As real estate prices continue to decline, many readers will think that including real estate as a factor in becoming a millionaire is crazy. But despite the floundering real estate prices, long-term analysis and research results very much support the importance of real estate as an important factor in increasing generational wealth. In fact, today’s real estate prices present an opportunity for those investors with the right intentions.
Just to review our “How to Become a Millionaire” series, Spectrem Group continually conducts both online, telephone based quantitative research with wealthy investors. Additionally we conduct qualitative research through one-to-one interviews as well as focus groups with affluent households. Our research has identified 8 factors that appear commonly among wealthy households. While the various households do not equally adopt each factor, many of the factors are consistent and may help you as you pursue your own quest for greater asset based wealth.
The factors include the following:
2. Hard Work and Average Hours Worked.
3. Business or Professional Practice Ownership
4. Slightly aggressive risk tolerance
5. Use of professional advisors
6. Balanced portfolios that include alternatives
7. Investment Real Estate – our topic for today
8. Willingness to invest in new but well research ideas and concepts
Prior sections can be viewed at MillionaireCorner.com.
While in the past few decades there was a common belief that your primary residence was one way to accumulate wealth, that fundamental belief has been shaken in recent years due to the drop in the value of real estate. Additionally, early in this decade and at other times, many individuals made a profit by buying and then flipping real estate. Neither of these is the way to build long term generational wealth. While it is nice to have a principal residence that you may enjoy living in, be sure that you acknowledge that you are primarily living in a residence because you enjoy it and can afford it, and not because you see it as a primary source of future wealth.
As you can see by the charts attached, wealthy investors generally own various types of investment real estate ranging from residential rental properties to commercial properties. The most interesting chart is the chart below with the ownership of investment real estate by those households with $25 million plus of net worth. Note that almost half own residential rental real estate, commercial real estate and undeveloped land. A third own other types of investment real estate. It is also important to note that the percentages that own real estate has increased since 2007 because these wealthy households realize that the market currently provides opportunity for those who can afford it.
Why are Residential, Commercial Real Estate and Undeveloped Land important for the development of wealth? Primarily these households are not buying these properties for the short term. Instead, they intend to buy and hold these properties. The rental incomes generally cover any sort of financing that they may have participated in. (Sometimes it makes more sense to finance …especially at low interest rates…than to pay cash). At the same time, the current market reports indicate that many individuals are paying cash for properties. Do the math and determine whether you have the ability to take advantage of the opportunities currently available.
The chart above highlights the ownership of rental properties by Millionaires and households with $5-25 million of net worth. As you can see, as wealth increases, so does the likelihood of purchasing real estate as well as the overall value of the assets invested in real estate.
Not only does investment real estate provide a long term investment opportunity, for many households it represents a long term income stream. Many households will leave investment properties to their children and grandchildren providing that individual the decision of whether to sell the property and cash out or to keep the ongoing income stream. Because of this flexibility, investment real estate provides a great long term opportunity for building family wealth.