Building Wealth for Real Estate Investors

Journal of Financial Planning: March 2026

NOTE: Please be aware that the audio version, created with Amazon Polly, may contain mispronunciations.

Cynthia Meyer, CFA, CFP^®, ChFC, offers fee-only financial planning, business coaching, and learning resources to real estate investors and the financial planners who serve them. She is the founder of Real Life Planning (https://reallifeplanning.com) and cofounder of the Real Estate Financial Coach Course, Real Estate For Generations, and the You Unlimited coaching program. Cynthia lives in New Jersey with her husband and children.

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Americans love real estate. The younger the client, the more likely they are to have real estate planning questions:

• “How do I get started with my first rental property?”
• “How profitable is my rental portfolio?”
• “Can I BRRRR (Buy, Rehab, Rent, 
  Refinance, Repeat) to scale quickly?”
• “Can I retire early on my rental income?”
• “Do I need an asset protection program for 
  my properties?”
• “Can I use the short-term rental loophole?”
• “Should I invest in this real estate syndication?”

Financial planners who understand real estate investing and taxation are uniquely positioned to help them. However, most planners have not been trained in real estate investing and tax planning concepts. The CFP® curriculum only touches lightly on investment real estate, mostly in the estate planning and insurance categories, with some tax concepts and a general overview of investment risks.

Financial Planners Misunderstand Real Estate Investors

Financial planners and advisers typically focus on investing in securities and may view the client’s rental properties as outside the scope of the planning engagement. Other planners may actively discourage real estate investments and may go so far as to encourage the client to sell rental properties without appropriate analysis and reinvest the proceeds in securities. This risks significant negative tax and estate planning consequences.

The fiduciary financial planner with clients who own rentals must be knowledgeable about real estate financials and tax planning or consult with a planner with that expertise. These clients require a base level of knowledge about the following issues:

• Real estate cash flow
• Depreciation and depreciation recapture
• The role of leverage
• Property and casualty insurance
• Common rental property expenses
• Delaware statutory trusts (DST), 1031 exchanges, and 721 exchanges (UPREIT)
• Passive losses

Keep in mind that the planner who is not a tax professional may offer education but must avoid giving tax advice. As always, see a tax professional.

Similar to Small Business Owners

Working with real estate investors who own individual properties is similar to working with small business owners. Think of real estate operationally as a business when organizing the financial planning engagement, and the client as a real estate business owner. Be prepared to learn the tax benefits and rules of the real estate business. Here’s a simple analogy: If your client owned multiple auto-repair shops, you would not suggest that your client was “overweighted in auto repair shops.” You would help that client manage the risks and opportunities in the auto repair business.

Passive income is a tax category (Schedule E), not an effort category. Rental real estate requires ongoing effort: personal attention, cash flow planning, risk management, bookkeeping, contingency and estate planning, and tax planning. Either the property owner or the property manager is dealing with tenants, maintenance issues, and paying the bills.

Real Estate Investors Are Underserved

How many of your clients own rental real estate—or want to? More than you may think.

• Three quarters (74 percent) of the nation’s rental properties are owned by individual investors—the “mom and pop” landlords, representing just under half of all rental units.¹
• These are mostly single-family homes, small multifamily properties of 2–4 units, and small apartments (5–24 units).²
• Ninety percent of investor-owned homes in the United States belong to small landlords with fewer than 11 properties, but most landlords own just 1–4 total rental units.³ 

Your working-age clients are much more likely to want to diversify into real estate. I like to call it the “HGTV” effect. Bankrate’s 2025 Long-Term Investment Survey found that one in four respondents (24 percent) preferred real estate as the way to invest money they didn’t need for a decade or more.⁴ That’s down only 5 percentage points, since 29 percent of respondents chose real estate over stocks in the 2022 survey, even though mortgage rates have more than doubled and the S&P 500 has skyrocketed since then.⁵ Gen X (31 percent real estate) and millennials (29 percent real estate) are driving these numbers.

The Real Estate Millionaires Next Door

Real estate investors are the millionaires next door.⁶

The typical real estate investor has a growing net worth, a good income, is a good saver, has control over their spending, works diligently, learns by doing, and lives below their means. That’s how they save the large amounts needed for down payments on their rental properties. I work every day with real estate business owners and can affirm that they make wonderful clients who naturally get things done. They are independent, DIY, and look for coaching and mentorship.

Most real estate investors have retirement accounts and securities investments. However, they prefer real estate to build wealth, so securities play a secondary role as diversification, flexible sources of income, and tax deferral. Some investor couples are interested in pursuing passive loss strategies to offset one spouse’s high income.

