outcome for what is likely their largest asset in their net worth.
While there are many reasons your client may want to get out of their investment property, the two biggest reasons we hear for contemplating a change are:
“I’m just tired of managing everything myself.”
And that’s fair. Spending a hot summer day fixing leaky plumbing instead of spending it with the kids at the lake can get old really quick.
“Look how hot this market is! Maybe I should take advantage of this seller’s market.”
As a real estate agent, you know the answer to this question far better than I do, but the data shows that current real estate market values are higher than ever.
“How Will This Decision Impact My Life?”
And there is the question holding everything up.
Your client has likely owned this investment property for a very, very long time, and the thought of making a change can be intimidating.
“How will this impact my finances, my taxes, my retirement, my life?”
This is the question standing in between your client and the actionable step that will lead them to the right choice for their specific situation.
The Financial Planning Process
Luckily, there is a solution that helps provide the clarity your client needs to make a confident and informed decision on their investment property: building out their own custom financial plan. This can help them:
Get organized: The factors that will determine the best outcome for your client go far beyond the property’s market value. They must have an organized financial picture that they understand before you can model the impact of such a big decision.
Establish goals: Success means different things to different people. Is the goal to minimize taxes? Maximize growth? Diversify their net worth? Or maybe just simplify their life? The answers to these questions will point them toward the decision that will fit them best.
Make a plan: A financial plan is the intersection of financial data and personal goals. Once both are defined, your client can see the trajectory of their financial plan and the impact that selling their investment property will make in their life.
Optimize the plan: Now is the time to plan for everything else impacted by the decision. Are they optimized for taxes? Is the estate planning still in line after that change? Does their decision impact insurance needs? How about liquidity?
While every client’s scenario is unique, here are a handful of actionable solutions the financial planning process could lead to.
1. Keep the Property and Hire Professional Management
This outcome is especially likely if the client’s net worth is not highly concentrated in real estate. Additionally, tax-sensitive investors of highly depreciated property may choose this option. The key change here for your client is hiring the management company to free themselves of their duties and spend more time on the things they enjoy.
2. Sell the Property and Diversify
Having all your eggs in one basket is not the ideal financial position. Selling the property to diversify is typically the outcome in this scenario and comes with the need to plan for the corresponding tax bill of the decision. Tax strategies, such as moving into a vacation rental as the primary residence for a period to achieve tax savings, should be evaluated.
3. Sell the Property and Do a 1031 Exchange
This option makes sense if the client’s overall issue is the property itself and not real estate as an asset class. If so, this is a slam dunk as it solves the tax issue. Where this solution can come up short is in providing diversification or the desire to get away from management responsibilities.
Have a client who could benefit from the Financial Planning Process? We would love to partner with you in helping them achieve their financial success.