Real estate has long been considered a safe investment, whether you own, flip, or rent. If you have the money, you may want to expand your portfolio into the luxury real estate market. Before you jump in, here are some of your options for investing in luxury real estate.
Real estate isn’t considered luxury just because it’s expensive. It must also be unique, exclusive, and perceived as superior.
High-end buyers want access to luxury activities like shopping, dining, and the arts, as well as proximity to other luxury homes.
Luxury real estate investors can flip a mansion, invest internationally, buy a luxury condo, buy a high-end vacation property, or build from scratch.
Luxury real estate prices were hot and had been soaring. Case in point: The most expensive residential real estate sale of 2019 was a Manhattan penthouse that sold for $240 million, according to data from Miller Samuel Inc. That’s almost $166 million more than the previous year’s top New York City sale.
With the wealth of the world’s richest people growing, it had seemed that the potential market for luxury properties was larger than ever. Then the coronavirus pandemic hit, and prospects for real estate prices and real estate, in general, have become notably uncertain.
Bargains may be available for those with cash. However, the willingness of potential investors to step up and buy them is doubtful, to say the least.
Whether you’re interested now or thinking about future investments, here are key principles for investing in luxury real estate based on market growth before the pandemic.
What Is Luxury Real Estate?
It’s crucial to understand the features that characterize luxury property before you invest. A high price tag alone won’t put a property in this category. “It has to be unique and exclusive—in a good way, in a desirable way,” said Randy Char, senior VP of operations at One Queensridge Place, a luxury Las Vegas high-rise. “People who are wealthy will pay a premium for something that’s perceived to be superior.”
High-end buyers want locations with access to luxury activities such as high-end shopping, dining, and the arts, as well as proximity to other luxury homes. A trophy address, like Park Avenue in New York City, adds value. Having a storied history doesn’t hurt, either. Many luxury buyers seek the natural beauty of a waterfront location, or at least views of a river, ocean, or lake. Others want countryside or mountainside views.
High-end buyers desire many of the same features that all buyers want but on a grander scale. They want privacy and security, sometimes to the point of seclusion. They want beauty inside and out and can afford custom architecture, custom design, over-the-top attention to detail, and opulent finishes.
They also want amenities on top of amenities: a chef’s kitchen, luxury pool, expansive owner’s suite, and outdoor living space, not to mention home automation, motion detectors, car lifts, and temperature-controlled wine cellars. Many also want space, but you certainly don’t need a massive home to live in luxury.
When choosing a luxury home, it’s extremely important to think about the aspects of the property that can’t be changed, said Mark Fitzpatrick, CEO of RUHM Destination Marketing, a marketing service for luxury properties. “You can’t change the path of the sun, the location of the ocean, or the fact that there is a flight path for large airplanes over your head. Ugly wallpaper in the bathroom is far less important than the weather,” he said.
How Much Does Luxury Real Estate Cost?
In markets where prices are generally lower, you could need as little as half a million to own a piece of luxury real estate. But you’ll need at least $1 million to buy a luxury property in most major cities, and the entry price point goes up where the cost of living is high. According to Christie’s, it’s $3 million in San Francisco, $5 million in Los Angeles and New York, and $7 million in London.1
Luxury buyers often pay cash, but a jumbo mortgage is another option. If you’re financing the purchase, you’ll need a large down payment, excellent credit, proof of income and assets, and large cash reserves.
How to Invest in Luxury Real Estate
If you want to invest in luxury real estate, there are several paths you can take. Whether you buy for yourself, rent, or flip, here are some options:
Luxury homes tend to be more well-maintained than non-luxury homes, which means there is potential for fewer rehabilitation costs. The downside to this is that competition may be higher among luxury home flippers, but the upside is that there is less competition in the luxury-home market overall. That’s because there are fewer people with the know-how to secure financing, negotiate like a pro, and execute a luxury property rehab project at a high level.