There are many opportunities for financial planners to help the real estate investor client:

• Tax planning
• Retirement planning
• Risk management
• Investment diversification
• Deal analysis
• Building a real estate team (agent, lender, property manager, etc.)
• Cash flow management
• Operations education and coaching
• College planning
• Liability management
• Contingency planning
• Estate planning

Financial Planning Opportunities for Clients Who Are Buying Real Estate

Direct investment in real estate can be very rewarding, but it comes with substantial risks, especially for the new investor. For certain investors, there are tax planning opportunities in the buying process. A real estate-savvy financial planner can help clients determine if a deal makes sense financially in terms of their total picture, set up financial operations, manage risks, and optimize related tax planning.

Planning opportunities include:

1. Assess financial readiness. The biggest risks accrue to the new investor, who may be stretching their cash reserves to get into their first rental property. First time house hackers—those who are buying an owner-occupied rental property like a duplex or a home with an accessory dwelling unit (ADU)—may need coaching on the cash management needs of being a homeowner and landlord all at once.

New investors must know that real estate has carrying costs such as mortgage, taxes, insurance, maintenance, and utilities, which have to be paid by the owner, whether or not the tenant pays. Rental property can remain vacant for longer than planned, have a tenant who stops paying the rent, or a large, unexpected repair.

2. Deal analysis. Financial planners can help clients analyze properties and develop a cash flow budget for the deal. We love spreadsheets after all! This is best done with the client, rather than for the client as you are not making a recommendation to buy or sell a property. Rather, you’re helping the client understand the financials of the deal and the potential risks.

You can build your own custom spreadsheet models and share them with the client, or use other tools, such as the excellent new real estate analysis tool for financial planners, ReWealth Reports, or the analysis tools in real estate investor education platform Bigger Pockets. Research rental comps on Rentometer. I recommend financial planning portals RightCapital and eMoney for the capacity to run a variety of real estate goal scenarios. This allows you to see how the deal affects the client’s retirement projection, estate plan, and current cash flow.

At my firm, we use RightCapital to model real estate investor financial plans. We also build our own custom property and real estate portfolio analysis spreadsheets, and use ReWealth, BiggerPockets, PassivePockets, FactRight, and Rentometer.

3. Build solid real estate business operations. A CFP® professional can also help the buying client:

• Understand the risks of investment real estate and how to mitigate them
• Build a team: real estate agent, lender, insurance agent, etc.
• Decide if they want to be “hands-on” or “hands-off” with a property manager
• Coach them on how to set up or improve financial operations
• Analyze how this new property contributes to their existing real estate portfolio

4. Understand syndications. Financial planners can help higher-net-worth clients who want to be completely hands-off with their real estate investments research and vet alternative investments such as:

• Commercial real estate funds (called “syndications”)
• Hard money lending funds (private lending)
• Opportunity zone funds, and
• Private REITs

The majority of high-net-worth clients who are interested in syndications or other real estate alternative investments do not understand how they work, the risks, the fees, how returns are calculated, and the lack of liquidity.

Advisers can read the private placement memoranda, discuss the features with them, and coach the client to do some additional due diligence on a sponsor. If alternative investments are your area of expertise, you may even do your own research and make recommendations. This can help clients avoid some of the huge risks that go along with these types of private investments.

Tax Planning Opportunities for Real Estate Investors

Real estate has significant tax advantages:

• Depreciation expense is deductible against rental income, but a well-maintained building typically appreciates in value over time.
• Taxes and recaptured depreciation can be deferred in a 1031 exchange.
• Property steps up in basis at death.
• Carryforward passive losses on a property can offset capital gains at property sale.
• A property that is house hacked (owner’s unit and rental units) can still qualify for a partial Section 121 capital gains tax exclusion of the sale of a primary residence.
• There are additional powerful tax planning opportunities when one spouse actively manages the investment real estate.

Real Estate Can Make Money but Generate Tax Losses

Net income from rental properties is taxable as income to the investor. However, due to depreciation expense, a rental property owner may have positive cash flow from the rental but show a net passive loss on their tax return. That would happen when the allowed depreciation expense for the property is greater than the gross rental income minus paid deductible expenses.

When a real estate investor talks about “cash flow,” they are referring to the rent minus actual expenses paid. Cash flow does not include depreciation expense, but does include payments of mortgage principal. In the early years of owning a rental property with a 75 percent loan to value, it’s common for the property owner to have low or no taxable income from the property—or a tax loss—even though the cash flow is positive.

