Real estate can create diversification in a portfolio while also acting as a hedge against inflation. Having a higher net worth could make it easier to invest in multiple properties in order to create passive income for yourself. High net-worth real estate investors are individuals who have $1 million or more in investable assets. If that definition applies to you, it’s helpful to have a strategy when adding real estate to your investment portfolio. Any time you have a portfolio of assets with a significant value, you may want to work with a financial advisor to help protect and grow those assets.
What Is a High-Net-Worth Real Estate Investor?
Net worth is a measure of assets against liabilities. In simpler terms, your personal net worth reflects the difference between what you own (assets) and what you owe (liabilities or debts). Someone with a high net worth has $1 million or more in liquid assets that they can use for investment.
Very high net-worth investors have $5 million or more in liquid assets. Investors who fall into the ultra-high net worth category typically have liquid assets greater than $30 million. A higher net worth can be a good thing, as it suggests greater financial stability. It can also create more opportunities for investment in residential or commercial real estate.
High Net Worth Real Estate Investing Strategies
There are multiple ways to add real estate to a portfolio, each of which carries different levels of risk and reward. High net-worth real estate investors may focus on just one or spread their investment dollars out across multiple investment types. Here are some of the different ways you might invest in real estate with a higher net worth.
1. Rental Properties
Rental properties allow you to collect rent payments from tenants, typically on a monthly basis. You might choose to invest in single-family homes or multifamily homes, such as a duplex or an entire apartment building.
Owning rental property could be appealing if you want the benefit of monthly income. You don’t necessarily have to handle the day-to-day management either. Instead, you could use some of the rental income generated to pay a property manager.
2. Short-Term Rentals
Investing in short-term rentals is another option for high-net-worth investors who want real estate exposure. With short-term rentals, you may only be renting the property for a few weeks or a few days at a time.
Airbnb is perhaps the most recognizable short-term rental investment model. If you’re interested in Airbnb investment as a high-net-worth investor, you might choose to purchase a suite of properties in different locations to rent out.
However, it’s important to consider zoning restrictions and the overall temperature of the short-term rental market. Should the popularity of short-term rentals wane, long-term rentals may provide more stability with less volatility.
3. Real Estate Investment Trusts (REITs)
A real estate investment trust (REIT) owns and operates investment properties. REITs can specialize in different types of properties, including:
- Storage space
- Nursing or assisted living facilities
- Student housing
- Retail space
Investing in a REIT offers the benefits of property ownership without having to purchase real estate directly. That might appeal to you if you’re looking for the tax benefits of real estate ownership along with dividend income, without the headaches associated with managing property.
4. Commercial Properties
Commercial property investment typically means purchasing commercial real estate, then leasing it out or flipping it for a higher price. For example, you might purchase a strip mall and lease out individual units. Or you may consider purchasing a unit franchise to create current income before selling it to another buyer later.
One thing to consider with commercial properties is long-term viability. Certain sectors, such as retail, may be more vulnerable to market fluctuations than others. If you own a strip mall that’s largely populated with smaller mom-and-pop style shops, those could take a hit in an economic downturn. That could put you at risk of seeing your lease income dry up.
5. Fix and Flip Properties
House flipping may appeal to high-net-worth real estate investors who don’t mind getting hands-on with investments. The end goal of house flipping is to sell properties for more than what you paid for them.
Flipping properties can be tricky, as you have to be able to gauge with a fair degree of certainty how likely it is to sell. It also requires you to be accurate in budgeting renovation costs in order to maximize profits.
6. Turnkey Properties
Turnkey properties are properties that have been renovated and are ready to be leased or rented. The upside of turnkey properties is that there’s nothing you need to do to get them ready for renters. It’s even possible that you might find someone selling a turnkey property that already has steady renters in place.
There are numerous companies that offer turnkey properties for investment, which can make the process of finding one easier. However, it’s still important to do your own research into the neighborhood, rental rates and property values to ensure that a turnkey home is right for your portfolio.
7. Real Estate Crowdfunding
Real estate crowdfunding allows you to invest in property by pooling your money with other investors. When you join a real estate crowdfunding, you may have your choice of residential or commercial properties, with initial investments ranging from a few hundred to several thousand dollars. Crowdfunding real estate could be something to consider if you’re looking for a longer-term investment. The typical holding period is anywhere from five to seven years.
Benefits of Real Estate Investing
Investing in real estate can yield numerous benefits to investors, regardless of net worth. Here are some of the main reasons to consider real estate for diversification when you have a higher net worth.
- Cash flow: Owning rental properties can generate steady cash flow month to month for investors. That cash flow can be used as a secondary source of income or help to pay down the mortgage on the property.
- Passive income: Passive income is essentially money that’s earned on autopilot, with very little active work required. High-net-worth real estate investors can earn passive income either through rental property ownership, dividends or a combination of the two.
- Inflation protection: Inflation can be detrimental to an investor’s portfolio as rising prices reduce purchasing power. Real estate is often viewed as a hedge against inflation since rents tend to rise along with other prices.
- Tax advantages: Rental property owners can deduct numerous expenses on their taxes, including property management fees, mortgage interest, property taxes and maintenance costs. All of that can result in savings at tax time.
- Diversification: A diversified portfolio is central to managing investment risk. Real estate has a low correlation with the stock market, which can help with balancing risk over the long term.
- High returns: Real estate returns can potentially outpace those generated by stocks or other investments. Higher returns can translate to higher risk, however, since you’re banking on real estate’s sustainability throughout market ups and downs.
The Bottom Line
High-net-worth real estate investors can choose from multiple paths when building a diversified property portfolio. The most important thing to keep in mind with any real estate investment is to do your research first so you understand where you’re putting your money and the potential risks involved.
Financial Planning Tips
- Consider talking to your financial advisor about the benefits of investing in real estate and how it could play into your overall financial strategy. If you don’t have a financial advisor yet, finding one doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you’re interested in increasing your net worth, paying down debt is a good place to start. You can also work on growing your investment portfolio. Opening a brokerage account can allow you to invest in stocks, mutual funds, exchange-traded funds or even cryptocurrency. Meanwhile, you can build savings for the long term by investing in a traditional or Roth Individual Retirement Account.
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