When brothers Kelly and Chris Edwards bought their first house in Raleigh, North Carolina, in 2002, they didn’t know much about real estate investing.
The twins, who were in their late 20s at the time, had both been working in commercial banking and noticed a trend among the tax returns they analyzed: The people with the highest net worth owned real estate.
Looking at one portfolio in particular, Chris remembers seeing that the client owned a handful of single family properties. “There was a house for sale two doors down from the one he owned,” Chris remembers. “We were like, ‘We might not be the smartest guys in the world, but we can figure it out.'”
U.S. millionaires see real estate as the top alternative-asset class to own this year, according to Morgan Stanley.
About 77 percent of investors with at least $1 million in assets own real estate, according to a survey released today by the New York-based investment bank’s wealth-management unit. Direct ownership of residential and commercial properties was the No. 1 alternative-investment pick for 2014, with a third of millionaires surveyed saying they plan to buy this year. Twenty-three percent said they expect to invest in real estate investment trusts, the second-most popular choice.
Wealthy investors are turning to a rebounding real estate market as fixed-income yields remain historically low and equities surge. U.S. commercial-property values rose 8 percent in the 12 months ended Jan. 31, and have jumped 71 percent since hitting their post-recession bottom in 2009, research firm Green Street Advisors Inc. reported today. The S&P/Case-Shiller index of home prices in 20 cities is up 24 percent from its 2012 low.
Home prices have been on a steady climb from the depths of the housing crash, leaving many wondering if it is still a good time to invest in the residential real estate market.
According to the National Association of Realtors, or NAR, 85% of major metro areas saw gains in existing, single-family home prices in the first quarter of 2015, while 14% saw a price decline.
However, low interest rates are still attracting buyers, according to the NAR, and limited inventory is behind escalating prices in some desirable areas. The NAR predicts continued steady growth in most of the country.
While many investors get a rise when it comes to the potential profits in real estate, that doesn’t mean all properties rise enough in value to justify the commitment.
“Some people buy real estate expecting it to appreciate a lot over time,” says David Reiss, a professor of law and research director of the Center for Urban Business Entrepreneurship at Brooklyn Law School. “But it can be risky – or even foolish – to pay so much for a property that you’re losing money on an operating basis just because you think it will appreciate.”
The wisdom in real estate, then, applies just as it would with stocks, commodities or any other investment class: The variables are many, the can’t-miss propositions few. So where should the savvy money go? And how does real estate fit into your overall portfolio?
As entrepreneurs find success with their primary business ventures, many search for the proper investments for their profits.
Of course, we can and should all start traditional tax preferred vehicles like an IRA and 401k. These are the bedrock of good ‘benefit’ planning for ourselves and our employees. I’m also convinced more entrepreneurs should consider rental real estate as an important part of their portfolio.
I realize many business owners shrug off this concept after the recent downturn in real estate values, but let me list a few reasons that may change your mind: