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The Advicer

I was earning 14% on a real estate investment, but all the financial advisers I interviewed wanted me to sell and invest in stocks instead. What gives?

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Reader email: I interviewed many advisors for a year from standalone people to those at big firms. All, without exception, wanted to sell the real estate and convert it to stocks (they all had different approaches but in the end this was their message to me). Since my real estate holdings were medical office buildings kicking out 14% a month (annualized) before capital gains on the buildings, that made zero sense to me. I’m sure there are people out there who actually specialize in managing these kinds of portfolios but I didn’t find one. (You can use this tool to get matched with an adviser who might meet your needs.)

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Answer: We got that above note from a reader, and it made us wonder: Why did so many of the advisers he talked to want to turn real estate into stocks, and how do you find the right adviser if you own a lot of real estate? Here’s what the pros told us. 

Firstly, let’s address why so many advisers were pushing you to sell the real estate. “The most likely reason you ran into this issue with such prevalence is that money managers and financial advisers are often compensated based on the amount of assets that are under their management. If you sell the real estate and turn over the proceeds for them to invest, voila! They get paid on that,” says Greg McBride, chief financial analyst at Bankrate.

That compensation model could have made it tough for you to evaluate what was going on. “The hard part with any investment adviser who charges a percent of assets is that you don’t know if a recommendation to divest out of real estate is based on their assessment of the property as a reasonable investment and its role relative to your financial and other goals, or if that recommendation is driven by their desire to gather more assets given their fee structure,” says certified financial planner Lisa Weil, principal and founding member of Clarity Northwest. (Note that an adviser who is a fiduciary is obligated to put your interests first. To find a fiduciary, sites like FINRA’s Broker Check or NAPFA’s Find An Adviser offer databases with certified professionals in specific fields, locations and more. Here are 15 questions to ask any adviser you might want to hire.).

Of course, the advice to sell may have been solid. Bruce Tyson, wealth adviser at Morton Wealth, says the adviser might have seen your 14% calculation and realized you didn’t account for some key costs in there, or didn’t calculate it in the most helpful way. It may also have been that they noticed you spending a lot of money, in their view too much, to keep up the asset. “You have to spend money to maintain it in order for it to remain a productive asset,” says Weil. Was that what they were seeing — that you were spending too much to get what you saw as a 14% gain?   (You can use this tool to get matched with an adviser who might meet your needs.)

And many investors confuse cash flow with profit, says Weil. “They see the rent money coming in and view it as profit. In my eight years of practicing as a financial planner, I’ve never come across a client with real estate who had actually tallied their effective net profit,” says Weil. In fact, in her experience, real estate investors just love their monthly checks and their depreciation deduction because it feels like free money and they view this as their profit. Weil also adds that the tax situation with real estate can be complicated, as can issues with depreciation and resale, so make sure you’re factoring that in too.

And the advisers could have been giving that advice because they thought it savvy for other reasons: “A prudent financial professional may have seen you as being over-invested in real estate, lacking portfolio diversification and recommended increased exposure to stocks as a way to diversify without sacrificing long-term returns,” says McBride. 

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How to find an adviser with experience in real estate

Alana Benson, investing spokesperson at Nerdwallet, says many financial advisers are trained to work specifically with traditional assets. “Unfortunately, that may mean it’s difficult to find someone who specializes in real estate, cryptocurrency or other non-traditional assets. A financial adviser marketplace, which is a service that matches you with the ideal financial adviser, may be able to pair you with someone who specializes in the field you’re looking for,” says Benson. (You can use this tool to get matched with an adviser who might meet your needs.)

Tyson recommends looking for advisers who employ a broad range of investments, including real estate. “A firm that is more like a family office would be deeply involved in real estate,” says Tyson. “Often regional wealth management firms are like this.” Meanwhile, he says many of the very large firms need investments that are scalable across their entire client base so local real estate does not generally come under their purview. 

One good way to understand a potential adviser’s qualifications is to get a sense of what they’ve done before. “You can ask them for examples of how they have handled real estate in their clients’ portfolios in the past and see if those results align with your goals,” says Andy Rosen, investing spokesperson at Nerdwallet. You can also make sure they’ve worked with people in your financial situation before. But it’s important to remember that you’re not always comparing apples to apples. “Real estate will play a different role in your portfolio based on your life stage, net worth and the mix of your other investments,” says Rosen.

Certain kinds of financial planners, who have dealt with real estate situations like yours, may be your best option. “Fee-only planners are legally obligated to put their clients’ interests first, and hourly planners don’t have the same mixed, outside incentives to capture real estate assets,” says Weil.  (You can use this tool to get matched with an adviser who might meet your needs.)

Bottom line: As an investor, it’s always good practice to trust your instincts and ask yourself how well your adviser is attuned to your needs and goals. “With any recommendation, whether it has to do with real estate or something else, ask yourself what your adviser’s recommendation is based on and if it sounds reasoned and well-considered or like a sales pitch,” says Weil.

*Reader email edited for brevity and clarity. 

This story was originally published in 2022.