Why the Wealthiest Invest in Real Estate

Real estate has always been an anchor investment.

If you are reading this, you probably own a home and possibly a lake house, cottage, condo, beach property or ranch. You might have a couple of investment properties. You probably know more than you think at this stage of your career and life about the value of real estate. After all, you’ve probably moved at least a few times, selling and buying houses as your family needs have changed. And chances are those moves have been profitable ones, as price appreciation for real estate has consistently outperformed most other asset classes.

If you’ve sold a property recently, you know how extraordinary this performance can be. Between August 2020 and August 2021, the average home price in America rose by 14.9%. In the markets in which I operate, these rises have been even higher. In Denver, the figure was 17.9%. In Miami-Dade, an amazing 28.7%. And here in Austin, home prices rose by a staggering 39%.¹

While there are many factors behind these dramatic and often unprecedented rises, they are in fact an example of the foundational stability of real estate as an asset class. Yes, stability. A look at the past 30 years reveals steady growth patterns of 7% to 10% a year on average in those three dynamic metro markets. Nationally, the annual average price appreciation since 1992 has been 5.3%, which factors in a lot of unpromising rural and rustbelt markets that saw little or no appreciation.² There is no other asset class like it.

This is true of commercial real estate, as well. In a year when many naysayers were forecasting doom for commercial real estate as a result of the pandemic and the shift to working from home, the reality of the past year told a different story. Every category of commercial real estate has seen price appreciation in the past 12 months, even retail, and some sectors such as industrial (9.4% in one year) and multi-family residential (7.6% in one year) have thrived.³ As the pandemic subsides and growth accelerates, we can expect even greater growth across all real estate segments during 2022.

Yet, amidst this growth, most of the financial advisors and wealth managers you’ve likely spoken with over the years heavily favored equities, fixed income products, exchange traded funds (ETFs) and market funds instead of real estate. Without question, these other vehicles are all important parts of a diversified portfolio. After all, the markets have largely done well over the past few years. But relying on financial products alone is at best a strategy that means that at best you have been leaving money on the table and not maximizing your hard-won wealth.

Why wouldn’t advisors steer you towards the tangible, timeless value of real estate? There are reasons, and they are logical ones, even if they lead to suboptimal outcomes. First, most financial advisors earn their keep from selling and trading proprietary financial products, so asking them about real estate is the equivalent of asking a car dealer to sell you a boat. They are neither knowledgeable nor experienced, and mostly not very comfortable, when it comes to real estate.

Second, until recently there haven’t been many easy ways for individuals to participate in the wider real estate market in a scaled manner. Real Estate Investment Trusts (REITs) have largely been limited to institutional investors, and even where they are available to individual investors it is still the case that financial advisors often “go with what they know” instead.

But there are individuals, the wealthiest ones, who make a point of ensuring real estate is a central pillar of a healthy investment strategy. Family offices and other institutions representing the top of the one percent all invest heavily in real estate. The ownership of properties and land of all kinds – residential, commercial, agricultural – is how the very wealthiest become wealthier still.

This isn’t a secret, nor is it rocket science. The wealthiest are able to take advantage of these opportunities because their advisors have a larger-scale, longer-term focus on actual wealth appreciation. They seek opportunities, cherish value preservation, and they understand true wealth inevitably involves real property of all kinds.

As some of my other articles explain, there are also some tangible tax advantages and opportunities that can be unlocked by a structured approach to real estate investing. Beyond that, the wealthiest have discovered that real estate can achieve stable and often robustly predictable cash flows. It is less volatile than other asset classes and the very wealthy appreciate the extent to which the investor ultimately has more control over investment performance and returns.

The extent to which family offices representing the wealthiest invest heavily in real estate is unusual in the financial services industry. According to a report sponsored by Evergreen Property Partners, real estate makes up an average of 22.7 percent of family offices’ investment portfolios in the United States. According to the UBS/Campden Wealth Global Family Office Report 2019, a global survey of family offices, a full one-third of those surveyed said they planned to increase that percentage even more.⁴ Simply put, the value-centered approach of family offices favors real estate as an unparalleled engine of wealth creation.

Real estate’s value as a hedge against inflation is certainly one factor driving the wealthiest investors. Long dormant and dismissed, prudent wealth management must take inflationary pressures into account. They are real and may last longer than many think. Inflationary pressures have been compounded by natural disasters and trade tensions that have gummed up the global supply chain, making everything from cars to lumber subject to supply constraints not seen since the Second World War. The ownership of real estate assets offers investors the ultimate opportunity to hedge against inflation.

As many have discovered, real estate has unique advantages in any pricing environment. For example, in a deflationary environment, as bond yields are compressed, the cost of capital is also decreased, allowing for financial structuring to increase cash flow and returns on real estate assets. Conversely, during periods of inflation, investors are able to benefit from rental rate increases that may outpace the fixed cost of capital associated with debt on a property. Real estate is the rare asset class that yields rewards either way, and today’s inflationary pressures provide an additional fillip to real estate as they are partly driven by supply-driven constraints on new construction, a twist to today’s market I address directly in a separate article in this series.

The wealthiest of the wealthiest understand and take full advantage of the role of real estate as a catalyst for even greater wealth. It is a hard asset that has performed well while preserving both value and a legacy, offering them greater tax advantages than any other asset class possibly could.

Good for them. But what about you? If you aren’t landed gentry and are instead an affluent but hard-working, time-limited healthcare professional who doesn’t have financial advisors who can dedicate 100% of their time to you, it has not been at all easy to take advantage of these opportunities. D. J. Van Keuren of the Van Keuren Family Office Real Estate Institute (FOREI) says the traditional family office remains relationship-driven, fueled through friendships, family connections and word of mouth.⁵

Instead of relying on randomly receiving word of mouth introductions, some physicians and other professionals, recognizing they would like to have greater exposure to real estate in their portfolio, have banded into their own real estate investment clubs. At best these can be good, often enjoyable ways to pool efforts. But they can often be overly risky as they are rarely led by knowledgeable wealth-builders or real estate professionals, and they can often follow emotional whims and biased tastes. We’ve all seen the “I know a guy who knows a guy” approach to real estate investing, and that is far too casual an approach for you and your family when it comes to investing for real yield. At worst, this informal approach can lead to the blind leading the blind. There have been no small number of disaster stories related to uninformed “clubs”.

Taking risks is unnecessary. Today, there is no reason any qualified investor can’t harness the same successful strategies as the very wealthiest. Advances in technology, access to information and deep industry knowledge have led to a broad disintermediation of the tradition family office model, allowing all investors to benefit. In an era of transparency, the secrets of the wealthiest investors are not really secrets at all.

The reasons why the wealthiest invest in real estate are largely the same as everybody else – stability, growing wealth, building a legacy. A new generation of investors is now able to unlock the key. Organizations such as Ballard Built take the same sophisticated, risk-aware, data-driven approach as the world’s leading family offices. The investment strategies that work for billionaires also work for those qualified investors who spend much more time in surgery or seeing patients than they do on a yacht.