financial planner at Treasure Valley Financial Planning in Boise, Idaho.
Clients who are already experienced landlords might fare better, advisors say. But even their finances deserve close scrutiny.“ It’ s important to review their financial plan, including their overall financial situation, expenses, asset allocation and retirement goals, to determine if [ relying on rental income ] is right for them,” says Donna Walton at TD Wealth in New York City.
One big financial consideration is how the net return on the rental property compares to what the client could get from selling it and investing the proceeds elsewhere. Even if the returns are equivalent, that’ s probably not good enough, says Rich Arzaga at the Real Estate Whisperer Financial Planning in Monument, Colo.
“ Rental properties carry concentrated risk, illiquidity and management overhead,” he says.“ The return needs to be significantly better [ than an investment elsewhere ] to justify the extra complexity. Often, it’ s not.”
But there is another component to consider.“ Real estate has emotion and history behind it, unlike stocks,” Arzaga says. Such emotions may change over time.“ As clients age— especially into their 70s, 80s and beyond— the appetite for active property management drops. Most want to reduce exposure to direct ownership.”
That’ s why he recommends the clients have a strategy to get out of their property investments: He suggests they train a next-generation owner or prepare for eventual liquidation. Some clients prefer to swap their property using a 1031 exchange( named for the section of the Internal Revenue Code that allows transfers of real estate to new property of“ like kind” without generating capital gains taxes). One of the things they can exchange the property for, he says, is interest in a Delaware Statutory Trust— a legal entity that allows multiple, fractional and passive ownership of another property.
Other Considerations
One thing clients will want to consider is how they’ re going to handle the care of the building itself.
Carson of 2nd Story Wealth Planners often recommends that clients who buy property, especially if they are aging, hire a property manager to handle custodian duties and building maintenance. Though it can be difficult and expensive to find the right manager— professionals can cost anywhere from 10 % to 20 % of the monthly rent, depending on the location and the scope of responsibility— a good manager“ allows clients to take a more hands-off approach by shifting the responsibility of tenant communication, maintenance issues and daily oversight,” she says. She adds that it’ s important to thoroughly vet prospective property managers to be sure they can meet expectations and needs. Your clients pondering real estate are also going to want to consider the effect of capital gains taxes, which would almost certainly be triggered if they sold a property after holding it for many years. If clients can hold onto the real estate instead, it could become part of their legacy for their heirs. But do the heirs even want it( for living, renting or selling themselves)?
If your client’ s heirs sell their inherited property, they could get the benefit of a step-up in the basis, advisors say, so they won’ t have to pay as hefty a capital gains tax as would the original owner. On the other hand, they might feel burdened by inheriting real estate and may end up fighting with their siblings about what to do with it. For those clients, advisors say it’ s probably wiser to convert the real estate to cash or other assets that are easily divided among the kids.
Location, Location
Don’ t forget the importance of location. Is the property in a swamp or a desirable place? Where the property is, and what kind of shape it’ s in, affects its value if it’ s sold and its income potential if it’ s kept.
Clients might also want to think about options beyond traditional renting or selling. These days, they can list their properties on Airbnb, Vrbo or other online resources for short-term rentals.
But even here, there are inconveniences to consider.“ Short-term rentals can be lucrative, but they come with volatility, seasonality and the need for hands-on management,” says Jen Yacoube at Focus Partners Wealth in Walnut Creek, Calif. For instance, in a short-term rental, she says, a broken dishwasher needs fixing today, whereas you’ d have more time and breathing room if the property were rented out to a long-term tenant.
If the property is close to you, an outside manager might not be necessary. Yacoube says she owns several short-term rentals. One of them is outside of her home state, and for that one she’ s hired a local manager to be her“ eyes and ears on the ground.” But for the property that’ s only 90 minutes away, she and her husband tag-team on chores like speaking with guests, since their availability can be crucial in those situations.
Don’ t forget the importance of location. Where the property is, and what kind of shape it’ s in, affects its value if it’ s sold and its income potential if it’ s kept.
“ In short-term rentals, response time isn’ t measured in hours; it’ s measured in minutes,” she explains. It helps that she has a trusted family member who is even closer to the property to handle emergencies.
Partnerships
If clients want rental income but not the responsibility of property upkeep, they could also consider a private real estate limited partnership— a legal entity made up of a group of investors who pool their money to own shares of property.“ These offer income, diversification and the benefit of being a passive investor,” Yacoube says.
The client must have“ significant investable assets” and be knowledgeable about the risks and rewards, but, she adds,“ It’ s a great fit for accredited investors who want real estate exposure without the day-today management.”
SEPTEMBER 2025 | FINANCIAL ADVISOR MAGAZINE | 51