As a financial consultant, you are trained to provide advice and suggestions in the area of financial planning. This is an overview of a series of articles I have gathered and tailored for financial consultants such as yourself, to learn more about real estate and how it is related to financial planning.
As a holistic term, financial planning includes providing your clients with the solutions to these planning needs:
- Debts Management Planning
- Investment Planning
- Retirement Planning
- Risk Management
- Education Planning
- Estate Planning
- Cash Flow Planning
- Tax Planning
In short, it is called DIRREECT. You may often get questions from your clients, enquiring about areas related to Real Estate. How is DIRREECT relevant to real estate? Here are the ways:
Debts Management Planning
- Most people will take a mortgage loan while purchasing real estate. It is important to have basic knowledge on how mortgage loans work.
Investment Planning
- Real estate is often one of the biggest assets amongst the total assets of an individual or family. It is important to be aware of the potential investment upside that could be realised upon sale of the property as well as the regular rental income that may be derived from the property.
Retirement Planning
- Real estate can also be used as a form of retirement planning. This is an ongoing phenomenon where the Generation X believes that they can depend on rental income as a dependable source of retirement fund. However, I have come across many cases in the past few years where the rental income received is not sufficient to pay for the mortgage loan and other expenses.
Risk Management
- Whilst many believe that investment in real estate has little or no risk, it is not exactly true. There are many that suffer or become bankrupt due to property investment. Therefore, an individual should diversify his/her portfolio and have other forms of investment.
Education Planning
- Parents tend to view real estate as an investment that can be used to fund the education needs of a child upon reaching tertiary level. However, it is not always the case as there may be possibility of low real estate prices when the child is ready for tertiary education.
Estate Planning
- Real estate is often a source of dispute during distribution of estate. As it tends to form a substantial part of the estate of the deceased, real estate is often gifted to more than one person.
Cash Flow Planning
- Real estate is often purchased using a mortgage loan. It is important to make sure that the individual has sufficient surplus cash to make regular mortgage payments. If the individual is funding the purchase through salary or business income, it is important to ensure that there are reserve funds to make regular payments; in the event of unemployment or business failure or increase in monthly payment due to interest rate. For those who are using rental income to pay for the mortgage, it is important to provide reserve for end of lease servicing of mortgage and during the period of no occupancy.
Tax Planning
- The biggest expense in real estate investment is tax. When a property is purchased, the buyer has to pay Basic Stamp Duty and if necessary, Additional Buyer Stamp Duty. When a property is sold, the seller may have to pay Seller Stamp Duty or income tax on the profit made from the sale of property. When a buyer purchases shares in a company that owns real estate, the buyer may have to add Additional Conveyance Duty.
In the next few articles, you will learn in greater detail about the areas that are relevant to Real Estate and essential to your planning knowledge.
Sincerely yours,
Stephen
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