There is something so grounded about real estate.
Real estate has always been a standard investment product for wealthy investors. It is real, its value is apparent, and the supply of real estate is finite, making it a less volatile investment.
It’s how Donald Trump makes his living when he is not running for president.
Investing in real estate does run through cycles, and our research shows that real estate is not among the most popular investment vehicles available to affluent investors. But there are indications of the type of investors who prefer investing in something as solid as real estate.
“Real estate investing takes several different forms, and one of the more popular forms is to own a second or vacation home,’’ said Spectrem president George H. Walper Jr. “There are other tangible forms of real estate investing, including undeveloped land and residential rental property. But a popular form that draws a lot of interest from investors is real estate investment trusts, which provide different investment options than standard real estate investing does.”
First, some numbers.
Investable real estate is nearly equal to principal residence in the distribution of wealth among Ultra High Net Worth investors. In 2015, principal residence was 8 percent of a UHNW investor’s assets, and investable real estate was 7 percent.
Those percentage are much difference as wealth drops. For Millionaire investors, the principal residence is 16 percent and investable real estate is 7 percent. For Mass Affluent investors, principal residence has grown to 30 percent and investable real estate is at 6 percent.
The appeal of real estate investing is not universal. Among UHNW investors, only 16 percent own undeveloped land and 20 percent own residential rental properties. But 25 percent of UHNW investors are invested in Real Estate Investment Trusts.
An REIT is like a mutual fund, although it must have 75 percent of its assets invested in real estate and 75 percent of its gross income must be derived from real estate. The good news for investors is that REITs must maintain dividend payout ratios of 90 percent, and investors can reinvest those dividends to compound that income over time.
Among Millionaires, 13 percent plan to invest in real estate in the coming year. Approximately 15 percent are invested in undeveloped land and rental properties, but only 16 percent are invested in REITs. The percentage drops to 5 percent for Mass Affluent investors.
There are other forms of real estate ownership, although their value as an investment is questionable. For example, 16 percent of UHNW investors own a time share, and 6 percent own vacation club memberships.
Segmenting investors indicates a difference in the interest in real estate investing. Among UHNW investors, those that are between the ages of 48 and 54 show the greatest interest in real estate (37 percent).
Another segment of affluent investors interested in real estate ownership are Business Owners. Among UHNW investors, Business Owners are most likely to own a second home (49 percent), undeveloped land (28 percent), residential rental properties (38 percent, and commercial rental properties (22 percent).
That is also true among Millionaire Business Owners, with 22 percent owning undeveloped land, 30 percent owning residential rental properties and 14 percent owning commercial rental properties.
The occupation least interested in real estate ownership appears to be Senior Corporate Executives. Among UHNW investors, only 10 percent of executives own undeveloped land, 9 percent on residential rental properties and only 5 percent are in commercial rental properties.