Investing in real estate isn’t always a glamorous business, but luxury homes can add some bling to your portfolio.
According to Christie’s International, which surveyed 81 international luxury markets, luxury home sales increased by 11 percent annually in 2017. In some markets, limited supply and heightened demand allowed luxury housing to outpace non-luxury home sales.
In the U.S., a stable economy has helped drive luxury home sales, despite rising interest rates and questions over how tax reform might impact wealthier investors.
[See: 8 Ways to Cash In on a Hot Housing Market.]
“The equity bull market is in the longest stretch in American history and as a result, there’s an increasing activity among high net-worth individuals,” says David Parnes, luxury real estate expert and co-host of Bravo’s “Million Dollar Listing Los Angeles.” “This should continue to boost portfolios and create a wealth effect, increasing confidence and funds to invest in luxury real estate.”
Investing in high-end properties isn’t limited to the elite, however.
“Newly created net worth is driving a new buyer, including millennials,” says Patrick van den Bossche, president of Realty Executives International.
If you’re ready to invest like the rich, here’s what you need to know about moving up the property ladder with luxury real estate.
Adjust your perspective. Luxury real estate isn’t your run-of-the-mill property investment.
“They say all real estate is local, but that’s not the case when it comes to luxury real estate investments,” says Jason Haber, a broker with Warburg Realty in New York. “The luxury market is a global market; the buyer pool is international. As a result, it appeals to a larger audience and thus can command higher prices.”
That can translate to elevated returns for investors.
“Luxury real estate investments provide higher yields than the stock market without as much volatility,” says Parnes’s business partner and co-host, James Harris. He says real estate investors in top-performing markets are enjoying a windfall, and that “luxury real estate values in the U.S. will always increase over time.”
High-end real estate may also hold up better when traditional real estate or stocks flag.
“Luxury real estate investments tend to rebound better when markets soften because they’re considered desirable, are generally unique and tend to have strong intrinsic value that surpasses the cost of replacement,” says van den Bossche. “One significant benefit of owning real estate is that it will never be at zero value, even in a dismal market, while stocks can plummet to such a level.”
Luxury markets aren’t created equally. In general, luxury real estate can be lucrative, but some markets may be hotter than others, both domestically and internationally.
“In New York City, there now exists supply saturation and that’s putting constraints on price,” Haber says.
He says luxury properties saw tremendous appreciation in value from 2013 to 2016 as a new generation of luxury condos entered the market.
“The ‘Billionaire’s Row’ developments along the 57th Street corridor put an exclamation point on the luxury market,” Haber says. But, “that exclamation point has turned into a question mark as oversupply has become a real issue.”
[See: 7 REITs to Buy for Regular Income.]
In 2017, Seattle lead the way with the most robust year over year luxury sales growth, followed by Denver, Dallas and San Diego, according to Christie’s. Santa Fe proved to be the hottest luxury second-home market, with sales volumes of million-dollar-plus homes reaching levels not seen since the pre-housing crisis era.
Internationally, Vancouver, Singapore and Vietnam have emerged as some of the strongest luxury housing markets. Studying market trends is crucial when choosing where to invest in luxury properties.
“Most major markets are undergoing a slowdown in luxury real estate,” says Edward Mermelstein, property investment advisor and partner at One & Only Realty Holdings in New York. He cites pullbacks in still-developing countries affected by economic and political instability, such as China and Russia.
However, Mermelstein notes that in specific cities, such as London and Hong Kong, luxury real estate is capable of outlasting economic downturns. “In fact, when economies slow down, most luxury properties in the aforementioned markets will maintain their value.”
Focus on allocation, allocation, allocation. Direct ownership is one avenue to luxury real estate investments; real estate investment trusts, exchange-traded funds and crowdfunding are alternatives that may offer fewer barriers to entry. How you choose to invest depends largely on your investing style, objectives and how much of an initial buy-in you’re willing to make.
Van den Bossche says investors who are venturing into luxury real estate through crowdfunding should be aware of what they’re investing in. Crowdfunded investments may veer more toward commercial, rather than residential properties, “because commercial tends to be much more capitalization-rate focused, which is driven by cash flow from tenant payments.”
REITs can offer exposure to luxury homes, apartments and vacation properties, as well as luxury hotels and resorts, but cost must be weighed against returns.
“Most of the residential REITs tend to be private syndicates created by family offices or wealth management companies,” van den Bossche says. “They tend to provide some incremental marginal returns that are impacted by REIT management fees, administration fees and cost of ownership.”
If you have the means to invest in a luxury property directly, due diligence is critical.
“An investor needs to work with their financial advisor and determine how much exposure they want in their portfolio,” Haber says. “It’s important to remember that luxury has a price tag and it’s an expensive one.”
Brothers Zach and Cody Vichinsky, co-founders of Bespoke Real Estate in Water Mill, New York, say it’s all about understanding a property’s specific nuances and determining your end goal for investing.
“In most locations, investors need upwards of $1 million to even start looking at luxury real estate options in markets,” Zach Vichinsky says. “Once the property is secured, the options are endless and can extend from building custom homes to flipping them to offering their new purchase to potential renters.”
Cody Vichinsky says investors should get to know the location and market they’re buying into that to identify properties that will result in a strong return. It’s also important to consider your end game and exit strategy.
[See: 8 ETFs to Play a Robust Real Estate Market.]
“Being prepared to pay top-dollar prices, managing expectations and understanding ROI are all ways to lower risks,” he says. “When you’re investing in a property that comes with a seven-figure price tag, it’s important to be sure that there’s a demand for what you’re trying to sell.”
Zach Vichinsky cautions against succumbing to tunnel vision with luxury properties. “Having a diversified portfolio should be important to any investor. Sticking to a single market can get stale and there are many inherent risks to that approach.”
More from U.S. News
The 10 Best REIT ETFs on the Market
8 REIT Categories With the Wind at Their Backs
9 Strategies for Tapping the World’s Growth
How to Invest in Luxury Real Estate originally appeared on usnews.com
