November 2025
At our 2025 Investor Symposium, COO & CMO Stacey McKinnon and Wealth Advisor Kevin Rex unpacked the tradeoffs of holding vs. selling real estate.
They explored dead equity, increasing costs, tax considerations, and how real estate fits into your financial picture, while offering more flexible ways to access real estate income without the late-night calls.
Tune in if you're interested in…
Watch previous episodes:
Ep. 162 Why It Is Vital to Be a Healthy Skeptic
Ep. 161 You're Not Alone: How Advisors Can Help After Losing a Spouse
We are here to talk about a topic that Kevin and I have a love-hate relationship with, which is real estate. Because sometimes we love it. And owning property, owning additional properties outside of your home we love. And there's some benefits like income and other things. But there also are some costs, like 2 a.m. phone calls. Right, Kevin?
Yeah. I think people are wondering why real estate is on the lifestyle stage... because of the 2 a.m. phone calls that we deal with.
And so one of the reasons that this is a little bit more of a complicated topic is because over the last 60 years, owning real estate has been a good investment. Real estate is something that most people know as a good investment. Generally speaking, all the other things that we've talked about on some of the other stages and alternatives feel unknown.
But real estate feels known because we have homes and we live in our homes, and that feels like something that we should buy and own. But the challenges that real estate has changed over the last, especially probably five years, and there's some things that you have to know about it. And so Kevin and I thought it would be kind of fun to walk through a scenario that we've heard a dozen times we're going to role play for you, and actually showcase to you what the main problem of owning real estate is today.
Sounds good. Perfect. Okay, Kevin, we're friends. We're hanging out. We're sitting on the couch.
That's not the role-play part, right? We are friends.
I'm a braggy friend. I guess I'm a braggy friend. I say, Kevin, guess what? I'm making $60,000 a year in passive income owning real estate.
Wow. What kind of real estate do you own?
I own four duplexes in L.A.
Wow. Four duplexes. That's probably worth $2 million.
2 million? Yeah, actually, somebody down the street just sold for $2 million.
Do you enjoy owning real estate?
Mostly, but my tenant called me, 11 p.m. the other night because they were very mad that the other tenant was leaving dog poop on the lawn.
You know, $2 million. Yeah, you're probably earning about... I hate to be the bearer of bad news, but you're making about 3% on that property.
What?
Well, have you ever thought about selling it?
No, I can't sell it because I've been told that you shouldn't ever sell real estate. You have to keep it forever. And you shouldn't ever pay taxes either. So I'm not. I'm not going to sell it. But I didn't know it was making 3%.
Well, how much did you buy it for?
I bought it for a million.
Okay. Back of the envelope. Million dollars. You probably could sell it. Pay taxes and net, like 1.6 million on that.
Okay.
And if you invested in something else that doubled your return, let's say you got a conservative 6%. You'd be making closer to about $100,000 of income, and you wouldn't have any of those headaches that you were talking about.
Does 100,000 sound better than 60,000? It does, it does. Thank you. Kevin, thank you for being my advisor. Good role playing. Well, we wanted to work this out with you because you know what the number one problem with owning real estate is, is that people don't do the math. So especially when you inherit real estate from someone else, and you say, okay, I got this piece of real estate.
And it seems to be making income. And I've always heard that I should have passive income. But what we like to say is the math isn't math right? Is it worth the 3% return to deal with phone calls about dog poop on the lawn when there's other opportunities available? The challenge with that is the taxes are a real thing.
And so we're going to get through all of that today. We're going to talk about the pros, the cons and how we think about selling real estate. Because it's not as black and white as the role play that we just did. But it is something that we have to dig deeper into. So, Kevin, why don't you share why like how real estate has changed and why the math isn't math anymore.
Yeah, I think that's that's the first question to ask. So I think of my grandparents and my parents, uncles, and we all know people that have made a really nice increase in wealth by owning real estate. But you go back 30 years ago and the cap rates today are very different than they used to be. So the income that we make on real estate, specifically in the coastal area, so the East coast, West coast, we're here in California, you buy a property and you are typically earning about 3% back in the day.