Depreciation is like a loan from Uncle Sam that is only forgiven if the owner dies and the property steps up in basis. When a property is sold and the gains are recognized in that year’s tax return (e.g., the property is not 1031 exchanged), depreciation is recaptured and taxed. Straight line depreciation is recaptured at the client’s ordinary income tax rate, or 25 percent (unrecaptured Section 1250 gain).

Tax Losses Can Be Accelerated with a Cost Segregation Study

Certain real estate investors who are actively managing their properties may benefit from taking accelerated depreciation expense when they put a property into service as a rental.

The investor contracts with a specialty firm with expertise in tax law and construction/engineering to create an analysis that allocates value to parts of the property that can be depreciated faster than 27.5 years for residential property and 39 years for commercial property (components with five, seven, or 15 year depreciable lives). The line-by-line analysis is not reported to the IRS, just the total depreciation expense, but must be maintained for audit defense.

This high up-front depreciation expense is typically used to create a large tax loss, either to offset other real estate income, or in a passive loss strategy (see below). A cost segregation study typically reclassifies 20–40 percent of the building’s depreciable value, depending on the age of the property.

Accelerated depreciation is recaptured at the client’s ordinary income rate, with no cap, when a property is sold.

Passive Losses Generally Don’t Offset Active Income from Work or Business

Passive activities include trade or business activities in which you don’t materially participate. This includes most rental properties, even if the client is managing them.

• Passive losses can offset passive gains.
• A passive loss from one activity can generally offset a passive gain from another:
  o Real estate syndication loss can offset a net gain from rental property;
  o Net passive loss from rental property can offset a net gain from another rental property.
• Net passive losses generally must be carried forward to future tax years.

Passive losses can offset other income in the following scenarios:

1. Rental real estate loss allowance. Investors who actively manage their properties but aren’t real estate professionals can deduct up to $25,000 per year in losses from rental properties if their income is below $100,000. This is phased out completely at $150,000. In this context, “active management” means you are making all the important decisions about the property, even if you have a property manager.

It’s not unusual for a real estate investor living off rental cash flow to have a taxable income below $100,000 to $150,000 because of depreciation expense. Financial planners can help real estate investing taxpayers with passive losses to keep below the $150,000 cap if they are close, as well as discuss opportunities for Roth conversions and capital gains if they are substantially below the $100,000 threshold.

2. Carryover of rental real estate losses. Any unused real estate losses can be carried forward to future years until the property is sold. In some cases, upon sale, these carryforward losses may be used to offset active income. Carryforward losses offset the gain from the property first, then other passive gains, before any remaining losses are freed up to use against other income.

Financial planners can help clients who are selling a property with suspended passive losses to identify opportunities to use any that will be freed up against other income, such as stock option exercises, retirement account distributions, or Roth conversions.

3. Real estate professional status. Investors who qualify for real estate professional status (REPS) and materially participate (as defined by the IRS) in the management of their properties can deduct 100 percent of their losses from rental properties against other income.

To qualify as a real estate professional in a tax year, a client must:

• Provide more than one half of his or her total personal services to real property trades or businesses
• Work more than 750 hours during the tax year in real property trades or businesses
  o Should prepare contemporaneous time logs as proof for audit
  o Employee hours do not count
• Must be more than 5 percent owner of real estate or a real-estate-related business

According to IRC Section 429, taxpayers are considered materially participating in an activity when that activity is “(A) regular, (B) continuous, and (C) substantial.”

There are multiple tests for material participation. The tests most commonly met are:

• Participates more than 500 hours per year
• Participation comprises “substantially all” participation from any individual
• Limited partners are not material participants
• Hours spent as an employee are not counted unless the employee owns more than a 5 percent stake
• Spousal hours can count toward material participation (but not REPS)

REPS is difficult to qualify for, unless the taxpayer or spouse is self-managing many rental units, keeping a detailed time log, and does not have a full-time job doing something other than a real property trade or business.⁷ In the past, the IRS often audited tax returns with this type of passive loss strategy and until recently published a passive loss activity audit guide,⁸ which is currently listed as obsolete.⁹

Financial planners can look for opportunities to discuss REPS with their clients when there are real estate losses and:

• One spouse has high ordinary income
• One spouse is a realtor or real-estate related business owner
  o Or single filer is a real estate agent or real estate-related business owner
• Someone with a large pre-tax IRA/IRA rollover balance
• Facing large required minimum distributions, including inherited IRAs
• Opportunity to do Roth conversions
• Sale of business
• Large stock option exercises or restricted stock units vesting
• New rental, such as multifamily or commercial property- Immediate improvements- Cost segregation study

4. Short-term rental (STR) loophole. Investors who materially participate (as defined by the IRS) in the management of their short-term rental that meets property business criteria may be able to treat this activity as non-passive (does not require REPS). The result is that tax losses may offset active income.

