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Smart Investment Choices: How Real Estate Fits into Generational Wealth Planning

Elise Jansen, CMA,  Sr. Mortgage Advisor

January 8, 2024 — 6 min read

How Real Estate Fits into Generational Wealth Planning

Financial backgrounds vary, but the habits you put in place today may pave the way for financial success for generations to come.

By financial success, we mean establishing a robust and lasting legacy that goes beyond immediate, personal wealth; a financial foundation that provides opportunities, security, and prosperity for your family for decades into the future. This requires thoughtful investment strategies over the course of years, alongside comprehensive wealth planning.

Understanding Generational Wealth

What is generational wealth?

Generational wealth is the passing down of assets like real estate, savings, life insurance, and investments from one generation to the next. Typically, parents pass these assets to their kids, providing them with a financial advantage and creating a snowball effect as assets continue to transfer to the next family member in line.

Why is generational wealth important?

Currently, the United States is witnessing the biggest wealth transfer in history, with baby boomers leaving significant wealth to their heirs.

In total, it’s estimated that baby boomers and the silent generation will bequest a total of $84.4 trillion in assets through to 2045, with $72.6 trillion going directly to heirs, according to financial market intelligence firm Cerulli and Associates. This will have a significant impact on our economy, including in the housing market.

RELATED: Renting vs. Owning: How Homeownership Can Supercharge Your Financial Future

How much money is considered generational wealth?

There’s no definitive number, and for most, the amount of passed-down family wealth will depend on who is receiving the money and how it is used.

Consider this scenario—if you inherit one million dollars, but require only $250,000 to sustain a comfortable lifestyle for the rest of your life, the one million proves more than sufficient to qualify as generational wealth; this surplus can then be passed down to successive generations.

How Real Estate Fits into Generational Wealth Planning

How Real Estate Creates Generational Wealth

Saving and investing contribute significantly to financial growth. But the strategic investor knows that oftentimes, real estate is the simplest and most effective avenue for creating generational wealth. Here’s why:

The equity you have in your property will continue to rise as you pay down the principal of your loan and as the market value of your home increases over time.

That statement hits hard when we put it into numbers—on average, homeowners can expect a four percent increase in property value each year. However, sometimes rises or dips surpass expectations, such as during the height of the coronavirus pandemic, when existing home prices increased by 45 percent, according to the New York Times.

RELATED: Here’s How Buying a Home Can Set You Up for Financial Success

There are other potential benefits, including:

Passive income.

Strategically managing rental properties allows for a consistent cash flow that supplements primary income and has growth potential. This reliable income can be reinvested, used for expenses, debt payment, or future savings. Additionally, your real estate portfolio serves as a valuable legacy for descendants, offering opportunities for future generations.

Tax advantages.

Real estate provides tax advantages through strategies like depreciation and property-related deductions, minimizing tax liabilities and enhancing overall returns. Unlike stocks or bonds, real estate's tangible nature allows it to be maintained and passed down through generations, acting as a hedge against economic fluctuations and inflation, thereby preserving and growing generational wealth.

RELATED: What Are the Tax Benefits of Owning a Home?

Diversification & risk mitigation.

Crafting a resilient portfolio that can withstand economic downturns involves integrating real estate investments with other assets like stocks and bonds. Notably, real estate frequently operates autonomously from the stock market, introducing an extra layer of stability and decreasing correlation with traditional investment vehicles.

How Real Estate Fits into Generational Wealth Planning

Expanding on Your Home Investment

The benefits of building home equity extend beyond property transactions. Utilizing mechanisms like home equity loans, cash-out refinances, or HELOCs offers flexibility for diverse financial objectives, whether it's debt consolidation, retirement savings, or chipping away at student loans.

RELATED: Want to Finance a Fixer-Upper? Pros and Cons of a 203K Rehab Loan

Without home equity, unforeseen expenses like medical bills, home repairs, or a new vehicle might require a client to dip into their savings or retirement accounts. While credit cards and private loans are alternatives, they may come with higher interest rates. Click here to learn how you can leverage home equity to achieve your long-term goals.

Establish a Financial Foundation for Future Generations

Purchasing a home to build generational wealth opens up several possibilities:

  • Your kids can live in the home as they accumulate funds for their own real estate venture, offering the perk of having their kids close by.
  • When the time comes to downsize, you can gift the home to your children or include it in estate planning.
  • Leveraging home equity, you can help your kids with a down payment on their new home, alleviating some of the challenges associated with the home-buying process.

Like any investment strategy, meticulous planning, thorough research, and professional guidance are essential. Whether it’s a single property or you’re expanding your portfolio, real estate holds the promise of a lasting legacy that secures your family's financial future.

RELATED: Investment Properties vs. Second Homes: What’s the Difference?

Explore these additional insights to help build generational wealth through homeownership and reach out if you have questions:

  • Begin early. The sooner you start investing in properties, the more time your money has to mature.
  • Embrace the long-term. Realize that real estate is a marathon, not a sprint. Patience is key for reaping the benefits.
  • Enlist the help of expert housing professionals. The guidance of a knowledgeable and experienced mortgage advisor and real estate agent is invaluable. They will work together to ensure your real estate transactions are well-managed and optimized for your financial goals. Click here to connect with your neighborhood Mortgage Advisor today.
  • Get educated about the housing market. Equip yourself with knowledge about real estate investing before making any big moves. To start, explore our Wiley’s Weekly Wisdom video series, where Eric Wiley, executive vice president and co-founder of PacRes Mortgage, provides straightforward information about home finance, the housing market, and how current economic events affect these industries.
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