REAL ESTATE for Physician Investors

SOME GUIDELINES FOR COLLEAGUES

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By Dr. David Edward Marcinko MBA CMP®

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According to Rick Kahler MS CFP® ChFC CCIM [www.KahlerFinancial.com] real estate is one of the largest asset classes in the world. The family home is the largest asset many middle-class Americans own. And, real estate makes up a significant portion of the net worth of many wealth accumulators. Directly owning real estate is not an investment for the faint of heart, the armchair investor, or the uneducated. Most wealth accumulators would do well to leave direct ownership of real estate to the pros and invest in real estate investment trusts (REITs) instead [personal communication].

Still, as we have seen, the lure of investing in a tangible asset like real estate is enticing for high risk tolerant physician-investors who need a sense of control and interaction with their investments. If you are among them, here are a few guidelines that may keep you on a profitable path.

1. Don’t attempt to purchase investment real estate without the help of a commercial real estate specialist who is a fiduciary bound to look out for your best interest. Engage a Certified Commercial Investment Member (CCIM) with years of training and experience in analyzing and acquiring investment real estate. To find a CCIM near you, go to http://www.ccim.com.

2. You will sign a disclosure agreement that will tell you who the Realtor represents. Be sure the Realtor you engage represents you and not the seller, both parties, or neither party.

3. Never trust the income and expense data provided by the seller’s Realtor. While a seller represented by a CCIM will have a greater chance of supplying you with accurate data, most will significantly understate expenses and overstate the capitalization rate. Selling Realtors often understate the average annual cost of repairs and maintenance. I estimate this annual expense at 10%.

4. Another often understated expense is management. Many owners manage their own properties, so the selling broker doesn’t include an estimate for management expenses. They should. Real estate doesn’t manage itself, ever. You will either need to hire professional management or do your own management (always a scary proposition). Even if you do it yourself, you have an opportunity cost of your time, so you must include a management fee in the expenses. Most small residential apartments and single-family homes will pay 10% of their rents to a manager.

5. You must verify all the costs presented to you by the seller’s Realtor. Demand copies of at least the last three and preferably five years of tax returns. Research items like utility bills, property taxes, legal fees, insurance costs and repairs, maintenance costs, replacement reserves, tax preparation and all management fees. As a rule of thumb, expenses will average 40% of rental income on average-aged properties where the tenants pay all utilities except water. Newer properties may have expenses as low as 35%, while older properties can be as high as 50%.

6. By subtracting the vacancy rate and stabilized expenses from the rent, you will find the net operating income. This is the income you will put in your pocket—assuming the property is paid for. By dividing the net operating income by the purchase price, you will find the return you will receive on your investment, called the capitalization or “cap” rate. In Rapid City SD, for example, the cap rate tends to be 4% for single-family homes, 5% to 8% for duplexes to eight-plexes, and 8% to 12% for larger residential and commercial properties.

Citation: https://www.r2library.com/Resource/Title/0826102549

ASSESSMENT: Yes, physician-investors and all of us can build wealth with real estate. You just need to educate yourself, work hard, start conservatively, think long-term, and be prepared for lean years. This is not a quick or easy path to riches.

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What is a REIT, Really?

REITs – The Margarine of Real Estate Investing

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By Dr. Dennis Bethel MD

By Dr. David E. Marcinko MBA CMP®

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Just like real estate, butter has been around for thousands of years.  Sometime in the 1800’s someone decided that there was a need for something that looked like butter, tasted similar to butter, but wasn’t butter.  Along came margarine.  Real estate investment trusts (REITs) are the margarine of the real estate investing world.

NAREIT, the National Association of Real Estate Investment Trusts, answers the question

What is a REIT?” in the following way:

“A REIT, or Real Estate Investment Trust, is a type of real estate company modeled after mutual funds.  REITs were created by Congress in 1960 to give all Americans – not just the affluent – the opportunity to invest in income producing real estate in a manner similar to how many Americans invest in stocks and bonds through mutual funds.  Income-producing real estate refers to land and the improvements on it – such as apartments, offices or hotels.  REITs may invest in the properties themselves, generating income through the collection of rent or they may invest in mortgages or mortgage securities tied to the properties, helping to finance the properties and generating interest income.”

