Investing in Luxury Real Estate

Your options for tapping the high-end market

Real estate has long been considered a safe investment, whether you own, flip, or rent. If you have the money, you may want to expand your portfolio into the luxury real estate market. Before you jump in, here are some of your options for investing in luxury real estate.

Key Takeaways

  • Real estate isn't considered luxury just because it's expensive. It must also be unique, exclusive, and perceived as superior.
  • High-end buyers want access to luxury activities like shopping, dining, and the arts, as well as proximity to other luxury homes.
  • Luxury real estate investors can flip a mansion, invest internationally, buy a luxury condo, buy a high-end vacation property, or build from scratch.

Luxury real estate prices were hot and had been soaring. Case in point: The most expensive residential real estate sale of 2019 was a Manhattan penthouse that sold for $240 million, according to data from Miller Samuel Inc. That's almost $166 million more than the previous year's top New York City sale.

With the wealth of the world’s richest people growing, it had seemed that the potential market for luxury properties was larger than ever. Then the coronavirus pandemic hit, and prospects for real estate prices and real estate, in general, have become notably uncertain.

Bargains may be available for those with cash. However, the willingness of potential investors to step up and buy them is doubtful, to say the least.

Whether you're interested now or thinking about future investments, here are key principles for investing in luxury real estate based on market growth before the pandemic.

What Is Luxury Real Estate?

It's crucial to understand the features that characterize luxury property before you invest. A high price tag alone won't put a property in this category. "It has to be unique and exclusive—in a good way, in a desirable way," said Randy Char, senior VP of operations at One Queensridge Place, a luxury Las Vegas high-rise. "People who are wealthy will pay a premium for something that's perceived to be superior."

High-end buyers want locations with access to luxury activities such as high-end shopping, dining, and the arts, as well as proximity to other luxury homes. A trophy address, like Park Avenue in New York City, adds value. Having a storied history doesn’t hurt, either. Many luxury buyers seek the natural beauty of a waterfront location, or at least views of a river, ocean, or lake. Others want countryside or mountainside views.

High-end buyers desire many of the same features that all buyers want but on a grander scale. They want privacy and security, sometimes to the point of seclusion. They want beauty inside and out and can afford custom architecture, custom design, over-the-top attention to detail, and opulent finishes.

They also want amenities on top of amenities: a chef’s kitchen, luxury pool, expansive owner's suite, and outdoor living space, not to mention home automation, motion detectors, car lifts, and temperature-controlled wine cellars. Many also want space, but you certainly don't need a massive home to live in luxury.

When choosing a luxury home, it’s extremely important to think about the aspects of the property that can’t be changed, said Mark Fitzpatrick, CEO of RUHM Destination Marketing, a marketing service for luxury properties. “You can't change the path of the sun, the location of the ocean, or the fact that there is a flight path for large airplanes over your head. Ugly wallpaper in the bathroom is far less important than the weather,” he said.

How Much Does Luxury Real Estate Cost?

In markets where prices are generally lower, you could need as little as half a million to own a piece of luxury real estate. But you'll need at least $1 million to buy a luxury property in most major cities, and the entry price point goes up where the cost of living is high. According to Christie's, it's $3 million in San Francisco, $5 million in Los Angeles and New York, and $7 million in London.

Luxury buyers often pay cash, but a jumbo mortgage is another option. If you’re financing the purchase, you’ll need a large down payment, excellent credit, proof of income and assets, and large cash reserves.

How to Invest in Luxury Real Estate

If you want to invest in luxury real estate, there are several paths you can take. Whether you buy for yourself, rent, or flip, here are some options:

  • Flip a mansion
  • Invest internationally
  • Buy a luxury condo
  • Buy a high-end vacation rental
  • Complete a custom build

Here's a closer look at each option.

Flip a Mansion

Remodeling existing luxury properties is an option that may have potential for a higher return on investment. Still, you're limited to properties in the inventory that have just the right mix of architecture, condition, and style.

Luxury homes tend to be more well-maintained than non-luxury homes, which means there is potential for fewer rehabilitation costs. The downside to this is that competition may be higher among luxury home flippers, but the upside is that there is less competition in the luxury-home market overall. That's because there are fewer people with the know-how to secure financing, negotiate like a pro, and execute a luxury property rehab project at a high level.

Invest Internationally

Investing in luxury real estate abroad can have benefits you won't find domestically. For example, in the Turks and Caicos Islands, a small British territory in the tropical Atlantic Ocean, there are no annual property taxes and no capital gains taxes on transferred property. Property ownership is protected by a land registry, and the U.S. dollar is the official currency. So exchange rates aren't a factor in completing the purchase, or your property's future value.

It's unclear how the pandemic might change this, but these islands have been a good place to invest because land prices have increased steadily over the last ten years. They were expected to continue to do so thanks to rapidly growing tourism and development, according to Blair MacPherson, co-owner and broker of RE/MAX Real Estate Groups Turks and Caicos. However, that was before the coronavirus crisis stopped travel and so much else. You can earn additional income from your investment by renting it out while you're away and letting a management company handle the details, he added.

Investing abroad can also have unique hassles. “We have to remember that the rest of the world does not operate like we do in the States,” RUHM’s Fitzpatrick said. “You do not want to purchase a property in another country only to find out the government can take it back from you down the road.”

