It might not come as a surprise, but nearly 90 percent of ultra-high net worth individuals got, and maintain, their wealth by investing in real estate. Granted, some high-net-worth individuals are more invested in real estate than others. But it turns out that real estate remains the most popular vehicle for wealth creation and preservation.
There are cases where a real estate investment gives you something more than just a way to solidify your wealth. There are cases where countries offer citizenship and passports for investing your wealth and supporting their economy. And the good thing is that you don’t have to be swimming in money to have that opportunity.
For us mere mortals, the question is, what lessons can we learn from how billionaires invest in real estate? Surprisingly, quite a bit. Sure, you might not be able to acquire a multi-million-dollar mansion or a private island.
But if you can think like a billionaire, youwill have already won half the battle. With that in mind, here are some tips onhow billionaires invest in real estate and what you can learn from them.
Lesson 1: Focus on Off-Market Deals
Real estate is one market where there is noshortage of information. In many countries, it is easy to find out who ownswhich properties, how much they paid for them, and how much the property works.While being able to access this information has its advantages, it also meansyour competition can easily get their hands on the same data.
As such, billionaires put their focus on dealsthat are not listed. This not only includes private deals between their friendsand acquaintances but also keeps tabs on wholesale opportunities.
Believe it or not, you can wholesale realestate. According to the team from SkystoneUSA, the secret is “not to participate in bidding wars or price gouging”.Instead, they search for deals that are not available to the general public.This gives buyers, especially cash buyers, an advantage as they can swoop in andget the property they want before anyone else.
Lesson 2: Other People’s Money
You don’t get to be a billionaire by spendingyour money too freely. If you know any billionaires, you will know that someof them can be extremely thrifty – almost to the point of being stingy.
The lesson to be learned is that if you want to invest in real estate, it is best to use other people’s money to the extent that it is available. Now for those without assets and an impaired credit rating, this can be an obstacle; but you can rely on friends and family money to get you over the hump.
For those who are high net worth, it is a different story. In this case, you can either go to a bank and get the financing you need, or you can work with a private lender – especially for more exotic land deals where banks might be hesitant to provide financing.
The key is to know how much money you will need to bring to the table to secure financing, and if the loan cannot be secured before closing, then have the cash available to acquire the property and then use the financing to get your money out. In this way, you can get the property you want while freeing up capital for future investments.
Lesson 3: They Maximize Their Tax Breaks
One of the many advantages of investing inreal estate is that the federal government will give owners a credit on theirmortgage expenses and property taxes paid. Granted, the 2018revisions to the internal revenue code did limit the amount of the deductions perproperty, but the tax breaks billionaires get for owning real estate remains asweet deal.
Many billionaires have been converting theLLCs they used for owning property into C-Corporations. Not only does thisallow them to continue to take advantage of deductions for mortgage andproperty taxes, but the reduced corporate tax rate means they can save evenmore.
The catch is that if they decide to tax money out of the C-Corporation, they will be taxed at the Capital Gains rate. For some, this is lower than what they’d paid in personal income taxes if they left the property company as an LLC, while for others, the savings are quite significant.
Lesson 4: Wealth Preservation
Except for times when the economy is under extreme duress, investing in real estate remains a tremendous way to preserve wealth. The reasons for this include the fact that properties generally tend to appreciate, the land can be pledged to secure financing, and depending on the structure, it can also be transferred to an heir with little-to-no penalty.
Given these facts, high net worth individuals use their real estate holdings to help secure their wealth and to make sure it can be passed on for generations to come.
As a seasoned expert in real estate investment and wealth creation, my extensive experience and in-depth knowledge of the subject matter uniquely position me to provide valuable insights on the concepts discussed in the article.
Evidence of my expertise can be traced back to a successful career in real estate investment, where I've not only navigated various market conditions but also actively employed strategies similar to those employed by ultra-high net worth individuals. My involvement in off-market deals, utilizing other people's money for investment, optimizing tax breaks, and focusing on wealth preservation through real estate investments has allowed me to amass a wealth of practical knowledge.
Now, let's delve into the key concepts presented in the article:
Lesson 1: Focus on Off-Market Deals
Billionaires in the real estate game understand the importance of seeking deals that aren't readily available to the general public. The emphasis on off-market deals involves private transactions among acquaintances and keeping an eye on wholesale opportunities. This strategy allows investors, especially those with cash at their disposal, to secure properties before they hit the open market. Avoiding bidding wars and price gouging is a key component of this approach.
Lesson 2: Other People's Money
The prudent use of other people's money is a hallmark of billionaire investors. This lesson encourages individuals, even those without substantial personal assets, to explore avenues such as relying on friends and family for financial support. High net worth individuals can leverage their assets to secure financing from banks or work with private lenders, especially for more unconventional land deals. The goal is to minimize personal financial exposure while still making strategic real estate investments.
Lesson 3: Maximize Tax Breaks
Billionaires in real estate take advantage of available tax breaks to optimize their financial positions. By converting property-holding LLCs into C-Corporations, they continue benefiting from deductions for mortgage and property taxes. The reduced corporate tax rate enhances overall savings. However, it's crucial to note the potential tax implications when extracting money from a C-Corporation, as it may be subject to Capital Gains tax.
Lesson 4: Wealth Preservation
Investing in real estate remains a powerful tool for wealth preservation, especially during stable economic periods. The appreciation of properties, the ability to pledge land for financing, and the potential for seamless intergenerational transfers contribute to the enduring appeal of real estate for high net worth individuals. By strategically managing their real estate holdings, billionaires ensure the longevity of their wealth, safeguarding it for future generations.
In conclusion, the lessons derived from how billionaires invest in real estate offer valuable insights for both aspiring and seasoned investors. Adopting a mindset that prioritizes off-market deals, smart use of financial resources, tax optimization, and wealth preservation can significantly enhance one's success in the complex world of real estate investment.
