A start-up wants to help RIAs get a piece of the $18 trillion in Baby Boomers’ direct real estate.
Realized, whose founder built a business to help investors exchange tax advantaged investment properties for diversified portfolios of real estate interests, has now launched a platform for financial advisors. The service will allow many advisors to tap into direct real estate portfolio management for the first time.
“What we're doing is constructing portfolios using modern portfolio theory the same way that an advisor would construct a portfolio of stocks and bonds and ETFs,” Wieland said. With the new platform, the company acts as a sub-advisor or portfolio manager to advisors who want to offer real estate portfolio management to their clients.
Realized takes advantage of a 1031 exchange under the U.S. tax code, which allows investors to defer capital gains tax from a sale of investment real estate if they roll the proceeds into another property of equal or greater value. Realized, which typically helps investors sell their properties, uses a vehicle known as a Delaware Statutory Trusts (DSTs) to build a custom portfolio with fractional investments in commercial real estate based on the investor’s tax situation, risk tolerance, monthly income needs, and a liquidity profile.
Instead of owning a couple of properties in one location, investors end up owning 40 or more in 15 different states, said David Wieland, Realized CEO and co-founder. The company can tailor property selection around concerns such as not wanting to be in high tax states to avoiding parts of the country threatened by changing weather patterns, including hurricanes.
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Among other things, Realized’s platform allows the advisor to quantify risk on an individual piece of commercial real estate — the missing piece that has kept wealth management out of real estate portfolio management, Wieland said. The company has facilitated about $1.4 billion of real estate transactions purchased on behalf of thousands of individuals since its founding in 2015.
“Part of the reason that investment properties have not been included in wealth management portfolios is because, frankly, they could project the return, but they could never project the risk in a way that was quantifiable and standardized and scalable, and we have built the ability to do that on investment properties. It’s fundamentally a game changer,” said Wieland.
The company custodies with Schwab and uses a fee-based model on assets under management. Its full-service model, which includes ongoing valuation, consolidated billing, and a secondary market for liquidating positions, is about 70 basis points but can be scaled depending on the individual investor and the size of the real estate portfolio.
Wieland says there are many situations in which a 1031 makes sense for an advisor and their client. “If you have a family that has a lot of investment properties, that's clear,” said Wieland, but according to him even one client with one investment property can benefit because not only does a 1031 allow investors to defer capital gains taxes, but it also allows them to shelter income on an after-tax, risk-adjusted basis.
“Wealth Management as an industry doesn't understand direct real estate and real estate certainly doesn't understand wealth management, and [Realized is] the bridge between those two giant industries,” said Wieland.
Update: Story has been edited to reflect that Realized founder's name is spelled Wieland.
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