This short-term rental loophole really isn’t a loophole but is a strategy based on current law. It’s due to the fact that tax rules for bed and breakfasts and small guesthouses were written before the age of Airbnb and treated like Schedule C businesses. This can be applied to short-term rental businesses that meet certain criteria.

Tax preparers have some discretion (and different opinions) about whether short-term rentals should be reported on Schedule E or Schedule C. Generally, an STR with a property manager would be considered a passive rental activity (Schedule E). However, when the owner is also managing the STR business and it meets the property business criteria, there is an opportunity for Schedule C.

The investor must materially participate in the short-term rental business. Participation tests are the same as those in REPS. In this case, the material participation tests met are typically:

• Individual’s participation comprises substantially all of the participation from any individual
• Participates 100 hours and more than anyone else
  o Note that “more than anyone else” includes the cleaner who cleans in between guests

Property business criteria for non-passive activity:

• Average stay is seven or fewer days
  o This is the easiest test to meet for most short-term rental owners
• Average stay is 30 days or fewer and significant personal services are provided
  o Example: daily cleaning, meals, etc.
• Significant personal services are provided by or on behalf of the owner of the property in connection with making such property available for use by customers
  o  Example: bed and breakfast
• The rental is incidental to a non-rental activity of the taxpayer
  o  Example: working farm rents out a barn occasionally for family reunion
• The taxpayer customarily makes the property available during defined business hours for non-exclusive use by various customers.
  o  Example: golf club that rents a room to brides preparing for an onsite wedding
• Property used in an activity conducted by a partnership, S corporation, or joint venture in which the taxpayer owns an interest is not a rental activity

Planning Opportunities for Clients Scaling Real Estate Portfolios

Most clients who are working toward early financial independence using real estate have the goal of buying multiple properties and increasing their real estate cash flow. The most common ways they do this are with the strategic use of leverage and 1031 exchanges.

BRRRR: Buy, Rehab, Rent, Refinance, Repeat

The term BRRRR was coined by Brandon Turner, then the Bigger Pockets podcast host.¹⁰ In the original strategy, the real estate investor purchased a property that needed a little love using cash or a hard money (private) loan. The assumption is that a renovation will add value. After the property has been renovated, the investor refinances with a traditional mortgage and pays off the hard money loan. The goal is to leave no/little original cash in the property. Going forward, the tenants pay the mortgage.

BRRRR is frequently misunderstood by clients who are new investors. It works best in an appreciating market, with stable or decreasing interest rates. Refinancing with rising or high rates may make the property cash flow negative.

Additionally, risk seeking investors may combine a hard money loan with other financing (HELOC, 401(k) loan, credit cards). That could lead to 100 percent leverage, which adds risk.

Financial planners can educate clients about the financial risks of a BRRRR strategy and encourage them to avoid overleverage.

1031 Exchange

A 1031 exchange is the process of exchanging one property for another like-kind property without triggering capital gains or depreciation recapture. 1031 exchanges can be forward (sell then buy), reverse (buy then sell), or simultaneous (buy/sell at the same time).

The deadlines are tight in a 1031 exchange. Taxpayers have a 45-day window following the sale to buy replacement property, or identify property that they must purchase within 180 days of the original sale.¹¹

Goals of a 1031 exchange are frequently to:

   • Capture the appreciation of an existing property

   • Use the equity from the relinquished property as the down payment on a larger replacement property (more doors)

   • Improve the return on assets by buying a replacement property with higher cash flow

   • Recapture the ability to take some depreciation against rental income when the relinquished property is close to fully depreciated

   • Moving to a more hands-off portfolio while maintaining tax deferral by exchanging into a Delaware statutory trust (DST)

A 1031 exchange transfers the low basis from the property you sell to the property you purchase. However, if the investor purchases a replacement property that is more expensive than the basis of the relinquished property, they will be able to take some additional depreciation expense adjustments.

1031 exchanges allow you to postpone taxation of the gain and depreciation, not eliminate it. They kick the can down the road. The taxpayer can do this indefinitely, however, and many real estate investors do, with the goal of passing property to their heirs with a step-up in basis at death.

Financial planners can help their clients identify 1031 exchange opportunities in their existing real estate portfolios. They can educate clients who haven’t done these transactions before about the requirements, the process, and the timeline. Clients will benefit from planners who help them clarify goals for the exchange, plan far in advance, set criteria for evaluating replacement properties, and analyze deals with them.