While REITs typically own real estate, investors in REITs do not.  REITs are paper assets that represent interest in a company that owns and operates income producing properties.  In essence they are real estate flavored stock.  As such, REITs are generally highly correlated with the stock market.

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TERMINOLOGY

When discussing REITs, you encounter the following terminology – public, private, traded, and non-traded.  Public REITs can be designated as non-traded or traded depending on whether or not they are traded on a stock exchange.

Since traded REITs are traded on the stock exchange, they enjoy a high degree of liquidity just like any other stock.  Unfortunately, traded REITs tend to follow the economic cycles and can closely correlate with the stock market.  This can lead to a higher degree of volatility than what is usually seen with physical real estate.  Additionally, they do not afford the investor the tax-advantages that come with investments in physical real estate.

MORE: https://medicalexecutivepost.com/2017/11/15/on-non-traded-real-estate-investment-trusts-reits/

Private REITs and non-traded public REITs are not traded on an exchange.  These are usually offered to accredited investors through broker-dealer networks.  These REITs are illiquid and generally have high fees.  They have been plagued with transparency issues as well as conflicts of interest.  Valuation of this stock is difficult and can be misleading to the investor.  Due diligence is very important as the quality of non-traded REITs can vary widely.

MORE: https://medicalexecutivepost.com/2014/06/13/why-i-hate-non-publicly-traded-reits/

ASSESSMENT: Your thoughts and comments are appreciated.

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Are Financial Asset Classes like a Box of Valentine Chocolates in 2021?

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On Valentine’s Day Diversification

By Rick Kahler MS CFP® ChFC CCIM  www.KahlerFinancial.com

Rick Kahler CFPWith displays of Valentine candy in every store, February is the perfect time to talk about chocolate. A creative financial planner might even steal Forrest Gump’s analogy and say, “Diversification is like a box of chocolates.”

Except that it isn’t.

True, a box of chocolates might have a lot of variety. Cream centers. Caramels. Nougats. Nuts. Dark chocolate. Milk chocolate. Truffles. Yet it’s all still chocolate.

Retirement Savings

Buying that box would be like investing your retirement savings in a variety of US stocks. Even if you had a dozen different companies, they would all be the same basic category of investment, or asset class.

For example, suppose you gave your true love a slightly more diversified Valentine gift made up of chocolates, Girl Scout cookies, baklava, and apple pie. That would compare to investing in different types of stocks like US, international, or emerging markets. But, everything would still be dessert.

Wiser Physician-Investors

You would be a wiser doctor-investor if you took your true love out for dinner and had a meat course, a salad, vegetables, bread, dessert, and wine. Now you’d start to see real diversification.

In addition to US, international, and emerging market stocks (all dessert), you might have some other asset classes like US and international bonds (meat), real estate (bread), cash (salad), commodities (veggies), and absolute return strategies (wine).

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box

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Long Term Growth Generator

This kind of asset class diversification is the best investment strategy for long-term growth. My preference is eight or nine different classes. For many clients, I recommend a mix of US and international stocks and bonds, real estate investment trusts, a commodities index fund, market neutral funds like merger arbitrage and managed futures, junk bonds, and Treasury Inflation Protected Securities (TIPS).

Market Fluctuations

Fluctuations in the market will tend to affect the various securities within a given asset class in the same way. Most US stocks, for example, would generally move up or down at the same times. So, owning shares of several different stocks wouldn’t protect you against changes in the market. When a portfolio is well-diversified, the volatility is reduced even during times when the markets are moving strongly up or down.

When I talk about investing in a variety of asset classes, I don’t mean owning stocks, real estate, gold, or other assets directly. For individual investors, mutual funds are a much better choice. Occasionally, someone will ask me, “But why should I have everything in mutual funds? That isn’t diversified, is it?”