You earned a lot more cash flow right out of the gate. As we all know, real estate values have gone up. So just to get your foot in the door, you have to save a lot more money for a down payment. You're typically going to take on a lot more leverage right? Borrowing because the property's worth so much more.
And that adds to the interest rate environment. Back in the day, we always hear like, oh well, when I bought it was 12% or 13% one. It was on a smaller value, but two, what happened? Interest rates were in a bull market for the next 30 years, and that allowed I remember my parents refinancing, pulling money out and their payment was lower.
Right. That's not the world that we live in anymore. So when you buy real estate in this environment, you typically aren't getting the opportunities to pull capital out. So you're kind of stuck in that environment. We can talk about legal and legislative stuff going on, whether it's California or other places. The tenants have all the control it, you know, it was it was easier 30 years ago than it is today.
You can't just go and kick somebody out. That's not paying rent and squatting in your property. You think about maintenance costs. We have insurance in California, so buying a property and just trying to get it insured is a whole nother cost on top of that. So when you start going down this path and then you think about institutions, they weren't around buying all this property 30, 40 years ago.
You're competing against money coming from overseas, all cash offers. You're dealing with institutions that are buying up whole neighborhoods. That is drastically shifted the environment to where when you think about getting into that situation and your net income is 3%, does that all start making sense? So that's a very long answer on kind of a lot that has changed when we think about real estate today versus ten, 20, 30 years ago.
Which is why we say it was a very good investment. But I have a squatter story for you. So we had a property. It was an Orange County single family home with an Adu. Somebody moved in, paid two months of rent, stopped paying rent and started Airbnbing the property to make money.
But you could kick them out right away.
No- nine months to kick them out. So we didn't get rent and had a situation where they were Airbnbing being the property. This is happening in California. And so where you say to yourself, oh, it would be really great. I think the rent on that property was about 4000 a month to get 4000 a month.
The reality was at the end of the year it was in the red and negative, because it was really hard to do that. And so it's one of those things where it sounds better than maybe it plays out in real life. And I think that that's that's hard when you have the scenarios, there are people who can tell you good real estate stories, and I have a few of those as well, so not all is made the same.
I don't want to just dog on it, but I think these are some realities that are important to take into consideration.
Yeah, to make it clear, we still love real estate, but we're talking about owning real estate outright in some of the headaches that can cause. Are there other ways, obviously, that we get exposure to real estate that investors can consider?
Yeah. So one of the things that I think has been very eye opening for me is, is the benefits of real estate funds. So you probably heard from grab earlier today, KBS on the stage next downstairs. So the difference between accessing real estate through a fund versus owning it individually. And by the way, we're not talking about your homes right now in these conversations.
We're just talking about owning an investment property, in a fund structure. Art, the fund managers we use, they are so smart and they're involved in everything to do with their real estate, including KSB. We'll look at things like climate change and not buy in places where local regulations will decrease profitability because of climate change. That's an interesting angle.
That's an example. They look at things like, costs. And because they own typically 10 to 15 properties in a fund, they can get, the easiest way to describe it is wholesale pricing on any construction, anything that you need to have happen to that fund. And then they're diversified geographically across the US. And oftentimes in different type and property types.
And so the question becomes if you wanted to buy a property and let's say it was $1 million property, you can either buy one property and you can manage it. And you could hire a property manager. But that cuts into the income even more. Or you could put money into a fund, be diversified across 10 to 15 different properties, and then not have to deal with the 11 a.m. or 2 a.m. phone calls.
And so we think that accessing real estate through a fund today is a really good way to access real estate. Now there is a there is a chance that real estate recovers from that. When I say recovers, I actually mean it goes down, and comes back to realistic pricing where it could become attractive again to buy. So I don't think this commentary from us is like a forever commentary, but today I think it's probably better to, buy through a fund than it is direct ownership.
Yeah. And I think it comes down to the headache piece of it. So the investment is one thing, but then how much work you have to do to get that investment so we can talk all day. We still love real estate. There's different opportunities out there. And obviously our fund managers are finding those opportunities. But to do that as an individual has gotten so much more complicated.
