Client Situation: Mark is a 65 year-old single father who has built a substantial net worth through his small business. He owns seven rental properties and is planning on transferring three of these properties to his three children now that they are adults. Even though these properties were paid off, he did not want to transfer these homes to the kids without mortgages because he wanted them to have the responsibility of making monthly mortgage payments. Mark decided to refinance three of the homes as a first step to transferring these properties to his children. His CPA told him that he would not be able to deduct the interest on the newly refinanced mortgages against the rental income so he would need to have enough investment income to get maximum tax benefit from the mortgage interest.
Investable Assets: Mark has $7M in investable net worth, $6.5M in his Living Trust and $500k in IRAs.
Beacon Pointe Value Add:
We understand that every client has their own unique financial circumstances. Our success in the case was predicated on:
- Education – Mark asked us to walk through his options for creating investment income. We discussed that the current interest rate environment meant he would receive low yields in publicly traded debt unless he wanted to take a lot of credit risk, which we would not recommend. Since he had plenty of liquidity and cash flows we discussed the opportunities in the private markets. With the dislocation of specialized real estate lending after the era of the Dodd-Frank Act on the banking sector, there was a market opportunity to receive higher yields if the client was comfortable with illiquidity.
- Portfolio Management – The client already owned seven rental properties on top of his primary home, so we did not want to add Real Estate Equity Risk to his overall portfolio. Adding Private Debt would be a good diversifier for his liquid equity portfolio and generate significantly higher yields than the public markets. We were able to offset all his mortgage interest through a $400k investment in a Private Note with an 8% yield that was on Beacon Pointe’s approved list of investment strategies.
- Expertise – The Research Team at Beacon Pointe had already completed the due diligence to find opportunities in the Private Debt space. In this case, the issuer of the Notes had a long-term relationship with Beacon Pointe, and we had previously invested in their Real Estate Funds. The Research Team felt the risk/reward opportunity of these Notes would be a good fit for some of our client portfolios.
- To be able to deduct mortgage interest from refinanced loans
- To generate yield that created a positive spread above the interest paid
- Not to take excessive risk to create this yield
- Increase the diversification of the client’s investments
Beacon Pointe Action Items:
- Investment Strategy
- Developed and implemented a customized investment plan tailored to Mark’s financial goals and objectives
- Take advantage of the liquidity premium in private markets
- Provide client access to a Private Note that had these unique characteristics:
- 8% yield
- Equity investors providing additional capital protection
- Entity lent with an average loan-to-value of 50-60% providing additional layers of capital protection
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Important Disclaimer: Case studies presented are hypothetical scenarios and intended for illustrative purposes only. They do not represent an actual client or an actual client’s experience, but rather are meant to provide an example of the Beacon Pointe’s process and methodology. An individual’s experience may vary based on his or her circumstances. There can be no assurance that the Firm will be able to achieve similar results in comparable situations. No portion of this case study is to be interpreted as a testimonial or endorsement of the Firm’s investment advisory services, and it is not known whether the hypothetical clients referenced approve of the Firm or its services. The information contained herein should not be construed as personal investment advice.
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