Mutual Funds

Mutual funds are not an asset class. A mutual fund isn’t like a type of food; it’s like the plate you put the food on. A single plate might hold one food item or servings from several different food groups. More specifically, mutual funds are pools of money invested by managers. One fund might invest in real estate investment trusts (REITS). Another might have international stocks chosen for their high returns. Still others invest in a diversified mix of asset classes. The mutual fund is just the container that holds the investments.

heart[Courtesy GE Healthcare]

Annuities

Annuities and IRAs aren’t asset classes, either, but are also examples of different types of containers that hold investments. If you use your IRA to purchase an annuity, all you’re doing is stacking one plate on top of another. It doesn’t give you another asset class, it just costs you more for the second plate.

Assessment

Having a box of chocolates for dinner might seem more appealing in the short term than eating a balanced meal. Investing in the “get-rich-now” flavor of the month might seem tempting, too. Yet in the long run, asset class diversification is the best way to make sure you have a healthy investment diet.

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February 14th, 2021

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On non-traded real estate investment trusts (REITS)

Private real estate investment trusts (REITS)

By Rick Kahler CFP®

In February 2016, I published an article that was not kind to non-traded or private real estate investment trusts (REITS). Unlike the traded variety that can be sold immediately on a public exchange, non-traded REITS have no public market if you want to liquidate the shares, making them much more illiquid. I contended that even though non-traded REITS had some theoretical benefits, the high fees and commissions, illiquidity, lack of transparency, and lack of a track record associated with them negate any advantage. My longstanding recommendation has been to stay with traded public REITS for your portfolio.

That article was picked up by Barron’s, where it was read by Tom Lonergan of JLL Income Property Trust. He agreed with me that most non-traded REITS did have all the negatives I listed, but pointed out that others did not. While I was skeptical, I decided to investigate further.

A Sleuth

My investigation over the past year did turn up a handful of non-traded REITS that don’t pay a commission, have reasonable fees, have limited liquidity, offer transparency, and do have an existing portfolio of properties that offers an easily discernable track record. This article is my acknowledgement that not all non-traded REITS are equal.

First, why should you even care if real estate is in your portfolio? The biggest reason is that it’s the third largest asset class, behind bonds and stocks. Of all that real estate, about 7% is owned by public REITS. The remaining 93% is owned by publicly traded corporations, private partnerships and REITS, and individuals.

One of the strongest arguments for including a non-traded REIT in your portfolio is that it acts much more like directly owning real estate than a traded REIT. The big difference between non-traded and traded REITS is volatility. Traded REITS are more volatile than stocks. Traded REITS have a potential annual volatility (referred to as standard deviation) of 22%, while the stocks of large companies are 16%. A non-traded REIT has a volatility of around 2%, which is almost that of bonds at 3%.

Why the huge difference in non-traded and traded REITS when they are the same asset class? The answer is liquidity. With traded REITS, liquidity is both a major strength and an Achilles heel. Traded REITS are subject to public sentiment, just like stocks. Their price is driven by behavior. Since they are liquid and can be bought and sold in a nanosecond, their price can swing wildly. In this regard, traded REITS act more like a stock investment than a real estate investment.

Non-traded REITS, just like rental houses or office buildings owned directly by an investor, can’t be traded or liquidated quickly. The price of a non-traded REIT is set by the value of the properties that are owned, not public sentiment. That is why the share value of traded REITS dropped around 75% in 2009, while non-traded REITS dropped around 25%. The properties owned by the traded REITS didn’t decrease any more than the non-traded REITS, but the wholesale panic in the public exchanges dropped their share value three times more than the decline in the actual value of the real estate.

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Assessment

As with many things in life, when it comes to real estate we can’t have our cake and eat it too. One factor that makes real estate such a stable investment is that it is inherently illiquid. You can’t have both liquidity and low volatility. But you can have a non-traded REIT that has limited liquidity, a track record, with reasonable fees and no commission. However, you do have to look hard to find them.

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Leader Of The Healthcare REIT Industry?

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About Ventas, Inc

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By Timothy McIntosh MBA MPH CFP® CMP™ [Hon]

Ventas, Inc. is a real estate investment trust (REIT). The Company has a portfolio of seniors housing and healthcare properties located throughout the United States, Canada and the United Kingdom.