Managing a multifamily property in Oklahoma from California while working your full, full time job, it's just not that easy to do.
Yeah. And look, I, I think that there's an opportunity cost to it. Right. So one argument to our, role play we did earlier is we were just giving you a return on income. We weren't giving you a return on growth. So how the real estate was going to be growing over time. So typically speaking, in a good real estate market like we've had last 60 years, that return number is actually a little higher because you take the income return and the growth return and put it together, and that's higher.
The challenge is that, real estate flatlined or declined in many parts of the country. If you were to have bought a home a few years ago, it probably isn't. Hasn't grown as much as it has over the last decade. So what do you see as the opportunity costs of owning real estate, as opposed to exploring other investment opportunities?
I think the biggest like kind of red flag when it comes to just locking your money in is that illiquidity piece. Like you get into something and you're somewhat stuck unless you just take a drastic decision to get out of it. And so when you buy real estate, you can't just sell it any second that you want. So your money is now locked into that.
On top of it, you think about taxes. So one of the best thing about owning real estate is the depreciation, the write offs, early years. You're taking income and you're not paying any taxes on that. But what that does over time is it locks you in even further because your property values going up, your basis is going down and going back to the very first conversations, like if you don't want to pay taxes, so you have an illiquid asset because it's hard to sell, you have an illiquid asset because you're just stuck and don't want to pay tax.
And you think through what else could I be doing? So when you think of opportunity costs, are there other investments that I'd want to be opportunistic about if something happened? The market's correct. Morton comes up with a really creative private equity strategy. You can't just move money and take advantage of that. And then you think of opportunity cost of what if I want to take my family to Disneyworld?
Or what if I want to give to charity? Or what if I want to do other things with my money? You've missed out on the opportunity to to be able to take advantage of all of those things. So I think when you think of this, like to take a property, make 3%. Yes, there's the appreciation opportunity, but those have kind of gone away as far as just buy and hold before you're making seven, 8% and time was on your side.
Now you have to add value. Are we in the business of wanting to do an add on remodel kitchens, you know, create value that's not already there? Because especially in this local area, a lot of properties you're buying, you're they're not turnkey. And if they are you're spending a lot of money. So you've got to put that time and energy that sweat equity into to building that, that opportunity there.
So thinking through this, if we could sell that property, we've done this analysis. How many times in the last couple months do we, we run the analysis where you sell the property, you pay the tax. And now we're investing in something like our our private credit strategies, you may have heard of. They're yielding 7 to 10%. It actually doesn't take that long to recoup that loss, the tax loss that you've paid into.
Oftentimes it's around like a five year period. You don't have the headaches you can start investing in things or you have a lot more liquidity and a lot more options.
Yeah. We generally hear I would say three reasons that people say they're not currently wanting to sell their investment real estate. One is their parents told them not to. That's a real reason. That's actually probably the most common.
Number one reason: parents told me not to. And there's an aspect of that that I really value. I value the loyalty of that. I value the respect of that. I value the passing on of wealth to generations piece of it. The challenge becomes, if that loyalty stops you from enjoying time with your kids, if it stops you from passing on to the next generation, a life of what Kevin and I call memory bank deposits versus just bank account deposits.
And so when you're thinking about selling real estate, this tied to keeping it forever, because that was what Mom and Dad told us to do. I think that there's a part of that I don't want to discount, but I also think it's important to consider what are you leaving to your next generation? And and children. And I think what ends up happening sometimes is if you have multiple kids now, they co-own it.
Somebody has to make all the decisions. They're now in a position where they're managing real estate and they're negotiating between their siblings. And what we've seen is actually that deteriorates the family bond. It doesn't actually build it.
And I've seen people, clients, family members, where they're now having to retrofit everything. Right. I'm sure a lot of you have gone through this, whether it's plumbing or earthquake, and now they're putting all of this money into this property. It's not even yielding enough to cover that cost. And this isn't something that they necessarily wanted. And so it's at some point you kind of need to make that decision of, okay, mom and Dad, I love you, but this isn't worth me any longer.