Use an international real estate attorney and other professionals to help with your due diligence, Fitzpatrick said.

Buy a Luxury Condo

Whether you buy a luxury condo for yourself or to rent out, “spending money on a home located in a great luxury building with amenity and transportation options nearby is the way to go,” said Lydia Sussek of Corcoran, a full-service real estate firm in Manhattan. As always, location matters. “Buying in a luxury-looking building with poor transportation options is a poor investment,” she said.

The services and features the building offers can also make or break your investment. “Don't have a full-time doorman? Fine, but what else does your home offer? Views, high ceilings, terraces, all of these features help distinguish your home from other cookie-cutter apartments and can lead to a higher selling rate when it's time to move out,” Sussek said.

Keep in mind that when you buy luxury real estate, you buy a lifestyle. Private roof decks, swimming pools, common spaces with fitness centers, and maid service or hotel-style services distinguish luxury real estate, she said. “Even if there are other new condos built around the home you buy, these types of properties hold value,” Sussek said.

Complete a Custom Build

When things go well, a custom-built home offers the highest profit margins—although it often has a longer time frame. Still, a home where everything is new and has today’s most desired styles and amenities is crucial in getting top dollar.

If you aren't building the home for yourself, be careful about how you customize it. You'll want to select a layout, amenities, and finishes that will appeal to a broad segment of the luxury market to maximize your chances of selling quickly and for top dollar. Ensure the home is functional, welcoming, and has the security and privacy features that high-end buyers want. But there's a fine line between building that broad appeal and creating the uniqueness that luxury buyers crave.

“When something is not commoditized, and it is desirable, and there is demand, that’s when you see prices really jump,” Char said. “If you look at a bottle of ‘82 Lafitte Rothschild, the price appreciation grows exponentially over a vintage that is less superior because of supply and demand. It’s the same thing with luxury real estate. The more exclusive and harder to find, the more worthy of investment the home becomes.”

Choose a High-End Vacation Rental Property

“A luxury vacation rental can provide a wealth of benefits including asset appreciation, tax deductions, business networking opportunities, and most importantly, personal enjoyment,” Fitzpatrick says. Choosing a location with a typically strong market is key, such as a ski resort town, Hawaii, or a tropical island.

“They are great for seasonal income and perform well during good financial markets," Fitzpatrick adds. "However, they may suffer more during a recession than the homes near major cities.”

On the other hand, bear markets are the best time to buy if you have the cash.

Indeed, the luxury housing market experienced the strongest rebound from the 2008 housing crash in major cities, with resort areas following suit, stated a 2019 report from Christie’s International Real Estate. Of course, that report predates the pandemic, so just read it for guidance. It's unclear how the aftermath of the coronavirus will affect the market in resort areas—or anywhere else, for that matter.

In addition to choosing the right city, investors should consider buying a property that will be attractive to vacationing families, Fitzpatrick says. “It will increase your occupancy rate and your ROI,” he says.

Bruce Tobias, a 22-time top producing real estate agent with RE/MAX Sedona in Arizona, noted that high-profile tourist resort destinations are a sound choice, and investors should look for properties with the potential for long-term gains.

Jumbo Mortgages for Luxury Real Estate

While most luxury real estate buyers opt to buy property with cash, some use jumbo loans to snag luxury real estate. Jumbo loans (also called jumbo mortgages) are loans for amounts greater than the limit that the Federal Housing Finance Agency (FHA) sets.

Typically, that amount is in excess of $510,400. However, it is sometimes even greater, particularly in counties with more expensive real estate markets.

Tips for Investing in Luxury Real Estate

If investing in luxury real estate sounds like a good fit for you, there are a few things to keep in mind before you get started:

  • Identify your goals. The goal of investing in any real estate is to earn a return on your investment. When you choose luxury properties, consider the outcome you want. For example, if you plan to turn a quick profit, you might focus on flipping. If you want long-term income, you may consider a luxury apartment building.
  • Figure out financing. Even if you have cash on hand, it's not always the best option. For example, a hard money loan might be appropriate to finance a flip that you plan to complete within a few months.
  • Choose the right market. If you invest in a seven-figure property, make sure the market will support your decision. Look at the job market, cost of living, median household incomes, and the area's economic outlook. If it's going to be a rental, consider the year-round and peak-season traffic.

The Bottom Line

Investing in luxury real estate can be more exciting than investing in securities, thanks to its tangible nature. There are many ways to do it, from building a custom home to flipping a mansion to buying a vacation property. You can enjoy your luxury home as a resident, vacationer, or landlord, or you can build luxury homes for others to enjoy.

Before you invest, make sure you understand the features that create lasting value in this asset class to get the best return on your investment. And of course—unless you are buying to live there yourself—make sure there will be a market of buyers or renters for your properties.

Article Sources

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  1. Christisie's. "Luxury Defined: An Insight into the Luxury Residential Property Market," Page 1. " Accessed Jan. 21, 2021.

  2. Christie's International Real Estate. "Luxury Defined 2018." Accessed Jan. 21, 2021.

  3. Federal Housing Finance Agency. "FHFA Announces Maximum Conforming Loan Limits for 2020." Accessed Jan. 21, 2021.