The Company operates through three segments: triple-net leased properties, senior living operations and MOB operations. The triple-net leased properties segment invests in seniors housing and healthcare properties throughout the United States and the United Kingdom and lease those properties to healthcare operating companies under triple-net or absolute-net leases that obligate the tenants to pay all property-related expenses.

The senior living operations segment invests in seniors housing communities throughout the United States and Canada and engages independent operators, such as Atria and Sunrise, to manage those communities. The MOB operations segment, acquires, owns, develops, leases, and manages MOBs throughout the United States. It invests in seniors housing and healthcare properties.

Ventas: Leader Of The Healthcare REIT Industry

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Conclusion

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Retirement Portfolio Real Estate?

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Inefficient and Illiquid … But?

By Rick Kahler MS CFP® http://www.KahlerFinancial.com

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.

RLPs

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.

REITs

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.

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Assessment

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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Conclusion

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Why I Hate Non-Publicly Traded REITS

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On Product Frustration

Lon JefferiesBy Lon Jefferies MBA CFP®

As my experience in the financial planning and investment advisory industries has grown over the years, there is one investment that I’ve seen no logical reason to own — non-publicly traded real estate investment trusts.

Josh Brown, one of my favorite analysts and author of TheReformedBroker.com nailed each of my frustrations with these products. Here is a significant excerpt from his post:

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I consider non-traded REITs or nREITS to be part of the group of investments that are just absolute murderholes for clients – they pay the brokers so much that they cannot possibly work out (and they rarely do without all kinds of aggravation and additional costs). Further, I have yet to hear a single credible explanation as to why a broker would recommend a non-traded REIT over a public REIT other than compensation. The only explanation that makes sense to me is that 7% is a lot more than the 1% commission you get doing an agency trade on a NYSE-traded REIT. A reader with experience in the industry sent this to me and I found it hilarious. Below, a fictional, transparent conversation between an indie broker and his “client” that would never occur…

If Brokers Were Transparent:

Rep:

Before we wrap up our quarterly portfolio review I would like to talk to you about a new investment I think you might be interested in.  You have been looking for more income and this is an investment vehicle that pays a 7% dividend.

Client:

Sounds great, give me the details.

Rep:

With your portfolio size and risk tolerance I would recommend a $100,000 investment.  Given that amount let’s first go over the fees. If you invest $100,000 I will be paid a commission of $7,000. My firm is going to get $1,500 – $2,000 in revenue share. My wholesaler, the salesman that works for the investment’s sponsor company, will get $1,000. He is a great guy, buys me dinner and takes me golfing. The sponsor company is going to get around $3,000 to pay for some of the costs they incurred in setting up the investment. So after Day 1 there will be around $87,000 left over to actually invest.  I bet you are getting excited.

Client:

Are you on drugs? Why would I pay 13% in fees on anything?

Rep:

Don’t worry, it won’t feel like you are paying $13,000 in fees. The rules allow my firm to report your investment at $100,000 on your statement. You never really know what its worth but you will think you never lost money. Pretty sweet huh?

Client:

You have to be kidding.

Rep:

No, this is a really good investment. Let me tell you about the income component before you jump to any conclusions. Like I said this investment pays a 7% dividend and the dividend won’t change.

Client:

That sounds high and how do you know it won’t change?

Rep:

You see, the sponsor just picks the 7% dividend number out of thin air. Here’s how it works. You see the vehicle you are going to invest in is new and it’s going to take the firm a while before your net $87,000 is actually invested. Later on, maybe 2-4 years from now they will have the money fully invested and it will generate actual cash flow. So they just pay a quarterly dividend of 7% by giving you your money back. This is great from a tax perspective because return of capital isn’t taxed as income.

Client:

Are we on hidden camera or something?

Rep:

Ha, you are funny. I bet this next benefit will change your mind.

Client:

I hope so or I should start looking for another financial advisor.

