One of the biggest misperceptions when it comes to high-net-worth individuals is that all they invest in are equities and mutual funds. However, there are many other avenues for high-net-worth individuals to hedge risk, generate returns, and potentially grow their riches with today’s real estate market being one of them. Let me explain why real estate is an important key to your wealth management strategy.
What are High Net Worth (HNW) Portfolios?
High Net Worth (HNW) Portfolios are a collection of assets that allow investors to maintain their current lifestyle and save for retirement. The term “high net worth” is used to describe individuals with over $1 million in investable assets, excluding their primary residence.
High Net Worth Portfolios are not limited to stocks and bonds. Real estate can play an important role in any investor’s portfolio by providing additional diversification, a hedge against inflation, tax benefits and more.
To understand fully HNW, we need to take a little perspective from bankers and consultants who use tables and charts to depict what should be in an HNW portfolio. In order to achieve this, we would take a look at some regions and how their asset allocation is distributed in the general market.
Figure 1: Asset allocation of HNWI 2021 for Asia-Pacific (Excluding Japan)
Figure 2: Asset allocation of HNWI 2021 for Europe
It is evident that HNWIs in Asia-pacific; including Singapore, allocate about 17.5% to real estate investment while Europe allocates 18.7%.
Investors often underestimate the importance of real estate as part of their investment strategy. This is due to the fact that real estate is often seen as an illiquid asset class that requires significant time and energy to understand and manage properly. However, when it comes to diversification, real estate has many advantages over other investments:
Real estate can be bought in different types of investments such as commercial or residential properties; each offering different risk/return profiles depending on your risk tolerance and goals.
Real estate provides investors with access to both domestic and international markets which increases diversification opportunities significantly compared to other asset classes such as stocks or bonds.
The caution exercised by investors in the Asian region can be reflected in their inclination to embrace less-risky investments and still get greater diversification. This was evident in a recent study that showed people in Singapore and other Asian economies show more concern and are more attentive to their portfolio compared to those in the western economies.
Figure 3: Percentage that are more attentive to their portfolio
With the high percentage of HNWI being concerned about the state of the economy (63% for the western economies and 80% for the Asian economies), a lot of them are not ready to pull out of the market. One answer to this dilemma is real estate. Real estate provides a combination of investment diversification and income generation that can meet your goals. Plus, it’s more tax efficient than most other investment options.
Real estate can also provide some stability during turbulent times in the stock market. For example, during the 2008 financial crisis, when stocks were hit hard, real estate prices dropped only 5 percent and recovered within 6 months.
But why should real estate be part of any HNW portfolio?
Real estate has always been an important part of a high-net-worth portfolio. It’s also one of the most misunderstood asset classes.
Real estate is often thought of as an investment where you can “buy low and sell high.” While this is true, it’s not the whole story. To understand why real estate should be part of every high-net-worth portfolio, you need to understand what makes it special.
The first thing that makes real estate unique is that it’s an asset that generates cash flow regardless of the economy or market conditions. You may have heard about how great stocks are during bull markets and how horrible they are during bear markets, but this isn’t true for real estate. Even if there’s a recession or a crash, your rental properties will still generate income from tenants paying rent month after month — even if they’re struggling financially themselves.
The second thing that makes real estate unique is that it’s relatively easy to get started with little money down. If you want to invest in stocks, you’ll typically need tens or hundreds of thousands of dollars just to get started — which means the barrier to entry is very high compared to real estate investing where all you need is enough money to close on a house or apartment building.
Benefits of Real estate investment for a HNW portfolio
In the past few years, it has become clear that real estate is an important component of any well-balanced portfolio. Real estate provides investors with several benefits, including:
- Diversification – Real estate can be an effective way to reduce overall risk in a portfolio by providing exposure to asset classes that may not be included in other investment classes.
- Liquidity – Many real estate investments can be sold quickly at little or no cost, which can be beneficial for investors who want to turn their assets into cash quickly.
- Appreciation potential – Real estate can appreciate significantly over long periods of time due to demand for rental properties and other factors, such as population growth and increasing land values.
Contrary to popular belief, real estate is one of the safest investments for your high-net-worth portfolio. This is due to the compounding effect of rents paying for property taxes and expenses and providing a passive income stream. There are always unique challenges with every investment, but real estate is rarely in a state of uncertainty or constant change.
Real estate can be a high-net-worth individual’s best friend. If you are planning on adding real estate to your investments, but are not sure where to start, consider reaching out to Smart Mortgage for tips when it comes to making your decision as to where you should include real estate in your investment portfolio.