By Jonathan Howard, CFP®

Real estate investors come with different expectations and goals. Some are offensive investors eager for growth and high income. Others are defensive investors, focusing on mitigating risk and making stable, long-term investment choices. At SeaCure Advisors, we work with both. The following case studies show how we work with both types of real estate investors.

Case Study 1: Offensive Real Estate Investors

Recently, we met a client eager to get back into real estate investing. Thanks to the client’s business, he had some cash sitting on the sidelines that he wanted to get back in the game. Here’s how we helped.

Actions

First, we met with a real estate expert familiar with a range of private placement opportunities. This gave us a better understanding of currently available passive real estate investments on offer through our firm’s alternative investment platform. We discussed factors unique to the current investment landscape—namely liquidity, interest rates, supply chain costs, and labor costs—and selected an investment with which the client felt comfortable. By connecting the client to a real estate investment specialist, the client was able to learn how best to enter the sector and navigate risks and opportunities.

One of the risks associated with investing in a private placement in this way is that, after a certain number of years (in this case 4 to 5), the investment will liquidate and investors will receive their investment plus gains, which will be taxable to our client.

To help reduce the client’s tax exposure when the liquidation event takes place, we allocated some of the client’s cash to a tax-harvested direct index portfolio. Doing so gave the client exposure to traditional equity markets while generating ongoing deductible capital losses. As these losses accumulate, they will help to offset and potentially eliminate the tax bill created by the private placement liquidation.

Results

The client was thankful to get back into real estate investing without having to actively manage a property. Along the way, we addressed the challenge of an investment sponsor who made changes to the underlying holdings. This challenge is ongoing, but we’ve been able to help the client continue moving forward with their investment plan.

Importantly, we analyzed the household financial plan to ensure the client didn’t allocate too much money to private placements. This was the client’s first experience with this kind of investment, so we wanted to be careful not to over-allocate to the real estate sector and tie up funds in something with notable liquidity restrictions.

Lessons

Real estate investors should recognize that Rome wasn’t built in a day—and neither is a good portfolio. With this client, we found it was straightforward to implement the direct index strategy, but the task of adding a private placement in real estate was met with some unexpected speed bumps.

Along the way, we learned that due diligence is of great importance; the entire process can take weeks or even months. The most vital part is to approach the investment process deliberately, and whenever possible consult experts with direct knowledge of the opportunities you are considering.

Case Study 2: Defensive Real Estate Investors

Some real estate investors take a defensive approach. That was true for one of our clients who was faced with a tax dilemma due to liquidations of appreciated mutual fund positions. The client needed to sell the mutual funds to provide funds for home repairs and assistance with their kids’ college bills.

The client wanted to address the capital gains tax bill that would be generated by selling the mutual fund shares, but didn’t want to invest in anything more risky than the well-diversified, mainstream funds we were liquidating to free up the cash the family needed.

Here’s how we helped:

Actions

The first step we took was selecting which funds to liquidate from the client’s account. This account had been managed by another advisor before it came to our firm. That advisor had purchased actively managed mutual funds which, despite the client not taking distributions, were generating tens of thousands of dollars of realized capital gains each and every year. By reviewing the client’s tax statements, we were able to find these problematic funds and discuss the “why” of liquidating them with the client.

By liquidating the funds, the client would save roughly $7,500 in taxes annually, while also freeing up the cash needed to cover the upcoming home repair costs and college bills. The cash would come from the basis that had originally been invested in the funds. However, each of the funds had been passively held for years and had substantial unrealized gains. We needed to address the capital gain bill that would be created by liquidating these positions.

We started by educating our client about sponsored Qualified Opportunity Zone (QOZ) funds, which help defer capital gains tax bills until 2027 while providing a tax-free return of capital distribution to the investor to help pay that bill. We were able to find a sponsored fund that purchases newly built, off-campus student housing complexes at Division I universities. Since these buildings were already in the pre-leasing stage, the client was exposed to less risk compared to incomplete construction projects. Also, student housing is generally regarded as a relatively defensive position within the real estate investing space.

Outcomes

The client’s goals were successfully met. They saw their realized capital gains drop by over $50,000 from 2021 to 2022. They were able to use the cash they received from the return of basis in the mutual funds to fund both their home repairs and their children’s education. Additionally, they were able to defer their capital gain bill until 2027. At that time, the bill will be at least partially covered by a return of capital distribution from the Opportunity Zone fund sponsor.

Lessons

Actively managed funds can sound appealing. Active management can help reduce volatility. But every time the fund manager makes a trade, such as for rebalancing to a target stock and bond mix, or shifting to cash during a market correction, the tax bill gets passed on to shareholders. This makes them potentially problematic if held within a taxable brokerage account. In the client’s case, the QOZ provided a means to exit a troublesome position, free up cash for large upcoming expenses, and opened an avenue to address a big capital gains tax liability.

Helping All Types of Real Estate Investors

SeaCure Advisors can help match either offensive and defensive real estate investors with private placement opportunities which help them achieve their unique financial planning goals. We can help you understand your values, goals, and risks, and design a plan that aligns with what you hope to achieve with your money. Schedule an introductory call online, call us at 877-328-4037 or email info@seacureadvisors.com. We look forward to hearing from you!

About Jonathan

Jonathan Howard is a financial planner at SeaCure Advisors, a financial services firm committed to developing custom-tailored financial plans to help clients meet their specific goals and needs.

Prioritizing education, diligence, and communication with a high emphasis on tax planning, his goal with everyone he works with is to help them use their resources as tools to enhance their prosperity and well-being.

Prior to entering the financial services industry as a licensed life & health insurance agent, Jonathan spent 17 years in Los Angeles, working as an editor and visual effects artist. Jonathan holds a bachelor’s degree from Middlebury College as well as the Series 7, 63, 65, and CERTIFIED FINANCIAL PLANNER™ designations. He has contributed to financial articles published in Forbes, USA Today, Fox Business, US News & World Report, Kiplinger, Yahoo! Finance, and more.

Jonathan lives in Lexington, KY, with his beautiful and patient wife, two vivacious daughters, and two spazzy dogs. When he’s not working, he enjoys playing guitar, spending time outdoors, and family time. To learn more about him, connect with him on LinkedIn.