Rep:

This is the best feature. You can’t sell your investment until the sponsor has the opportunity to create liquidity. You might be locked up in this investment for 7-10 years.

Client:

This feels like the Twilight Zone. Your firm allows you to sell this crap?

Rep:

Oh yeah, our firm sells a ton of it. In fact independent broker dealer firms like mine sold over $20 billion of these investments in 2013. Think about that. Reps like me made over $140 million dollars and our firms pocketed $20-$30 million.

Client:

This is crazy, what is this investment?

Rep:

Non-traded REITs. $100,000 sound about right?

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Currency

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Josh touched on every part of these investments that I despise — excessive commission paid to the so-called “financial advisor” (salesman), a supposed “dividend” that is really just paying the investor his own money back (essentially providing an interest-free loan), and a complete lack of liquidity and transparency.

When I begin working with a new client who owns one of these products, it is impossible to obtain accurate, current information on the investment (not even a true value is apparent). Even worse, if the client wants to sell the investment he would need to do so at pennies on the dollar. For the most part, once an investor purchases one of these products he just needs to forget about it and hope that one day he can get his money back.

Assessment

The bottom line is that if your advisor ever recommends a non-publicly traded REIT, I’d strongly recommend you walk out the door and start searching for a true financial advisor with a fiduciary responsibility to act in your best interest.

Conclusion

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Tax Strategies for Retiring Medical Professionals

Some Valuable Tips for 2011

By Sean G. Todd, Esq., M. Tax, CFP©, CPA 

www.EMCAdvisors.com

We need to start this ME-P with the famous quote made by Benjamin Franklin almost 300 years ago and yet still rings true: 

Nothing in life is certain except death and taxes.”

I believe physicians and all individuals better be formulating a tax-efficient investment and distribution strategy. Here is why: as a physician retiree or planning-to-be retired, with an effective tax strategy, you will keep more of your hard-earned assets for yourself and your heirs. Here are a few items for consideration which just might help with your money management during your later years.

The General “Rules”

1.  Utilize Tax Efficient Investments

Municipal bonds or “munis” have long been appreciated by retirees seeking a haven from taxes and stock market volatility. In general, the interest paid on municipal bonds is exempt from federal taxes and sometimes state and local taxes as well. The higher your tax bracket, the more you may benefit from investing in munis. This is not the “silver bullet” to retirement income planning. Yet, we see unknowing investors being exposed to a significant downside risk which could result in significant losses of their assets.

2.  Utilize Tax Efficient Mutual Funds/Index Funds

A more acceptable point is that all mutual funds are not created equal. A prudent move might be to reallocate part of your portfolio to start investing in tax-managed mutual funds. Managers of these funds pursue tax efficiency by employing a number of strategies. For instance, they might limit the number of times they trade investments within a fund or sell securities at a loss to offset portfolio gains. Equity index funds may be even more tax-efficient than actively managed stock funds – having the ability to identify which index fund(s) are being more tax efficient is where we come in.

It’s also important to review which types of securities are held in taxable versus tax-deferred accounts. Why? Because in 2003, Congress reduced the maximum federal tax rate on some dividend-producing investments and long-term capital gains to 15%. In light of these changes, many financial experts recommend keeping real estate investment trusts (REITs), high-yield bonds, and high-turnover stock mutual funds in tax-deferred accounts. Low-turnover stock funds, municipal bonds, and growth or value stocks may be more appropriate for taxable accounts.

A Comparison Chart

Just for ease of comparison on a pure return basis, I thought the following chart would make a great reference.  Would a tax-free bond be a better investment for you than a taxable bond? Compare the yields to see. For instance, if you were in the 25% federal tax bracket, a taxable bond would need to earn a yield of 6.67% to equal a 5% tax-exempt municipal bond yield.

Federal Tax Rate 15% 25% 28% 33% 35%
Tax-Exempt Rate Taxable-Equivalent Yield
4% 4.71% 5.33% 5.56% 5.97% 6.15%
5% 5.88% 6.67% 6.94% 7.46% 7.69%
6% 7.06% 8% 8.33% 8.96% 9.23%
7% 8.24% 9.33% 9.72% 10.45% 10.77%
8% 9.41% 10.67% 11.11% 11.94% 12.31%

*The yields shown above are for illustrative purposes only and are not intended to reflect the actual yields of any investment. 

