The rising prices of luxury real estate are the talk of the town in the US real estate industry. Recently, a CNBC report mentioned that luxury real estate prices are at a record high, and have increased by 2% in the past three years. This is amidst the overall decline in sales in the rest of the real estate arena.
In this article, we will try to understand what is luxury real estate, how to invest in it, and more. Let’s start!
What is luxury real estate?
Luxury real estate refers to commercial as well as residential properties that go the extra mile to make tenants feel comfortable. There are different things that distinguish luxury properties. Let’s start with the location. Ideal locations may include mountains, waterfalls, or beachfront houses.
Some people also look for properties in the heart of metropolitan cities, or in exclusive neighborhoods and gated communities. The location is certainly one of the reasons why these properties have high prices. Of course, the target audience is people with a significantly high networth.
Apart from the location, the design of the properties is also lavish and well-equipped with access to various recreational activities and essential amenities. For example, people might be interested in properties that provide easy access to golf courses, shopping malls, etc.
When I say these properties go the extra mile, I really mean it! There are many expensive facilities that you wont find in most other places, like a luxury pool or hot tub, home theatres, private gyms, wine cellars, etc. In commercial properties, you might find fitness and wellness centres, concierge services, VIP lounges, high speed elevators, etc.
Investing in Luxury Real Estate
According to a 2024 report, for the week of April 22-28, the average asking price of luxury properties was $9,087,831. The most expensive luxury real estate deal was struck on a penthouse in Central Park South, for a price of $238 million.
That sure sounds like a lot of money to handle. If you are really interested in luxury properties, there are many routes to investing.
Become a homeowner
This route is the simplest on paper yet most difficult in reality. Many millenials and Gen Z citizens of America are struggling to buy homes because of soaring prices. But if you fall under a higher income bracket, investing in luxury properties could bring huge profits for you.
You can sell the place for a higher price, or rent it out fully or partially. The downside is that you will need a lot of money to make the initial investment. The advantage is that in the long term, the value of your property will increase, especially if it’s in a sought-after location, like a beach or a big city.
Earn passively through REITs
REITs, or real estate investment trusts, are like mutual funds, but for real estate. In a mutual fund, a broker company takes funds from those who are interested in investing. Then the broker puts their money into different kinds of financial tools like stocks and bonds, depending on the type of mutual fund.
The returns are enjoyed by the investors (after the broker cuts out their commission), depending on the proportion of their initial investment. Similarly, an REIT is a company that takes the money of people who are interested in real estate investments, and invests it in different ways.
Some REITs buy, refurbish and sell properties for a profit. Others may rent it out. Sometimes, they may even use the funds to give loans to people who want to buy property, and pay investors from the interest that they earn on those loans.
So if luxury properties look like they’re not your cup of tea because of the high costs involved, through REITs you can buy only a share of a property, depending on your income level.
Mansion makeovers
In this process, you buy a property that has the potential to be a luxury home or office, and refurbish it to increase its market value. They key is to spend as little time as possible in making the whole buy-and-sell transaction. This is advised only in times when real estate prices are rising at a rapid pace.
You see a space, you size it up. What kind of repairs would it need, how many changes would you have to make? How much would it cost? If you are confident that the returns will be more than the initial investment, go for it.
Usually, if the space is already existing as a luxury property, you can expect it to be quite well maintained. So you won’t have to spend much on repairs. But if you plan to redo the interiors or construct additional structures, that might take some time and money.
Vacation rentals
If you already own property in a prime location like a beach, lake, mountain, or a popular city, you can turn it into a vacation rental. You can either rent out the entire property, or just a part of it, like a few rooms or the top floor.
If you want to invest in one, you can buy a property in a popular vacation spot, and flip it into a luxury rental. For example, an abandoned house can be turned into a holiday mansion with gardens and pools. A tiny plot of land by a lake can be refurbished into a cute restaurant with outdoor seating.
Go international
Sometimes the zoning and tax laws in America can make it difficult for people to earn good returns on luxury investments. Keep an eye out for countries where you have to pay a lower tax on the property, or the difference in exchange rates is working in your favor.
If you are enthusiastic about investing in luxury real estate, we hope this article gave you a good introduction to this arena of investment. Keep exploring, and learning on your investing journey!
