Building Wealth Through Real Estate Financial Planning

Real estate investing, even on a very small scale, remains a tried and true means of building an individual’s cash flow and wealth.

– Robert Kiyosaki, #1 New York Times Best Selling Author

By Realttorney^®

Real estate financial planning is an essential part of personal finance. It involves strategizing and managing financial resources to achieve real estate goals. This financial planning approach entails examining the real estate market in the area where you plan to purchase property, evaluating your unique financial position, and making informed decisions on how to invest in real estate or use real estate as a tool for wealth accumulation.

In fact, I would venture into saying that real estate financial planning is an integral part of the estate planning process. Just as one needs to plan for different investment products, everyone should carefully plan for the purchase of any real property.

But first, we need to learn and discover what real estate financial planning is, its advantages and disadvantages, and why it is necessary for an average person who dreams of purchasing real property in the future.

What is Real Estate Financial Planning?

Real estate financial planning involves creating a comprehensive financial plan that takes into account an individual’s goals, income, and expenses to create a roadmap for achieving their real estate objectives. Are you planning to purchase your own house and lot? Are you thinking of purchasing agricultural land where you want to establish a “rest house”?

This approach is the same when analyzing the plan of purchasing your first real property, as well as different real estate investment options such as commercial real estate, multi-family dwelling units, and/or vacation homes by the coast. And, choosing the most suitable option based on an individual’s financial situation and resources.

Real estate financial planning also involves managing your finances and investments to ensure that real estate purchases align with an individual’s long-term financial objectives. A well-crafted financial plan can help individuals achieve a range of financial goals such as creating passive income streams, generating positive monthly cash flow, diversifying their investment portfolio, and building wealth over the long term.

So, what are the advantages of real estate financial planning?

First, real estate financial planning can help individuals build long-term wealth by creating passive income streams and capital gains. When done correctly, real estate investments can provide steady positive cash flow through rental income and an increase in property value over time.

Second, investing in real estate can provide diversification to an individual’s investment portfolio, which can mitigate risk and reduce volatility – or uncertainties that are caused by the fluctuation of values over short periods of time. Real estate investment returns are not correlated with traditional asset classes like stocks and bonds, making it a valuable addition to a diversified investment portfolio.

Third, real estate investment offers significant tax advantages, such as depreciation deductions and transfer-free exchanges. These tax benefits can help individuals reduce their tax liability and increase their net worth over time when planned properly.

Fourth, it is commonly known that real estate investments can provide a hedge against inflation by maintaining the value of an individual’s money in the long term. As the current inflation rate is still high (but decreasing for the last two months), real estate investments tend to appreciate in value, providing a hedge against above-average inflation in the Philippines at this time.

Fifth, real estate investment provides an individual with control over this type of investment. Unlike traditional investments like stocks and bonds, real estate investment allows an individual to make decisions on how to improve the property and increase its value. And, if planned properly, the individual can divest his/her interest in the real property at a higher profit margin, as the exit strategy in the said investment.

However, investments in real estate are not all rosy, promising, and encouraging. What are the disadvantages of real estate financial planning?

Illiquidity: Real estate investments are illiquid, which means that they cannot be easily converted into cash. This lack of liquidity can make it difficult to access funds in case of emergencies or when the individual needs money for other investments.

High Transaction Costs: Real estate transactions involve high transaction costs, such as closing costs – notarial fees, real estate commissions, internal revenue taxes, local taxes, unpaid HOA dues, and registration fees. These costs can add up, making real estate investments expensive to purchase at the start.

Market Risk: Real estate investments are subject to market risk, and the value of the investment can fluctuate based on current conditions. Economic downturns or changes in market demand caused by the pandemic lead to a decrease in the value of the property, reducing the return on investment.

Maintenance Costs: Real estate investments require regular maintenance, repairs, and renovations. And to this the payment of annual real property taxes and insurance coverage on the structure and the items inside it. These costs can add up over time and reduce the return on investment.

Management Costs: The higher the number of one’s real estate investments, the more one requires a dedicated management team to perform important functions, such as finding tenants, collecting rent, maintaining the property, and looking after any and all concerns of tenants and other stakeholders. These management costs can add up, reducing the return on investment if planning is done haphazardly.

Now that we have seen the good side and the bad side of things, it begs the question: Is Real Estate Financial Planning Necessary?

Real estate financial planning is necessary for individuals who are interested in purchasing real estate or using real estate as a tool for wealth accumulation. Typically, real estate investment is a long-term investment that requires careful planning, evaluation, and management. This is also true for flipping houses as a real estate investment strategy.

So basically, real estate financial planning provides a roadmap for achieving real estate objectives, by taking into account an individual’s financial situation, goals, and risk tolerance. Real estate financial planning can help individuals make informed decisions on real estate investments, diversify their investment portfolio, and manage finances to align with long-term financial objectives.

For an average person who dreams of purchasing real property in the future, real estate financial planning is especially important. By creating a comprehensive financial plan that considers an individual’s goals and financial situation, individuals can make proper decisions on the type of real estate investment that best suits their needs and investment style.

Real estate financial planning can help individuals determine the affordability of a property, evaluate financing options, and understand the costs associated with owning and managing a property. It can also help individuals create a long-term financial plan that includes real estate investment, enabling them to achieve their financial goals over time.

In summary, real estate financial planning is an essential part of personal finance that enables individuals to make informed decisions on real estate investments. It offers significant advantages such as building long-term wealth, diversifying investment portfolios, and providing tax benefits and a hedge against inflation. However, it also comes with certain disadvantages such as illiquidity, high transaction costs, and market risk.

For individuals who dream of purchasing real property in the future, real estate financial planning is necessary. By creating a comprehensive financial plan that takes into account an individual’s financial situation, goals, and risk tolerance, individuals can make informed decisions on real estate investments, manage finances, and achieve their long-term financial objectives.

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Atty. Jojo is a real estate attorney, an estate planning attorney, a licensed real estate broker, and a PRC-accredited Lecturer/ Speaker for Training Programs in Real Estate. He is a Chartered Trust and Estate Planning (CTEP^®) professional who is committed to educating Filipinos about the value and importance of having an estate plan in their lives.