3.  A question we get frequently: Which Security to Tap First?

A successful retirement plan is largely based on a sustainable income stream. This type of financial planning requires a specific set of skills. To facilitate a consistent income stream, another major decision is when to liquidate various types of assets.  The advantage of holding on to tax-deferred investments is that they compound on a before-tax basis and therefore have a greater earning potential than their taxable counterparts.

Consideration must also be given to making qualified withdrawals from tax-deferred investments which are taxed at ordinary federal income tax rates up to 35%, while distribution, in the form of capital gains or dividends, from investment in taxable accounts are taxed at a maximum 15% [Capital gains on investments held for less than one year are taxed at regular income tax rates].

This reason makes it beneficial to hold securities in taxable accounts long enough to qualify for the 15% rate.  When the focus is on estate planning, long term capital gains are more attractive because the beneficiary will receive a step-up in basis on appreciated assets inherited at death.
Another consideration when developing the sustainable retirement income plan is the timeframe for tapping into tax-deferred accounts.  Keep in mind, the deadline for taking required annual minimum distributions (RMDs) and have you taken into account the possible impact of the proposed tax law changes on your retirement income distribution plan?

4.  The Ins and Outs of RMDs

The IRS mandates that you begin taking an annual RMD from traditional IRAs and employer-sponsored retirement plans after you reach age 70 1/2. The premise behind the RMD rule is simple — the longer you are expected to live, the less the IRS requires you to withdraw (and pay taxes on) each year. RMDs are now based on a uniform table, which takes into consideration the participant’s and beneficiary’s lifetimes, based on the participant’s age. Failure to take the RMD can result in a tax penalty equal to 50% of the required amount.

Inside Tip: Why you should not wait until you retire to develop a sustainable retirement income plan: If you’ll be pushed into a higher tax bracket at age 70 1/2 due to the RMD rule, it may pay to begin taking withdrawals during your sixties. Unlike traditional IRAs, Roth IRAs do not require you to begin taking distributions by age 70 1/2. In fact, you’re never required to take distributions from your Roth IRA, and qualified withdrawals are tax free. For this reason, you may wish to liquidate investments in a Roth IRA after you’ve exhausted other sources of income. Be aware, however, that your beneficiaries will be required to take RMDs after your death. 

Estate Planning and Gifting

Attaining proper investment counsel and advice has to answer the question—-“What happens when I die?”  Many strategies can be implemented by clients to address the various ways to make the tax payments on your assets easier for your heirs to handle. Who is the proper beneficiary of your money accounts?  If you do not name a beneficiary, your assets could end up in probate, and your beneficiaries could be taking distributions faster than they expected.

In most cases spousal beneficiaries are ideal, because they have several options that aren’t available to other beneficiaries, including the marital deduction for the federal estate tax, and the ability to transfer plan assets — in most cases — into a rollover IRA.

Also consider transferring assets into an irrevocable trust if you’re close to the threshold for owing estate taxes based on the sunset provisions.  Best estate tax avoidance plan today – die in 2010 as there is no limit on the amount you can pass to the next generation estate tax free.  Assets in this type of arrangement are passed on free of estate taxes, saving heirs tens of thousands of dollars.

Inside Tip: If you plan on moving assets from tax-deferred accounts do so before you reach age 70 1/2, when RMDs must begin.

Finally, if you have a taxable estate, you can give up to $13,000 per individual ($26,000 per married couple) each year to anyone tax free.  If you need my contact information, please let me know.  Also, consider making gifts to children over age 14 as dividends may be taxed — or gains tapped — at much lower tax rates than those that apply to adults.

Inside Tip: You may want to consider a transfer of appreciated securities to custodial accounts (UTMAs and UGMAs) to help save for a grandchild’s higher education expenses.

