By Jonathan Howard, CFP®

In the vast and diverse world of investments, real estate consistently emerges as a favored asset class for many, holding its own unique allure. While most of us envision real estate investment as buying a home or perhaps owning a rental property, there are other, often underexplored, avenues: real estate private placements. These allow accredited investors to invest in real estate without many of the traditional burdens of property ownership. It also allows these investors to have assets that aren’t correlated to the stock and bond market.

However, as with any investment venture, it’s essential to navigate this path with both eyes wide open. This article aims to shed light on the intricacies of real estate private placements, from their unique potential for growth and income to tax advantages to the cautions every investor should be aware of. Whether you’re a seasoned investor or just beginning to explore this realm, this guide seeks to offer insights to help you make informed decisions about real estate private placements.

The Unique Value of Real Estate As an Asset Class

Real estate sets itself apart as a unique asset class because it presents an opportunity for sustained growth, consistent income, and a means for wealth transfer that remains relatively insulated from the fluctuations of the stock or bond markets. As an asset class, real estate benefits from a certain level of intrinsic value, given its tangible nature and the constant demand for housing and commercial spaces.

Investing in real estate, especially through private placements, offers accredited investors an avenue to take advantage of these benefits without bearing the day-to-day burdens of active property management. Who exactly is an accredited investor? In terms of finances, it is someone who has a net worth of over $1 million, excluding their primary residence, or someone who has an income of over $200,000 ($300,000 if married) for the past 2 years, and expects it to stay at the same level.

Private placements allow these investors to buy small slices of larger real estate portfolios, thus giving them access to attractive real estate ventures that would otherwise be beyond their reach.

Real Estate Private Placements and Tax Planning

Private placements also offer access to tax planning strategies that aren’t available in a typical stock and bond portfolio. For instance, let’s say you have a business or highly appreciated stock or real estate investments you would like to sell. Without careful planning, you might find yourself in a significantly higher tax bracket, which means these tax burdens can take a significant bite out of any profits realized. Further, navigating what you will owe in taxes from these investments can be quite complicated!

This is where tax planning with real estate private placements can make a huge difference. If you invest in real estate through either Qualified Opportunity Zones or Delaware Statutory Trusts, you might be eligible for tax advantages that can significantly reduce your tax bill.

With a Qualified Opportunity Zone, when you invest in an economically distressed area of the U.S., capital gains reinvested can be deferred and, if held for 10 years, appreciation within the investment is exempt from federal capital gains tax. States may or may not follow the Federal Opportunity Zone tax rules. California, for example, imposes state capital gains taxes on investments in Opportunity Zones. This means California investors using Opportunity Zones receive federal tax benefits only, but no state tax benefits. Be sure to understand whether or not your state allows capital gain deferral with these instruments.

A Delaware Statutory Trust (DST) offers tax benefits by primarily serving as a tool for investors in 1031 exchanges to defer capital gains tax on the sale of investment property as well as depreciation recapture by reinvesting the proceeds into real estate held by the DST.

While each of these options have a number of intricacies that likely require professional expertise, the tax benefits set them apart from other, more traditional investment vehicles. In addition, these real estate investment strategies could introduce a new asset class to an investor’s portfolio, filling a gap that might have been missing before. This expansion in portfolio diversity can provide an added layer of financial stability, further optimizing your overall wealth management strategy.

Downsides of Private Placements

Despite their potential for significant returns and tax advantages, real estate private placements are not the right fit for everyone. They necessitate a great deal of careful consideration and a thorough understanding of your financial picture. First, you need to understand your own risk tolerance, as these are not risk-free ventures, and one must be prepared for the possibility of underperformance or loss.

Furthermore, you should also evaluate your current real estate holdings within your portfolio. Overconcentration in any one asset class can expose you to unnecessary risk. Just like the stock market can have bad stretches of time, real estate is no different.

Finally, as with actively managed real estate, passively held real estate is not liquid. You cannot simply sell your interest in an Opportunity Zone, DST, or private placement whenever you choose. Opportunity Zones require a 10-year hold, while private placements and DSTs may have holding periods of around 5 years. Always make sure you understand the liquidity restrictions imposed by an investment instrument before committing to a purchase.

Unlocking the Value of Private Placements

While these aren’t for everyone, if you’re an accredited investor looking to diversify your investments and utilize favorable tax opportunities with a buy-and-hold instrument, private placements are worth considering as part of your overall financial plan and investment strategy.

If you’re looking to see if and how real estate private placements can add value to your financial portfolio, we’d love to see if we can help. At SeaCure Advisors, our goal is to help you thoroughly plan so you can prosper in the future. To get started, you can schedule an introductory call online, call us at 877-328-4037, or email info@seacureadvisors.com. We look forward to hearing from you!

About Jonathan

Jonathan Howard, CFP® is a financial planner at SeaCure Advisors, a financial services firm committed to developing custom-tailored financial plans to help clients meet their specific goals and needs.

Jonathan spends his days untangling all aspects of a client’s financial situation into an elegant, functional harmony designed specifically to enhance their happiness. Prioritizing education, diligence, and communication with a high emphasis on tax planning, Jonathan doesn’t know how to do anything halfway. His goal with everyone he works with is to help them use their resources as tools to enhance their prosperity and well-being.

Prior to entering the financial services industry as a licensed life & health insurance agent, Jonathan spent 17 years in Los Angeles, working as an editor and visual effects artist. Jonathan holds a bachelor’s degree from Middlebury College as well as the Series 7, 63, 65, and CERTIFIED FINANCIAL PLANNERTM designations. He has contributed to financial articles published in Forbes, USA Today, Fox Business, Time’s NextAdvisor, US News & World Report, Yahoo! Finance, and more.

Jonathan lives in Lexington, KY, with his beautiful and patient wife, two vivacious daughters, and three spazzy dogs. When he’s not working, he enjoys playing guitar, kayaking and stand-up paddleboarding, archery, camping, hiking, woodwork, and family time. To learn more about him, connect with him on LinkedIn.

Securities Offered through AAG Capital, Inc. Member FINRA/SIPC. Investment Advisory Services are offered through Accurate Wealth Management, LLC an SEC registered investment adviser. Registration does not imply any level of skill or training. Insurance products and services are offered through Accurate Advisory Group and sold through individually licensed and appointed agents in all appropriate jurisdictions.