Six Types of Real Estate Investor Planning Engagements

When you think of real estate investors, it’s really a broad category. We categorize real estate investor engagements in six categories:

Beginners. These are generally younger clients without much real estate investing experience. They may have a property or two, or they are just working on buying their first property. Sometimes they are house hackers with an owner-occupied multifamily property, renting to roommates, or renting their home on Airbnb.

Portfolio builders. These clients have ambitious financial independence goals. They are looking to scale up their real estate holdings with the goal of eventually becoming work optional. Portfolio builder clients use leverage strategically to accelerate their pace of acquisition. They are actively buying, so they are not spending their real estate cash flow. Portfolio builders are also likely to use 1031 exchanges to grow the number of doors (units) and rental cash flow. As their businesses grow, they need to improve and optimize their operations and uplevel their real estate team.

Maintainers. These are clients who are happy with the size of their real estate portfolio. They’re not planning to increase or really decrease the number of properties that they own. They are busy people, with multiple competing priorities at work and at home. They may be hands-on or hands-off in their real estate businesses, but are generally not looking to scale up the size of their holdings. They are focused on maximizing the cash flow and the opportunities from their current real estate portfolio.

Suddenly wealthy. These are clients who have a sudden wealth event, such as a large inheritance, business sale, or employer company going public. They may have started out as regular clients in the beginner stage, but the sudden wealth affords them opportunities as accredited investors. The suddenly wealthy clients are frequently tax-focused, hands-off, and diversification seekers. They generally have lots of questions around syndications, private REITs, opportunity zones, and hard money lending.

Retiring. This is a group who is transitioning from active employment living in full or in part off their real estate income. They plan to spend their cash flow and are looking to optimize it. Generally, the retiring or retired client is more cautious, especially with the use of leverage. As time goes on, they may tire of the day-to-day responsibilities of real estate and transition to using a property manager or 1031 exchange into DSTs.

Completely comfortable. This type of client is not as concerned with cash flow or running out of money in their real estate business. They are the most concerned with succession and estate planning. How can they create multigenerational wealth for their kids and grandkids? A small section of these clients may be also interested in philanthropic solutions.

An Important and Growing Planning Niche

My sincere hope is that you will be interested in learning more about real estate and real estate financial planning. There are so few planners who incorporate real estate investing into their financial planning process—and so many clients who have questions. 

Endnotes

1. Joint Center for Housing Studies of Harvard University. n.d. “Rental Housing Stock.” www.jchs.harvard.edu/sites/default/files/03_harvard_jchs_americas_rental_housing_2017.pdf.
2. U.S. Census. 2021, May. “2021 Rental Housing Finance Survey Infographic.” www.census.gov/library/visualizations/2021/econ/2021-rhfs-infographic.html.
3. BatchData. n.d. “Q2 2025 Investor Pulse.” https://batchdata.io/wp-content/uploads/2025/09/q2_investor_pulse_full__3_.pdf.
4. Royal, James. 2025, February 20. “Survey: The Stock Market Is Again Americans’ Favorite Long-Term Investment.” Bankrate. www.bankrate.com/investing/long-term-investment-survey/.
5. Royal, James. 2022, July 20. “Survey: Real Estate Stays on Top as Americans’ Favorite Investment for the Long Term.” Bankrate. www.bankrate.com/investing/survey-favorite-long-term-investment-2022/.
6. See https://themillionairenextdoor.com/.
7. 26 USC § 469(c)(7). “Real Property Trade or Business.” Cornell Law. www.law.cornell.edu/definitions/uscode.php?width=840&height=800&iframe=true&def_id=26-USC-1023800616-350863529&term_occur=999&term_src=title:26:subtitle:A:chapter:1:subchapter:E:part:II:subpart:C:section:469.
8. Bradford Tax Institute. n.d. “Passive Activity Loss.” https://bradfordtaxinstitute.com/Endnotes/ATG_Passive_Activity_Guide.pdf.
9. Internal Revenue Service. n.d. “Audit Technique Guides—Real Estate.” www.irs.gov/businesses/small-businesses-self-employed/audit-technique-guides-real-estate.
10. Turner, Brandon. 2020, July 11. “The BRRRR Origin Story: How I Discovered This Amazing—No Money—Real Estate Strategy.” www.biggerpockets.com/blog/brrrr-origin-story.
11. First American Exchange Company. 2025, November 3. “A Comprehensive Guide to the 1031 Exchange Timeline.” www.firstexchange.com/learn/articles/1031-exchange-timeline.