#563: Beyond ROI: How To Balance Real Estate And Stocks In Your Portfolio Denver Investment Real Estate podcast

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#563: Beyond ROI: How to Balance Real Estate and Stocks in Your Portfolio

4d ago 1:12:32

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Finding financial advisors who truly understand real estate investing can be challenging. Most traditional planners focus on stocks and bonds, often suggesting investors liquidate their properties and move into REITs—without understanding the fundamental differences between these asset classes. In this episode, I had the opportunity to speak with Daniel Huffman, a rare breed of financial planner who not only understands real estate investing but actively practices it alongside traditional portfolio management.

Episode Overview

Daniel Huffman from Cornerstone Financial Independence Planning brings a unique perspective to financial planning by combining his background in the FIRE (Financial Independence, Retire Early) community with his expertise as a Certified Financial Planner. Unlike many financial advisors who primarily focus on traditional retirement planning and asset management, Daniel specializes in helping real estate investors build comprehensive financial plans that incorporate both direct property ownership and stock investments. Throughout our conversation, we explored how to structure a balanced portfolio, the importance of evaluating return on equity in real estate, and strategies for optimizing investment decisions across different asset classes.

https://youtu.be/fzFnQjnQm1E

Timestamps

(00:00) Introduction
(06:08) Financial Independence Community and Career Transition
(13:45) Strategic Asset Allocation and Factor Investing
(20:11) Risk Capacity versus Risk Tolerance Analysis
(28:34) Real Estate Return on Equity Analysis
(37:22) Portfolio Optimization for Long Term Investors
(46:58) Fee Structure for Real Estate Investors
(55:42) Market Outlook and Investment Opportunities Discussion

Building a Diversified Stock Portfolio Beyond the S&P 500

While many investors default to broad market index funds, Daniel suggests a more thoughtful approach to stock market diversification, particularly for those with significant real estate holdings.

“I believe in what’s called a factor investing strategy, which is further diversification within the stock side. You can actually build a pretty diversified factor portfolio that represents the entire US Stock market, but in different weights and with different tilts towards different factors or styles of investing,” Daniel explained.

Factor investing focuses on characteristics like size, value, profitability, investment, momentum, and quality, allowing investors to build a portfolio with lower correlation between assets.
Instead of just owning the broad market where the top 7-10 stocks represent about 20% of the entire fund, consider diversifying horizontally (large, mid, small cap) and vertically (by different factors).

This approach can be particularly valuable for real estate investors looking to complement their property holdings with stock investments that don’t simply mirror the same market forces affecting their real estate portfolio.

Evaluating Real Estate Performance Through Return on Equity

One of the most valuable insights from our conversation was Daniel’s emphasis on constantly evaluating real estate performance through the lens of return on equity and internal rate of return (IRR) rather than just looking at gross cash flow or appreciation.

“Cash flow helps you retire today, appreciation keeps you retired. I really call it a total return approach. I want to make sure that with cash flow plus appreciation, my return on equity is not too low,” Daniel shared.

Many real estate investors focus too heavily on property appreciation without considering how it compares to inflation. As Daniel noted, “His real return, his appreciation on the property above inflation was like 0.6 and 0.8% for those two properties.”
Regularly analyze whether your equity could be working harder elsewhere, especially for properties you’ve held for many years where appreciation has accumulated significant equity.

This perspective aligns perfectly with what we do at Property Llama, helping investors understand when it might be time to reposition their equity into higher-performing assets rather than remaining emotionally attached to long-held properties.

The Flat Fee Approach to Financial Planning for Real Estate Investors

Traditional financial planning models often create conflicts of interest for real estate investors, as advisors typically charge based on assets under management (AUM), which doesn’t include real estate holdings.

“If you have a million bucks in real estate and you’re working with an advisor that’s charging a 1% AUM fee, that’s 10 grand a year that advisor’s not making,” Daniel explained, highlighting the inherent conflict that can lead advisors to recommend selling real estate in favor of marketable securities.

Daniel structures his practice as a fee-only firm that charges a flat annual fee rather than a percentage of assets, eliminating the incentive to recommend against real estate investments.
This approach allows for truly objective advice on the entire portfolio, including decisions about moving between asset classes without the advisor’s income being affected.

For real estate investors seeking comprehensive financial planning, finding an advisor with this fee structure can make a significant difference in the quality and objectivity of advice received.

Making Smart Decisions About Property Succession and Legacy Planning

Many real estate investors dream of passing their properties to their children, but this isn’t always the best approach. I shared my own evolution in thinking: “I was sitting at a closing table and some of the best deals we bought in single family, especially in small multifamily, were from someone that inherited the property… And then three, five, ten years later, the property is just run into the ground.”

Daniel added valuable perspective on this issue: “You don’t want to pigeonhole your kids into having to live out mom or dad’s dream. You don’t want to give them a job that they’re not well prepared for and that they don’t want, and what you intend to be a blessing to them could actually end up just being a curse.”

Consider whether your heirs have the interest, knowledge, or capacity to manage real estate effectively before planning to leave them property.
Evaluate whether the “endowment effect” (preferring to keep what you already own) is influencing your decision to hold properties that you wouldn’t buy again today.

This realistic approach to legacy planning can help prevent family conflicts and ensure your wealth transfer achieves the outcomes you intend.

Conclusion

Building a comprehensive financial plan that balances real estate investments with traditional asset classes requires specialized knowledge and an advisor who understands both worlds. Daniel Huffman’s approach demonstrates how real estate investors can make more informed decisions about their entire portfolio, optimizing for total returns rather than becoming emotionally attached to specific assets.

Whether you’re evaluating your current real estate holdings, considering how to diversify into stocks, or planning for the eventual transfer of your assets, having an advisor who can objectively analyze all your investments without inherent conflicts of interest is invaluable. The next time you’re reviewing your financial plan, consider whether your advisor truly understands how real estate fits into your overall wealth-building strategy.

Resources Mentioned

Books on Investment Strategy:
Financial Planning Resources:
- Cornerstone Financial Independence Planning: cornerstonefiplanning.com
- Contact Daniel Huffman: [email protected]
Investment Concepts:
- Factor Investing Strategy
- Return on Equity (ROE) Analysis
- Internal Rate of Return (IRR)
- Risk Capacity vs. Risk Tolerance

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