The Real Estate Holdings of the Wealthiest Americans
Financial investing is a convoluted practice. In the United States, the parameters change daily. Wealthy investors hire financial advisors because it is impossible to keep track of the changes that occur in market prices, exchange rates, interest rates and product complications.
If there is a constant in investing (and that is a significant “if”), it is real estate.
Unlike so many other investment vehicles, ones that are speculative and only have value because someone else says it does, real estate is tangible. It’s in solid form. It can be seen, touched, traversed and trampled. It’s right there, in front of you.
Because of real estate’s long-standing role as a stanchion of investment strategy, investors and advisors consider it to be one of the bedrocks of a long-term investment strategy. That’s why, in real estate, it is common to hear someone say: “Don’t wait to buy real estate; buy real estate and wait.” Although it fluctuates the way all investments do, it fluctuates less because it is real and its value can be seen.
Spectrem’s latest study of the wealthiest investors in the country looked into their real estate holdings to determine how much those investors put into the long-standing and highly valued market.
Initially, The Wealthiest Americans asked investors to delineate the distribution of their total assets. On average, these investors, with a net worth over $25 million, had 66 percent of their assets in investable assets. The next largest fund was in investment real estate (10 percent), followed by insurance and annuities (9 percent). From a real estate standpoint, principal residence was valued at 3 percent of total assets for all of the wealthiest investors.
(The investable assets included fixed income products, equities, alternative investments, cash and liquid assets.)
Real estate thus represents a significant portion of an investment portfolio for the wealthiest investors. For advisors, that means they need to have knowledge of the real estate market, especially in terms of both the commercial rental property market as well as the Real Estate Investment Trust (REIT) market. Those are both markets that require intense study and attention to detail, and advisors must be prepared to present their own knowledge or the knowledge of associates to maintain a level of respect with the investor.
When it comes to specific real estate holdings, 88 percent of the wealthiest investors own a home, and 73 percent have a second home or a vacation home. The average value of the principal residence is $3.6 million, and the average value of the second or vacation home is just over $3 million.
Home ownership is a standard indication of success in America, but in terms of investment, it tends to be very long-term. While wealthy investors might be another home, they often maintain one principal residence and maintain ownership of their second home as well. As such, it is not the fluctuating ownership other real estate investments can be.
For instance, 61 percent of the wealthiest investors own residential or commercial rental property. Because of the consistent value of residential property, owning buildings that produce revenue through rentals is a popular investment option. Such ownership comes with its own headaches, but advisors can certainly assist investors in finding properties and management companies which produce revenue without producing endless landlord issues.
The investments in REITs, the mutual fund for real estate, has grown exponentially in recent years. In Spectrem’s 2014 study of the wealthiest investors, only 37 percent had investments in REITs. The new study showed 58 percent of investors with funds in REITs, and the mean value of those investments was $2.8 million. Unlike other forms of real estate investments, REITS tend to be more liquid, and they pay annual dividends, another selling point other real estate investments do not offer.
The popularity of real estate investing includes undeveloped land, which is just gaining value as it sits. Fifty-seven percent of the wealthiest investors own undeveloped land as part of their real estate ownership portfolio.
Time shares and vacation club ownership is also considered a form of real estate investing. The value of such ownership varies depending on the travel plans of the investor.
The value of real estate investing comes from the steadfast nature of the market and the fact that, in general, real estate values will continue to rise. Even when the stock market tumbles, real estate prices are often the first to return to previous levels.
Mark Twain explained the value of real estate investing in the succinct manner he often used to express his thoughts:
“Buy land,’’ Twain once said. “They’re not making it anymore.”
Top Takeaways for Advisors
Advisors can solve a number of problems for wealthy investors by understanding real estate investments. Real estate is an obvious spot for risk-adverse investors, but those who are looking for a more liquidity can certainly get into REITs. For initial conversations with wealthy investors, real estate is not a bad jumping off point.
For advisors with established relationships with wealthy clients, an examination of the current real estate market might be more attractive now than it was when the relationship began.
Develop a relationship with real estate experts in your own community as well as nationally. Being able to provide expertise on these topics will deepen your overall relationship.
©2016 Spectrem Group