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Top 3 Tips for Investing In Luxury Real Estate

Investing in real estate can add diversity to your portfolio while creating a sustainable source of passive income. If you’re a high net worth investor, you may be able to expand your horizons beyond the basic fix-and-flip by moving into the luxury real estate market. If you’re interested in investing in luxury properties, here are a few things to keep in mind before diving in.

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1. Identify Your Investment Goals

Generally speaking, the goal of investing in luxury real estate is to earn a return on your investment. But there’s more than one way to do it. When you’re choosing a luxury property to invest in, it helps to think about what you want to get out of your investment.

For instance, if you’re looking to turn a profit fairly quickly you may want to look at doing something in the flipping arena. You can find a luxury home that’s a bargain, renovate or remodel it and put it back on the market. If the home sells relatively quickly at the price you listed, you could have a decent amount of cash in your pocket in a short period of time.

If you want something that’s going to generate income on a more consistent basis, however, you may want to look at investing in a high-end vacation home that you could rent out or a multi-unit apartment building. If you really want to go all in, you could finance a custom build project for a luxury property to either rent or sell once it’s complete.

Related Article: 4 Questions to Ask Before Investing in Real Estate

2. Decide How to Finance the Investment

Top 3 Tips for Investing In Luxury Real Estate

When investing in a luxury property, one of the most important details to work out is how you’re going to bankroll the investment. If you’re sitting on a sizable nest egg, you may consider just paying cash so you can own the property debt-free. On the other hand, in some scenarios it may be better to borrow money for your investment.

Let’s say, for instance, that you want to buy a foreclosed mansion, renovate it and re-sell it. The asking price is $1 million and you believe that once the renovations are complete, its value would be closer to $2 million. The house is located in a hot market so you believe you can sell it in no time.

In that situation, you may be able to get a hard money loan to finance the flip. Hard money loans are short-term loans that are designed to be paid back in just a few months and they’re usually easier to get approved for than traditional bank loans. This type of loan usually carries higher fees and interest rates. But if everything goes as planned, you could pay it back fairly quickly without having to liquidate any of your own assets.

3. Choose the Right Market

Top 3 Tips for Investing In Luxury Real Estate

When you’re investing in a property that comes with a seven-figure plus price tag, it’s important to be sure that there’s a demand for what you’re trying to sell. Checking the temperature of the market you’re thinking of investing in before you start shopping around is a good idea.

If you’re looking to buy in a major metropolitan area, you’ll need to consider a number of factors, including the job market, cost of living, sales prices of comparable homes, median household incomes and the area’s overall economic outlook. If you’re thinking of investing in a luxury vacation rental, you’ll also need to think about the kind of traffic the area sees during peak periods and year-round.

Related Article: 3 Ways to Add Real Estate to Your Portfolio

The Bottom Line

It’s important to research prospective markets carefully to determine whether there’s sufficient demand to justify your investment. Otherwise, you could end up with an expensive property on your hands that may be difficult to unload. If you have any questions or want some a professional’s input, don’t hesitate to turn to a financial advisor. SmartAsset’s financial advisor matching tool can help you find an advisor who suits your needs. First you’ll answer a series of questions about your financial situation and goals. Then the program will pair you with up to three advisors in your area based on your answers. You can then read the advisors’ profiles and interview them to choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.

Photo credit: ©iStock.com/wcjohnston, ©iStock.com/davidf, ©iStock.com/themorningglory

Rebecca Lake Rebecca Lake has been writing about the nuts and bolts of personal finance for nearly a decade. She is an expert in investing, retirement and home buying topics. Her work has been featured on The Huffington Post, Business Insider, CBS News, U.S. News & World Report and Investopedia. As a homeschooling mom of two, she's always looking for ways to make the most of every dollar.
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