Well, and the other two reasons are taxes the second most common reason. So not wanting to pay the tax and there is some bent if it's your own home, there's actually very good reasoning to not sell your own home. Because it could be very tax painful. But then if you pass away, it gets what's called a step up in basis.
Generally, if it's in the right type of account where your kids could inherit it without paying taxes. So your home is a little bit different of a story. I just want to clarify again. And then the and then the last reason is just they like the income. Right. And so these are kind of factors that come into play when people are trying to make decisions on the sell, whether it's sell or not.
And I know you've actually helped in the last couple of years, I think you've helped clients sell like $25 million of real estate this year.
Yeah, just this year.
Yeah. It's like Stacy has been very involved in helping people just create more efficiencies in their.
I'm not a real estate agent.
Just doesn't count on it. But I love to know a little bit about what you've learned. What does that experience teach you going through this with clients? What is their reactions been?
Yeah. So I've helped clients out. Restaurants, office buildings, industrial parks, like big factory industrial parks, single-family residences and then multi-family apartment buildings in the last year. And so when we look at all of those different types of real estate, they're so different. They have different income streams, different ways that you actually do a valuation on each of these properties.
And the number one thing that I've learned from selling all of these properties is that the real estate agent matters. So much, like it should not be your friend down the street who just got their real estate license. In all of these circumstances, the real estate agent actually can make a massive difference on your experience. So I'll give you some examples of some things that have played out for us.
So number one, we were able to sell a few properties off-market, meaning they didn't even go on the market because we used this agent. His name is Ron, who is in his mid 40s, but his entire career, what he's done, is at his firm. He makes relationships with all of the younger agents at the firm.
So whenever he has a property on the market, he first goes to all of the younger agents who he mentors and makes good relationships with, and they actually are able to find buyers without even going to market. So he actually internally networks within his own organization and firm to find the buying opportunities. And we've been able to close on some deals without even having to go to market.
The other thing that he does, which is amazing, he mostly works in office and industrial, is he is incredibly nice and lovely. So one of the things in office and industrial you have the option of doing is selling to your tenant. That sometimes can be a conflict of interest. You get two real estate agents involved. All of that can be more complicated.
Ron will represent both the buyer and the seller, which sometimes people feel is dangerous because you could have conflict of interest, but because he's the nicest person I've ever met, he actually is able to negotiate, and he was able to negotiate a deal between my client, who was the seller, and, the buyer in a way that I think really honored both the tenant and the landlord.
And because he represented both the fees were lower, too. So that was really interesting. And then on the multifamily property we had, we interviewed a lot of different agents. This is in Orange County. And what we realized through this experience is that local presence is incredibly important because there are a bunch of environmental issues in the area. And in order to get the buyers over the environmental issues, you needed to have somebody that had local expertise and history within that environment.
So the agent is incredibly important. The other thing that's maybe changed a little bit that I would mention, is that pricing is more important than it's ever been, because what happens now is when you put, put something on the market. It used to be, let's just put a higher price and see if anyone comes in. Like, let's just mark it up a little bit, put this higher price.
We'll just see if anybody makes an offer. Well now what happens is when you put a property on the market, it actually goes into an online system where buying agents can filter out your price based on cap rate. So if you don't price it accordingly, nobody will see your property. So working with the right agent who has local expertise, I actually really prefer very nice people to like you want to work with.
I mean, don't we all prefer really nice people?
But I think like a bulldog, someone that's going to go to bat for you.
But you don't want that. You actually want the, like, kind, caring, thoughtful person who is very thoughtful to how they price as well so that you have the most opportunities. And so we've been able to get some of these transactions done by, I think, having the right team in place, but then also doing the math on our end to make sure it authentically was the right decision for the client, too.
That's great. So we have hit on a lot, and I know we only have a little bit of time. That point number two I made of like nobody wants to pay the taxes. There are ways around this and you've explored that with quite a few clients. Can you share a little more about tax planning opportunities?