Market Focus

As individuals, especially doctors living in mini-mansions, come to grips with not being able to sell their homes for a value they once thought possible, we are apt to suggest that we might see increased activity in the home improvements sector as individuals just decide to make the upgrade to their existing home while they wait this whole real estate mess out. 

How can all this help you financially?  You are seeing exactly why you cannot base your investment decisions on the latest headline or try to time the market  Single and doubles in the investment world will score more runs than trying to to hit a home run (timing the market). What is your singles and doubles strategy? 

Summary

  • Formulating a tax-efficient investment and distribution strategy may allow you to keep more assets for you and your heirs.
  • Consider tax-efficient investments, such as municipal bonds and index funds, to help reduce exposure to taxes.  It’s what you keep that counts.
  • Tax-deferred investments compound on a before-tax basis and therefore have greater earning potential than their taxable counterparts. However, qualified withdrawals from tax-deferred investments are taxed at income tax rates up to 35%, whereas distributions from taxable investments held for more than 12 months are taxed at a maximum 15%.
  • You must begin taking an annual amount of money (known as a required minimum distribution) from some tax-deferred accounts after you reach age 70 1/2.
  • Review how your assets fit into a comprehensive estate plan to make the most of your money while you’re alive and to maximize the amount you’ll pass along to your heirs.
  • Before selling appreciated investment assets, be sure that you have owned them for at least one year. That way, you’ll qualify for lower capital gains taxes.
  • If you’re considering placing assets in a trust or custodial account, think carefully about which assets would be most appropriate to transfer.
  • Schedule a meeting with a financial professional to review your tax management strategies.
  • Remember to begin taking required minimum distributions from traditional IRAs and employer-sponsored retirement accounts after you reach age 70 1/2 in order to avoid costly penalties.

Conclusion

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Physician’s Acquiring Real-Estate

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Innovative Funding in Difficult Times

[Staff Reporters]mortgaged-house

Real estate can be acquired by physician-investors, even in these difficult times, in many different ways. For example, through direct purchase, participation in a real estate partnership vehicle with other investors [such as general partnerships, limited partnerships, various corporate entities, and, in most states, limited liability companies (LLCs), and investments in real estate securities such as Real Estate Investment Trusts (REITs).

Section 1031

Real estate also can be acquired through tax-deferred exchanges under Section 1031 of the IRS Code, in which a client “trades” one investment property for another, deferring the taxes due on the sale of the exchanged property. This allows the doctor to reinvest “pre-tax” dollars in another real estate investment, potentially benefiting from appreciation on the larger investment. The physician may also exchange one larger property into two or several smaller properties and pay tax consequences on each one as those properties are sold as cash is needed.

Tax and Risk Management

The way a physician takes ownership of real estate will affect the tax treatment of income and profit. For example, having an LLC-owned investment property will provide him/her with the same protection from individual liability as a corporation, while allowing him/her to have much more favorable tax treatment. Real estate can be bought directly by purchasing it in the following manners:

1. Paying cash,

2. Paying a cash down payment and acquiring a loan,

3. Paying cash to the seller who is financing, or

4. Financing the purchase by using either new real estate financing, seller financing, or credit borrowing when a lender is willing to loan solely on the strength of, and the financial statement of, the borrower, or a combination of these.

Trading and Secured Loans

Real estate also can be acquired by trading other valuable assets, sometimes in combination with financing. A client can obtain interests in real estate by making loans on real estate assets that are secured by a deed of trust or a mortgage. Another method is to invest as a participating lender. In such an instance the borrower needs to agree to provide equity kickers or participation in cash flow whereby the lender (doctor) can benefit directly from the real estate performance.fp-book21

Equity Participation Plans

With an equity participation, the physician-investor can profit or gain from the sale of the property, sometimes in a preferential manner (i.e., the money the doctor loaned is returned, with interest, and a predetermined percentage or portion of the gain is given to the owner/borrower before distribution of the sales proceeds). Similarly, the doctor can participate in annual cash flow, giving a fixed or a fluctuating amount depending on the performance of the investment. As a lender, many of the benefits of ownership of real estate are not available to the MD, but the doctor should have a security interest in the property and no direct responsibility for operation of the real estate investment. Also, if possible, the borrower should provide additional guarantees of performance. The borrower could do this by providing additional security, such as the deeds of trust on the borrower’s house, other real-estate, and the acquired property; bank letters of credit; or guarantees of performance from people other than the party to whom the money is originally loaned.archway

