Building blocks: helping clients understand real estate investments.

• Author: Koehler, David R.
• Position: Property investing

After 20 years as a practicing tax CPA, I find taxpayers' typical initial foray into real estate investment starts when they rent out their former primary residence or inherited family residence. Their experiences and investment returns vary widely, so it's important to help guide tax clients to better understand the investment attributes of real estate they own.

Investment real estate, when aligned with the goals of the clients, can often be a pillar of a well-rounded financial plan--and CPAs are in a strong position as an objective adviser to help. Most professionals surrounding the real estate market are compensated when a transaction is completed, which--at times-- can cloud judgment. CPAs are generally compensated for objective analysis, which can be of tremendous value to your clients.

This article focuses on giving CPAs the general tools to help clients understand, monitor and improve their real estate holdings and financial return on investment real estate they own. Issues around the acquisition of real estate, asset class selection and passive activity limitations are important, but beyond the scope of this article.

A Basic Understanding

The advantages of real estate investments in a client's financial plan are numerous and can include stable cash flow through difficult markets, tax sheltered income, relative noncorrelation to financial markets, growth of accessible equity through financing and the ability to exchange to different real property without incurring any current taxes. But there are risks, including the lack of liquidity of the assets, unrecognized deferred maintenance issues, the potential ongoing financial drain if the property can't produce enough income to cover its expenses and the threat of losing the entire asset if loan payments can't be made.

A basic understanding on what drives real estate value, as well as how to measure, improve and monitor that value is a great thing to educate your clients on. Clients too often simply collect the rent and wait until something befalls the investment, such as an unexpected loss of a tenant; a major downturn in the rental market; loans becoming due at inopportune times; and tenant actions like damage, unpaid rent and evictions. As advisers, we're often tasked with assisting clients out of a stressful situation, or explaining the consequences of poor decisions. CPA advisers are in a position to counsel clients holding real estate on how to avoid potential landmines and focus...