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If there’s one group of people who need safe and high-return investments, it’s doctors, legal professionals, entrepreneurs, executive retirees and other high net worth professionals. High income means a significant share goes to the Treasury unless you put your capital — and gains — into investments that protect your money from taxes and the erosion of value due to inflation.
Keep reading for insight on the best investment for professionals needing deep-pocket protection measures.
Challenges For High-Income Earners
Having a lot of capital isn’t that fun. The excitement happens when you leverage your gains to generate passive income and keep the taxman at bay. REI helps investors conquer financial challenges as a high net worth individual (see if these resonate with your experience):
• Increasing medical costs, particularly for independent entrepreneurs
• Income that places you in the upper tax brackets
• Reduced income after retirement and the need for stable residual income and equity growth
• The desire or expectation to leave an inheritance
Though I’m inherently biased in favor of real estate as a developer and asset manager of the same, it’s my experience working with our stakeholders that everyone benefits from diversifying their portfolio to include performing real property. This is true for professionals with many options but not much time to invest in finding suitable assets and conducting the due diligence to make a sound investment.
Risk tolerance is among the primary issues for accredited investors with substantial income but not a tremendous amount of liquid capital, and for which a significant loss would be detrimental for the investor’s broader portfolio. Tolerance typically has an inverse relationship with the stage of advancement in your investing career and portfolio development. Your tolerance will gradually decrease, either by choice or circumstance, as you progress in your investing career and require less ROI to maintain and grow your holdings.
Taxes are the other principal concern. Earning a living as a high net worth professional means luxury — for the IRS. By falling in the upper tax brackets without a valid tax management strategy (to include real estate), your gains will divert from your legacy to government spending.
Real Estate Versus Other Investment Classes
Real estate investing provides many benefits to its stakeholders. A combination of natural market forces, regulatory oversight and monetary policy drives stable appreciation that typically exceeds inflation and can provide protection from taxes while also providing protection for property rights and values.
Recessionary concerns are on the minds of most investors; however, key indicators point to stable yet persistent growth. In the second quarter of 2019, the FHFA home prices index rose by 3.13%, or 1.46% YOY, after adjustment for inflation. Additionally, out of 20 major U.S. markets, only Seattle saw a decline in values, with Phoenix leading growth at 5.83% in Q2 of 2019 based on data from S&P.
Here’s a brief review of the upside and potential drawbacks of REI.
Tax advantages — the good:
• Protection from capital gains assessments through elimination, reduction and deferral, or 1031 exchanges and opportunity zones
• Deductions including mortgage interest, depreciation, operational losses and improvement expenses
• Stable historical appreciation
• Less market volatility compared to securities
• Strong demand in growth markets
• Hedge against inflation
• Passive income
• Diversification across sectors and asset classes
• Financial leverage utilizing other people’s money (OPM)
• Availability of opportunity for investors of all skill levels and capital holdings
The not so good, depending on how you look at it:
• Less liquidity
• Asset and portfolio management: acquisitions, funding and development
• Operations: property-level management requirements
• Larger capital requirements for individual investors
• Renovation and capital expenditure improvement costs
• Legal liability that is mitigated by retaining counsel, insurance and electing limited-liability operating structures
The perceived downsides of real estate investment may not be disadvantages for investors with experience and capital. Inspiringly, individual investors who build or partner with a support team capable of targeting, vetting, acquiring and operating stable long-term assets for appreciation and residual cash flow will find returns.
Home values are on the rise, but growth isn’t limited to the residential sector. According to the National Council of Real Estate Investment Fiduciaries (NCREIF), private market commercial real estate returned an annualized growth rate of 9.85% over the past five years. Additionally, occupancy is at a near-record high of 94.25%; despite cooling, there is still tremendous potential in the market with an anticipated overall market growth rate of 1.1% this year.
Investment Options In Real Estate
One of the upsides of real estate investment is the plethora of options available. Some of the most popular avenues for high net worth and accredited investors include professionally-managed investments (private equity funds, real estate investment trusts (REITS), real estate mutual funds, crowdfunding platforms) and self-managed investments.
Depending on your preferences and abilities, you can find deals and projects through traditional networking or by investing with managed funds. Both strategies are viable; however, each has its pros and cons.
Investing as an individual requires more time, more considerable capital outlays and higher risk; however, it also affords the investor the greatest control and responsibility.
Alternatively, when investing in a managed fund, which may include crowdfunding platforms, you’re sharing or distributing risk across multiple stakeholders and projects. Working with a reputable venture helps to reduce risk as well as footwork, paper shuffling and project management.
Evolving Plans
Only fleetingly, we touched on the broad and accessible opportunity for investors at all levels. Considering all the factors that position real estate as an attractive investment, low barriers to entry and myriad operational structures and opportunities are indeed the most significant benefits. Wherever you’re at in your financial or professional journey, real estate offers viable options. Consult with qualified tax, legal and investment professionals as you develop and implement your investment plan.