A home, vacation property or condo with a steep price tag is usually a good indicator that a property is special, but a high list price isn’t the only criteria for luxury real estate. Other factors need to be present, such as a sense of splendour, an image of grandeur or the perception that the property is unique or superior.
This sense of exclusivity can be created with the addition of high-end amenities, the use of custom builds or the liberal use of opulent features. In every case, however, luxury real estate offers current and potential owners a chance to own and promote an exclusive experience. In other words, when you purchase a luxury home it’s more than an investment into a property — it’s an investment in a complete lifestyle.
For more than a decade, the real estate market has been a safe investment. Whether you own and rent, flip or rent out, real estate offers investors a chance at achieving excellent cash flow and asset appreciation.
Quite often, however, the notion of investing in the real estate market excludes the luxury property category. While there are many benefits to investing in luxury real estate it requires a considerable financial investment.
Before you jump into luxury real estate investments, it’s best to understand how and why to invest in this asset class.
How to Invest in Luxury Real Estate
The first step to successfully investing in the high-end real estate market is to determine your goals.
Usually, the goal for any investment is to earn a return but when it comes to luxury real estate, there are often several ways to get a return on the money you invest.
For real estate investors who want to get their money in and out, relatively quickly, the best options are to buy, renovate and flip.
However, for the investor who wants to capitalise on cash flow and asset appreciation, there are two options:
- Luxury properties that are considered desirable by high-net worth renters (because they are unique, offer exceptional amenities or grand design and decor); or
- Luxury properties that meet the needs of a large segment of the population, who are looking for a small taste of the luxury lifestyle.
Consider the first market segment the longer-term renters, while the second-set are the vacation home and short-term rental clientele.
Consider Your Location
More often than not high-end property renters are looking for locations with easy access to luxury amenities. This can include shopping destinations with brand-name stores, award-winning restaurants and access to self-care facilities such as day spas and driving ranges. Renters are also quite particular about their community — choosing to rent in areas that put them in close proximity with other luxury property residents.
Consider the Funds
There is no rule when it comes to luxury properties prices. In some markets, you can purchase a luxury condo for as little as half a million, in other markets you’ll need at last $1 million, or more, just to compete in this market. The key is to consider the down payment required for the property — in Canada you’ll need to invest at least 20% (of the purchase price) of your own money as the down payment on the property.
Regardless of the list price, you will need to talk to a mortgage broker, Realtor and your accountant to determine the monthly costs and the annual outlay required to carry the property. The idea is to make sure the math on the investment property provides sufficient cash flow that you will realise a better than decent return on investment.
Quite often, there’s a misconception that only the rich invest in expensive real estate because they have the cash to do so. Turns out, most buyers, even high-net worth buyers, will take advantage of leverage: Using a little bit of your own cash, to acquire the rights to a high-value asset. A mortgage is the easiest and often the cheapest option to leverage your 20% down payment to purchase an expensive luxury market asset.
The Process of Finding Luxury Real Estate Investments
Where most people may focus on the macro market, if you want to make a smart luxury real estate investment, you must dive deeper into the details of a community and into the specific property itself. For investors, this means comparing the price-per-square foot for neighbouring properties; examining price-to-rent ratios and identifying the unique ‘selling’ features of the property you are considering. (In this circumstance, ‘selling’ equates to the features you know will attract the right rental client at the right lease price.) Community factors that investors need to consider include the number of properties that are owner-occupied, recent and historical vacancy rates as well as future plans for either new builds or redevelopment in the area.
The best way to obtain all of this information (and more) is to work with a real estate agent who is comfortable and familiar with the luxury real estate market in your city. A Realtor with experience will know the best negotiation tactics and can help develop the most advantageous investment plan, based on your needs, the property’s qualities and the current market trends.
There are always people that are looking for a taste of luxury and renting out a luxury home is an accessible option. This makes investing in luxury properties a potentially lucrative alternative to other investment asset classes. Given that luxury real estate markets will often ebb and flow at a different pace than the standard residential real estate cycle.