A five step plan to protecting your real estate assets

In life, random events occur every day and they can reshape lives in an instant. I’ve seen way too many instances where a spouse passes, leaving the surviving spouse with real estate assets and no plan. Unfortunately, more often than not, the surviving spouse does not have the skill set to successfully run a real estate portfolio nor the peer group to help them figure it out. This is where the real estate plan comes into place. Do you have a plan? 

Every real estate pro (realtor, bankers, investors) that own real estate assets should develop a plan to ensure a smooth transition if something were to happen. Real estate is not like a stock that can easily be sold instantly. Real estate needs to be cared for to optimize its value. If something were to happen to my wife or I, would the other spouse have the skill set to run a real estate portfolio? Would they know who to call? How would they manage with zero experience?

I created a quick five step guide for real estate pros to develop a plan. What should be in your plan? 

Why not use a balance sheet?

A typical balance sheet simply lists assets and liabilities. This doesn’t provide enough details for someone to successfully navigate a real estate portfolio, it merely lists at a very high level all the items someone owns and what is owed.

 What is your plan?

Making a modified financial plan that takes your real estate assets into consideration is important. Real estate assets are not as straight forward as stocks, bonds, or other liquid asset classes. For example, you might own a single-family home that you are rehabbing or commercial properties with multiple tenants. Real estate is a business. So how do you prepare if disaster strikes and your spouse (or family) is left with assets but not the experience?

5 steps to make a plan:

Start with a balance sheet

First, make a traditional balance sheet. But put a number beside every asset, for each number make a note of the asset’s key information. For example:

Commercial Building: xxx Denver, CO: This is a 10,000 square foot building leased to 8 tenants, the leases are all NNN (rent roll and operating statements in xxx folder). There is currently a xxx mortgage on the property with bank of the xxx due in xxx. You should do this same exercise for all partnerships you have an interest in and other illiquid assets.

Provide key contacts for each asset

For each asset above provide key contacts: property managers, tenants, insurance, maintenance folks, etc. (everyone someone would need to contact for a respective property).

Identify the strategy for each asset

Identify the long-term plan for each property. Should your spouse sell it for quick liquidity if needed? Is the property a long term hold for future income?

Overall key contacts you trust:

After completing the 3 steps above, at the bottom of the financial plan, put a list of overall key contacts: life insurance, contacts for other assets, and most importantly who to call that you absolutely trust if there are questions. For example, on my contact list, I have two attorneys, a close friend that is knowledgeable about real estate and a couple contractors that I know very well that could help out and answer questions.

Review with your spouse:

The plan is useless if your spouse doesn’t understand the document. Take a few minutes to go through everything with your spouse to ensure all their questions are answered.  At the same time go through your past your tax returns to make sure you covered everything.

I know the above sounds like quite a bit of work, but not only will it help your family be better prepared, it’s a good exercise to put on paper to visualize all your assets. Each year, I pull out my document from last year and look at what has changed and where I’m heading. Updating your plan annually also allows you to reevaluate your strategy and see how the pieces of your portfolio fit together.