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.
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, you will have already won half the battle. With that in mind, here are some tips on how 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 no shortage of information. In many countries, it is easy to find out who owns which 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 means your competition can easily get their hands on the same data.
As such, billionaires put their focus on deals that are not listed. This not only includes private deals between their friends and acquaintances but also keeps tabs on wholesale opportunities.
Believe it or not, you can wholesale real estate. According to the team from Skystone USA, 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 and get the property they want before anyone else.
Lesson 2: Other People’s Money
You don’t get to be a billionaire by spending your money too freely. If you know any billionaires, you will know that some of 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 which 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 in real estate is that the federal government will give owners a credit on their mortgage expenses and property taxes paid. Granted, the 2018 revisions to the internal revenue code did limit the amount of the deductions per property, but the tax breaks billionaires get for owning real estate remains a sweet deal.
Many billionaires have been converting the LLCs they used for owning property into C-Corporations. Not only does this allow them to continue to take advantage of deductions for mortgage and property taxes, but the reduced corporate tax rate means they can save even more.
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.