Investing in Luxury Real Estate

Here are some of your options for making money in the high-end market

Real estate has long been considered a relatively safe investment, whether it’s your primary residence, a vacation home, or an investment property. If you have the money to invest, you may want to expand your portfolio into the luxury real estate market. 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 also must be unique, exclusive, and perceived as superior.
  • High-end buyers want access to activities such as luxury shopping, dining, and the arts, as well as proximity to similar 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.

What Is Luxury Real Estate?

A high price tag alone won’t put a property in the luxury category. “It has to be unique and exclusive—in a good way, in a desirable way,” says Randy Char, president and broker of Char Luxury Real Estate in Las Vegas. “People who are wealthy will pay a premium for something that’s perceived to be superior.”

Wealthy 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: chef’s kitchen, luxury pool, expansive owner’s suite, and outdoor living space, not to mention the latest home automation, 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 especially important to think about the aspects of the property that can’t be changed, says Mark Fitzpatrick, chief executive officer (CEO) of RUHM Luxury Marketing, a marketing service for destination 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 says.

How Much Does Luxury Real Estate Cost?

In markets where prices are generally lower, as little as half a million dollars can buy a piece of luxury real estate. But you’ll need well over $1 million to buy a luxury property in most metropolitan areas, and the entry price point goes up from there. As of April 2022, the average asking price of luxury homes in New York City was $8.96 million, according to one report. The most expensive residential real estate sale in Manhattan in 2021 was a pair of condos on adjoining floors that went for $157 million.

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

How to Invest in Luxury Real Estate

If you want to invest in luxury real estate, there are several paths that you can take. Whether you’re buying a home to live in for a while or to flip for a profit at the earliest opportunity, 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 an existing luxury property is an option with the potential for a higher return on investment (ROI) than house flipping in general. For one thing, luxury homes tend to be better maintained than the average home, which can mean lower rehabilitation costs. Still, you’re limited to the available properties that have just the right mix of architecture, condition, and style.

While competition for those properties can be keen, the upside is that fewer flippers focus on that market. That’s because it takes specialized know-how to secure financing, negotiate a price that leaves room for profit, and execute a luxury property rehab project at a high level.

Invest Internationally

Investing in luxury real estate abroad can have benefits that 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 in your property’s future value.

If you buy a home in which you plan to live for only part of the year, you can earn additional income from your investment by renting it out while you’re away and letting a management company handle the details, notes Blair MacPherson, co-owner and broker of RE/MAX Real Estate Groups Turks and Caicos.

However, 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 says. “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.”

For that reason, Fitzpatrick advises would-be buyers to use an international real estate attorney and other knowledgeable professionals.

Buy a Luxury Condo

Whether you buy a luxury condo to live in 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,” says Lydia Sussek of Douglas Elliman Real Estate in New York City. As always, location matters. “Buying in a luxury-looking building with poor transportation options is a poor investment,” she adds.

The services and features the building offers can also make or break your investment, Sussek says. “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.”

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. “Even if there are other new condos built around the home you buy, these types of properties hold value,” Sussek says.

Buy 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, golf mecca, or 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 can be the best time to buy if you have the cash.

In addition to choosing the right location, 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.

Complete a Custom Build

When things go well, a custom-built home can offer the highest profit margin—although it may involve a longer time frame. Still, a home where everything is new and has today’s most desired styles and amenities will often prove to be a good investment when you decide to sell.

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 that 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 often look for.

“When something is not commoditized, and it is desirable, and there is demand, that’s when you see prices really jump,” Char says. “If you look at a bottle of ’82 Lafite 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.”

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 that you want. For example, if you hope to turn a quick profit, you might focus on flipping. If you want long-term income, you might consider a luxury apartment or vacation home that you could profitably rent out.
  • 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. Before you invest in an expensive property, make sure that the market will support your decision. Look at the job market, the 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.

What is a jumbo loan?

A jumbo loan is a mortgage that exceeds the conforming loan limits set by Fannie Mae and Freddie Mac. In 2022, those limits are $647,200 for a single-family home in most of the United States. Certain high-cost areas, such as Alaska and Hawaii, have higher limits. The maximum is $970,800.

How is vacation home income taxed?

The taxes on rental income from a vacation home, and the expenses that you’re eligible to deduct, depend on whether you lived there for any part of the year. For example, if you rent out the home for fewer than 15 days, then you don’t need to report any rental income and can’t deduct any rental expenses. The Internal Revenue Service explains these rules in Publication 527: Residential Rental Property.

How are real estate profits taxed when you sell?

Any profit that you make when you sell an investment property is considered a capital gain. If you held the property for a year or more, it will be taxed at capital gains rates. If you held it for less than a year, it will be taxed as ordinary income, typically at a higher rate. Different rules apply if you are selling a home that was your principal residence for at least two years.

The Bottom Line

For some people, investing in luxury real estate is more exciting than investing in securities, thanks to its tangible nature. Plus, you can even live in it if you want to. There are many ways to get into the luxury real estate market, from building a custom home to buying a prime vacation property or renovating a high-end fixer-upper. But before you invest, make sure you understand the features that luxury buyers want—and that they’re willing to pay for.

Article Sources
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