It should come as no surprise: High net worth real estate investments don’t exactly look the same as other real estate investments.
In this article, we’ll talk about the different types of high net worth real estate investments, why high net worth real estate investors tend to choose commercial real estate in particular to offset their tax bill, and how accredited investors can access a model that’s typically reserved solely for the super wealthy to position their own portfolios for optimum commercial real estate exposure without having to spend hundreds of hours on coordinating everything.
What Are High Net Worth Real Estate Investments?
When you think about high net worth real estate investing, a few topics come to mind: 1) buying luxury properties and vacation homes , 2) accessing private commercial real estate funds that are only available for accredited investors, and 3) high net worth individuals who are looking to own 100% of their own commercial property without using a syndication or any partners.
Why Do HNWIs Choose Real Estate?
High net worth investors invest in real estate at a higher rate than low net worth investors. Average investors tend to hold most of their wealth in their primary residence while high net worth investors tend to own a variety of income-producing assets.
Bloomberg reports more than 24 million households across the US have a net worth greater than $1 million (18% of all households), but most of that is highly illiquid. In fact, when you exclude home equity, the median net worth is around $60,000. Most average Americans barely have any invested assets. While they may be “paper millionaires,” due to recent increases in home valuations, they’re certainly not accredited investors.
What are the HNWIs doing differently, then? One thing they’re doing is investing in real estate.
The primary reason is tax optimization. Direct real estate ownership exposes their portfolios to tax benefits that they simply can’t get with any other asset class.
For example, if you’re an investor with a $5M portfolio made up of an $800k primary residence, $3.8M in public equities, and $400k in a mix of cash/bonds, you’re likely going to benefit from a strategy that allows you to use depreciation to offset your tax bill (and that’s particularly true if you or your loved one qualifies for Real Estate Professional Status, since you could potentially write off even active W2 income). Your long term estate plan can also utilize 1031 exchanges to avoid ever paying capital gains tax on any real estate that you transact, which will allow your estimated tax benefits to grow alongside your portfolio without having to incur ever-higher capital gains. At death, the cost basis of your property resets and your heirs can sell it at current market value, effectively eliminating that tax burden entirely.
The Different Types of High Net Worth Properties
Luxury Properties and Vacation Homes
High net worth investors own more luxury properties than the average person. However, high net worth investors also own more diamonds than the average person. That doesn’t mean that the diamonds caused their wealth; it means that the wealth caused their diamonds. The same thing can be said about luxury properties. High net worth investors aren’t buying these properties to boost their overall returns, they’re buying them because – like diamonds – they like them.
Prices for luxury homes are down across every tier and have been for the past 29 months.
It might make more sense to categorize luxury properties as a high-end consumer purchase, not an investment. Investments have some expectation for cash flow and return. In our opinion, only luxury properties that are marketed and sold as AirBnbs have the potential for significant gains after maintenance costs are factored in. Luxury properties that are purchased solely for individual use don’t have those same benefits.
One exception might be high-end flipping. If you buy a $1.5M fixer-upper in Southern California and plan to put $2M into it to bring it up to par, that might make more sense — although it will take quite a bit of active work. If you’re looking for something more passive, private commercial funds are an option.
Private Commercial Funds
This is a massive differentiator when it comes to high net worth real estate investments.
Certain government regulations stipulate that some investments are inaccessible for average investors. Regulation D (Reg D), for example, allows companies to raise capital through private placements without registering their securities with the SEC as long as investors qualify as “accredited.”
All other investors are barred from participating in investments such as these. In order to qualify as an accredited investor, you need to have one of these two covered:
Net Worth: A personal or joint net worth exceeding $1 million, excluding the value of a primary residence.
Income: An annual income of over $200,000 (or $300,000 combined with spouse) for the previous two years, with the expectation of earning the same in the current year.
You could also qualify through specific licensure, although it’s a much less common option. However, there are plenty of problems with syndications. That’s why some investors are eliminating the middleman entirely:
Owning 100% of Your Own Commercial Property
Owning your own $1-20M commercial property is, by definition, exclusive to the wealthy. In order to qualify to purchase a commercial property, a lender typically needs to see a significant balance sheet: both assets and income.
Investors who are looking into this option have usually been burned by an underperforming syndication in the past and are now looking for a better option. If you’re interested in learning more about owning 100% of your own commercial property but you’re not sure how to get started, give us a call. We’ll walk you through the whole process.
How You Can Access 100% Ownership of CRE
If you’re an accredited investor, you can access the same model that high net worth families throughout history have utilized to build their own wealth: The private family office.
Here at Custom Capital, we built a private family office that specializes in commercial real estate. If you’ve ever attempted to purchase commercial real estate on your own, you’ll know how fraught with pitfalls the process can be. You have to find properties that fit your buybox, find lenders who can actually close on commercial real estate, coordinate hundreds of documents (including the ALTA survey, inspection, appraisal, etc), and then coordinate all of the closing documents in order to actually cross the finish line.
Commercial brokers are happy to show you deals, but they’re not willing to help you with all of the other stuff. It can take hundreds and hundreds of hours to buy your own commercial real estate deals – but when you have a team, it can take as few as 3-5 hours. For high net worth investors looking to utilize the tax benefits of commercial real estate ownership, that can be a gamechanger.
Plus, we bake our fee into the purchase price of every deal we show you so that what you see is what you get.
If you’re interested in learning more about how to invest with Custom Capital, click here.
Own 100% of Your Next Commercial Property
Custom Capital is a private family office built for accredited investors who want direct commercial real estate ownership without the hundreds of hours.
