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Transitioning Wealth, Not Transferring It: An Interview with David Wieland of Realized

[Updated: Apr 07, 2021 ] Jun 04, 2020 by Liz Brumer
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David Wieland, CEO, and founder of Realized, a wealth management firm that helps individual property owners convert investment property into a wealth solution, sat down to talk with Millionacres about the current state of the economy and how it's impacting property owners, particularly those nearing or in retirement.

A long career in venture capital and real estate

David Wieland is a successful real estate entrepreneur who has co-founded several real estate capital venture firms and directed over $3 billion of institutional real estate and capital markets. Since the start of his career in the '90s, David and his partners have focused their efforts on the merging of taxes, real estate, finance, and, now, technology to maximize long-term wealth as a real estate investor.

David tells us his current firm, Realized, is "focused on helping individual investment property owners to manage their wealth with the same sophistication they would in other asset classes like stocks, bonds, real estate investment trusts (REITs), or exchange-traded funds (ETFs), particularly those who are in retirement or rapidly approaching retirement."

How is the current climate posing a risk for real estate investors, particularly those who live off of their real estate income or are using their investments for retirement?

Fear surrounding the current crisis is causing some real estate owners to want to fire sale their property, especially those who own real estate in the hardest-hit sectors, which include vacation rentals, hotels, office, or retail space. Lost income and lack of demand for the asset class in the current market will very likely continue to push values down and put more pressure on the property owner, especially as policies are put into place that further restrict evictions against past-due tenants.

What alternatives do investors who may be suffering from lost income or lack of liquidity in the current market have other than flash-selling their real estate?

Real estate investors who are currently experiencing hardship from the coronavirus pandemic, in which selling the property would not positively benefit them in the long run, should seek alternative options to refinance or work with your tenants to optimize your current investment without selling at a loss.

Those who are interested in selling should be utilizing a 1031 exchange on applicable properties, which is one of the most important and powerful tools available in our current tax law. By using a 1031 exchange, the investor can defer capital gains, in essence into perpetuity, keeping all of their money invested.

Capital gains can run anywhere from 30% to 40% of their profits. If you were to sell a property and pay 40% in capital gains, then reinvest that earning 5%, it would take eight years just to get back to where you were to begin with. Instead, the investor can keep their capital working through a 1031 exchange, while also having the ability to shelter income coming from the real estate through depreciation.

For some investors, holding your real estate assets in the current climate may make sense. In many areas, values are holding strong and rents are continuing to increase. But in general, most real estate investors have a concentration of wealth in a small set of assets in a focused geographic area. This type of wealth is inconsistent with what most want to accomplish in retirement, which is reliable passive income across a diversified portfolio.

If the real estate owner is trying to change their risk profile, transitioning from growing wealth in real estate to creating stable income, selling, even if it's for less than the value was a few months ago but deferring taxes, still puts them ahead. Ultimately, it comes down to what they are trying to accomplish from their real estate holdings and the amount of cash flow they are receiving on an after-tax basis compared to the risk they are taking.

How can Realized help investors transfer their wealth in the current economic climate?

A 1031 exchange by itself isn't always the right solution when it comes time to sell a property, especially for those who want to retire and live off of their real estate investment income in retirement. As an example, an investor may sell a property in the north part of Austin using a 1031 exchange to reinvest in another property in the south part of Austin. While this defers taxes, it hasn't necessarily transformed their wealth. Instead, they transferred their wealth from one asset to another. They may still be managing the property, and their wealth is still concentrated into one geographic area or asset class.

According to the Federal Reserve, households over the age of 62 have $6.5 trillion of equity in housing wealth. Families create this immense wealth over the course of their life, with single-family rentals, multifamily properties, or other types of commercial property. Yet they have no way to manage that in a sophisticated manner.

We help investors who may own a handful of investment properties transition to having ownership interest in a larger portfolio of diversified investments that creates reliable passive income, both on a pre-tax and after-tax basis consistent with their personal needs, lifestyle, and tax basis. We do this by helping facilitate the 1031 exchange process, reinvesting their wealth into a Delaware Statutory Trust (DST), the only entity that allows co-investors to invest in institutional-quality investment properties through a 1031 exchange.

With Realized, an investor can go from owning four single-family rental properties to having ownership interest in a diversified real estate portfolio with a billion worth of assets. We look at their tax situation, preferences, estate planning, income goals, and risk profile, working with them through our platform, collaborating and constructing a portfolio of co-investments that meet their needs.

Many of our clients are truly the millionaire next door. They have invested in real estate over decades, creating wealth by paying down mortgages, reinvesting their earnings, or even possibly doing 1031 exchanges previously. They have sophistication with real estate and investing but may not have the sophistication about wealth management through real estate. We take the time to talk about what risk really means, explaining the process and benefits in an easy to understand manner.

For a little fun with David Wieland, check out our 5 Foolish Questions.

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