Yeah, I think that tax is one of the biggest things that drives people to just stay put. Obviously we talked about number two, if you want to sell a property, the first thing is understanding what are your goals. What do you need that money for. Because what we'll see is everyone comes in, I don't want to pay tax.
I want to do a 1031 exchange. So I want to move from one property to another. Well, if your goal is to reduce the workload and not have to manage a property, that probably doesn't solve that. Now there's ways to exchange from one property into another that generates higher cash flow or has higher upside growth. Or maybe it's a triple a triple net lease where you don't actually have to do a lot of work.
So there are ways to use it strategically. So we always start with does a 1031 exchange makes sense. If your goal is to be hands off then there's what's called a DST or a Delaware statutory trust. So you can actually exchange into something where a manager owns or doesn't own. The manager runs and takes care of that property.
The cost... their fees are usually higher, returns are usually lower, but strategically, if you don't know what you want to do with the funds but you're getting out of a property, this could buy you 3 to 7 years to kind of figure it out. Or maybe your income is going to be lower because you're retiring, and then you can realize those capital gains a few years down.
If it's somebody who's older, you know, potentially getting towards the end of life, you can wait for a step up in basis and not have to manage the property. So there are reasons why these make sense. There's what's called a 721 up right where you take that DST property, and now you exchange it into shares of owning a diversified fund.
And many of you have heard of opportunity zones. So with the new one big Beautiful Bill act, it's now those are available in perpetuity. So another opportunity to defer taxes not eliminate taxes. But with all of these different ways to to mitigate or defer or exchange taxes, what you're getting into matters the most. Because just to save tax but get into a property that's going to be more headaches or not create the return that you need or give you the liquidity that's maybe most beneficial for you.
It's you. Again, don't let tax be the biggest part of that decision. So when we run the analysis, we go through all of these different options and we say, okay, what are we trying to achieve? What's the best way to get there? What's the cost. And I always like to share. Like we never make decisions for our clients.
It's like, hey, these are your options. These are the pros. These are the cons. Let's get together and figure out how we can get you to the the goals that you want to achieve in the most efficient manner.
I would share that on a recent transaction. This is somebody who wasn't a client but was a co owner called me and said, hey, I'm going to 1031 exchange. My piece of the property said, oh, that's that's great. What are what are your main goals? And she's like, my main goals are to support my children for the rest of my life and to make sure that this money goes to them.
And I'm like a 1031 exchange will not make that money go to that. Your your kids will not allow you to support. That's just locking in more real estate. And so something that's really important is Kevin. They are always going to ask the first question, which is what do you want this money to do for you. And that's a really important part of the analysis.
And I just want to even reiterate, we don't get paid to do this analysis in any other way. We just think it's really important that our clients live their best lives. And so if we can, if real estate's getting in the way of that, it's really important to us to look at the numbers, and we're happy to help in whatever way we can to kind of get you to that place of feeling like the burden is relieved, and that you have opportunities in other places to make money.
We've helped many clients do the analysis. So if you're sitting there wondering, what should I be doing? Again, I said this before, knowledge is power. Let's figure out what your options are and so then you can make the best decision possible. We'd love to help you work through that. So thank you for being here.
The information presented herein is for discussion and illustrative purposes only and is not intended as financial advice. It is not intended as an offer or solicitation with respect to the purchase of any security or asset class. The views and opinions expressed by the speakers are as of the date of the recording and are subject to change. Morton Wealth makes no representation that the strategies described are suitable or appropriate for any person. It should not be assumed that Morton will make recommendations in the future that are consistent with the views expressed herein. Past performance is no guarantee of future results. Client stories are provided for illustrative purposes only and are intended solely to provide an example of Morton Wealth's process and methodology. These client stories are based on scenarios that an actual client might experience, but should not be construed as a representation that any client/prospective client has experienced or will experience a certain level of results or satisfaction. Your experience may vary based on your individual circumstances, and you should not rely upon this client story when making decisions regarding your financial adviser. You should consult with your financial advisor to thoroughly review all information before implementing any transactions and/or strategies concerning your finances.”
