Physician Retirement Portfolio Real Estate?

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Inefficient and Illiquid … But?

By Rick Kahler MS CFP®

Rick Kahler MS CFPWhat’s the best way to hold real estate in a retirement portfolio? For many investors, the answer seems to be “not at all.” That’s not the right answer. This asset class, appropriately owned, can help support you well in retirement.

Not like Stocks

Unlike stocks, which trade on a highly efficient and liquid exchange, trading real estate is inefficient and illiquid. The ease of buying and selling stocks is one of the major reasons the asset class is over-represented in most portfolios.

Based on the fascination of the financial press with the stock market, it’s easy to get the impression that stocks comprise the largest financial asset class. According to Matthew Yglesias, author of The Rent Is Too Damn High, the total value of commercial real estate in the US as of December 2013 was $20 trillion. This equals the value of publicly traded stock. (The largest asset class is bonds with $37 trillion.)

While one could make a strong argument for owning equal amounts of real estate and stocks in most retirement portfolios, very few hold any real estate at all.

Direct Ownership

Probably the worst way to hold real estate is to own it directly. The only popular retirement plan that allows direct ownership of real estate is the self-directed IRA. Unfortunately, the government discourages holding real estate this way by taxing it unfavorably. As I’ve described in a previous column, it’s not a good idea.


Registered Limited Partnerships [RLPs] were a popular way to own real estate in the 1980’s. While someone must have made money on these investments, I don’t think it was the investors. I don’t know an investor who made a dime, but I do know some distributors and promoters who got very rich with them. The problem wasn’t the real estate but the lack of transparency inherent in a limited partnership. This allowed promoters and distributors to hide high fees and commissions that didn’t give the investors a chance of profiting.


Gradually, the real estate investment trust gained popularity as another investment vehicle for owning real estate. A publicly traded REIT is similar to an ETF (a form of a mutual fund) that trades on the major exchanges and invests directly in real estate. REITs receive beneficial tax breaks, must pass through 90% of their cash flow to investors, have a high degree of transparency, and are highly liquid. They also tend to specialize in certain types of real estate, so rather than hold REITs individually; I prefer to own a mutual fund that owns a diversified assortment.

The fees and commissions associated with REITs are very low, which helps make them a good choice for investment portfolios. It is also another reason they don’t often show up there, since most financial vehicles are sold, not bought. Mutual funds, annuities, and cash value insurance pay much higher commissions than exchange traded REITs.

Wall Street solved that problem by creating the non-traded REIT, which does not trade on a securities exchange and therefore is highly illiquid. The benefits touted by salespeople are the potential for higher dividends, plus lower volatility than publicly traded REITs. Here’s the downside: Their lower volatility is an illusion created by their high illiquidity. They also lack transparency, which gives cover to charging high fees and commissions. The non-traded REIT is scarily like its older cousin of the 1980’s, the registered limited partnership.



Including real estate in a retirement portfolio can be a good idea as long as the ownership is properly structured. A mutual fund that holds a broad diversification of publicly traded REITS is one way to help you build a strong foundation for retirement.

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3 Responses

  1. Eight Most Common Mistakes Real Estate Investors Make

    To help identify which pitfalls to look out for, brokers and consultants detail the most common mistakes they see.



  2. Asset Protection: 10 Commandments for Real Estate Investors

    This is by no means complete, but it’s a start and address many of the issues that wiped out R.E. investors starting with the 2008 recession.

    One glaring mistake not listed below? DIVERSIFYING. We saw far too many people who were so heavily invested in concentrated R.E. holdings that they lacked any reasonable level of liquidity and no cash or equivalent assets when the market collapsed. This meant even people with eight and nine figure net worth levels were largely wiped out, while more “average” successful people lost everything they had ever worked for.

    1. Understand the limits and extents of the personal guarantees you sign. Many investors are signing as jointly and severally liable for six or seven figures in total debt when they only own 20% of the deal, as one example. Limit your liability % to your ownership % where possible;

    2. Don’t sign blanket personal guarantees, be specific or the bank will value what you own at pennies on the dollar and try to take it all;

    3. Protect yourself from your renters, their guests and business invitees, you are liable for all of them and their health, welfare and safety. Have specific leases, written policies on conduct and the use of the properties and ENFORCE penalties for violating them;

    4. Have your leases, indemnity agreements and other legal docs drafted by a lawyer, or at least reviewed by a lawyer BEFORE you use them. Asking us what we think after the fact is useless as is relying on your estate planning trust or “RLT”.

    5. Insure yourself to hilt against liability incurred on the property. You will almost always be more collectible and better lawsuit target than your renters;

    6. Don’t put too many eggs in one basket. Divide properties based on use, equity and danger or liability. If you have multiple pieces of property in a single LLC, for instance remember that ALL of them are potentially at stake for an exposure at one property;

    7. Adequately insure yourself against loss and property damage, as distinct from liability. Use only top rated national carriers that you can sue if they don’t pay under the policy as they should. Yes, this is common, “bad-faith” lawyers exist for a reason. Remember that vacant property is often not covered by general loss and liability insurance after as little as 30 days if you don’t let the insurance company know and pay them extra;

    8. Get professional accounting help to maximize deductions. Using strategies like energy studies, property tax reviews and cost segregation studies to reduce your fixed long term costs and maximize what you get to keep;

    9. Implement personal asset protection planning TODAY and consult with experienced legal counsel on how you are protected and which of your other personal assets are at risk and should be made legally distinct. If he or she says, “just by more insurance” get better help. I personally turned away 50 “former” millionaires seeking help in 2009 alone because they called too late for anyone to help them. Nearly all of them had high dollar estate plans in place from so-called top law firms and had never been told that the estate planning they had in place would not protect them. Shockingly, the same lawyers that dropped the ball and left their clients exposed then wanted to implement asset protection planning and now hold themselves out as asset protection experts. They weren’t then and they aren’t now;

    10. Get ALL the right insurance. If you are professional manager you need general liability, E&O (like professional malpractice) and potentially D&O insurance (directors and officers) if you are a director or officer of a company that may be personally named for professionals acts or omissions, i.e. “I made the call that re-enforcing the balcony railings was too expensive…”

    Act today, anything you do after an exposure is more expensive and less likely to work. Be proactive and tactical in defending what you have earned.

    Attorney Ike Devji has over a decade of practice devoted exclusively to Asset Protection and Wealth Preservation planning. He works with a national client base including 1000’s of physicians and business owners often through their local attorney, CPA or financial advisor. Together, he and his associates protect billions of dollars in personal assets for these clients. Ike also regularly writes, teaches and speaks on these issues to executives, physicians and other professionals nationally. See his work in WORTH, Advisor Today, Physician’s Practice and at http://www.ProAssetProtection.Com

    As always, the information presented here is general and educational and can never replace the advice of experienced counsel specific to your assets or situation.

    Ike Devji JD
    © 2008-2015


  3. Clients Want Real Estate?
    [8 Things Financial Advisors Should Know]

    For advisors whose clients want some of their assets in real property, the current rebound creates both opportunities and challenges. Want to understand these clients a little better?

    A recent survey took a deep look at investment real estate buyers and identified several characteristics that set them apart.



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