Assessment

If a physician-investor is considering acquiring or lending on real estate, s/he should check with his professional advisors, including accountants and attorneys, before proceeding. The doctor’s attorney should review any contracts or agreements before the client signs anything. The physician also will need a due diligence review to ascertain both the relative values of the real estate on which money is being loaned and the borrower’s track record and background.

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Fractional Interests in Real-Estate

What is it Really Worth?

Staff Writers

If real-estate constitutes a large portion of your estate, as a mature physician, you should be familiar with how fractional interests are valued. This may be especially true during the current sub-prime mortgage debacle in this country.

It’s all About Control and Marketability

Fractional interests are generally subject to two general categories of valuation adjustments: [1] lack of control and [2] lack of marketability.

Lack of Control Discounts

Typically, appraisers first determine the value of the underlying real-estate asset as a single interest, applying one or a combination of approaches, including (1) the income approach, (2) the replacement cost approach, or (3) the comparable sales approach.

Determining Factors

In analyzing a fractional ownership interest, the appraiser needs to understand what investment risk and return factors change as the physician investor moves from fee-simple ownership to a fractional interest.

And, when the fractional interest is in the form of a partnership or other unincorporated business format, additional analysis will be necessary since these organizational forms are based upon contractual agreements among the investing parties, and upon state statutes that apply to each type.

It is usually somewhat difficult to obtain meaningful valuation data for fractional interests, and the total discounts realized are usually not separable into lack of control and lack of marketability factors. Numerous studies have been conducted by reputable valuation firms; with often ambiguous results.

Probably the most reliable data in determining lack of control discounts are those derived from the sale of minority blocks of stock of a real-estate corporation and those for publicly traded REITs.

Lack of Marketability Discounts

With respect to lack of marketability discounts, the best source appears to be sales of restricted stock, which show larger discounts for OTC stocks versus NYSE or ASE securities. These restricted stock studies cover a span from the late 1960s through today and traditionally indicated an average price discount of 35% until a few years ago. Today of course, this discount has increased with recent events.

Additional evidence comes from studies of IPOs by comparing the IPO stock price with the price at which the company’s stock traded in private transactions prior to the IPO. These studies indicate lack of marketability discounts of 40% to 50%, or more, in some cases today.

Assessment

Data from past studies provided appraisers, and physician-investors, with a solid arsenal of analytical weapons and data to draw from when a fractional ownership interest was to be appraised. Again, the situation has drastically changed in 2008, and into the near-future, at least.

Conclusion

Do you own any other fractional investments; like plans or boats? In today’s environment, how do you value fractional interests in real estate? Please comment and opine; the more experiential the better.

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Healthcare Franchising and Investing

New-Wave Physician Opportunities?

Staff Reporters

Did you know that there are several viable alternative practice and investment vehicles physicians can consider rather than traditional medical practice and investing? And, they’re in the healthcare field?

Traditional Franchises

For example, franchise opportunities currently exist through vein-treatment, medical spa and weight-loss centers; and are well known. 

Non-Traditional Franchises

But, franchise opportunities also exist for assisted senior-living residences and home healthcare businesses that in many ways are a perfect fit for those in the medical community. And, as the demand for retirement housing grows, and as more senior adults are looking to stay at home, physicians are the common link to the elderly in both those venues.

Medical Property Investing

The demand for medical properties is also increasing and, according to a report by real estate services and investment firm Grubb & Ellis Company, are positioned to outperform other property types over the next 10 years. Their report notes that patients aged 65-74 years made an average of 6.5 visits per capita to physician offices in 2005 compared with 3.3 visits for all age groups.

Conclusion

And so, your thoughts and comments on the matter are appreciated. Is this a new investing wave and emerging practice business model; or just another example of medical merchandising?

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