By: Charlie N. Jones
Are you interested in building generational wealth? If so, real estate may be a great investment for you. Investing in real estate is one of the most effective ways to diversify one’s portfolio. This creates wealth that can be handed down to the younger generation while maintaining flexibility.
“Real estate is a fairly unique asset class with a variety of underlying characteristics and strategies that can serve a variety of reasons for an investor,” says Reuben Bianchin, Senior Portfolio Manager of Private Equity at BNY Mellon Wealth Management. The asset class has lower volatility and a low correlation to stocks and bonds, improving a portfolio’s risk/return profile. Real estate investments can benefit high-net-worth families in the following ways: To compensate for a low-yielding, inflationary environment, Capital gains are protected, and the investment is tax-efficient.
Here are six key strategies for leveraging real estate investment strategies to increase generational wealth.
- Compensate for Low-Interest Rates
“With interest rates at all the time lows, there is an insatiable demand for yield,” Bianchin observes. “At this point, you are not seeing clients earn a lot of money from traditional fixed-income investments.”
Clients can always find stability with real estate to complement other parts of their portfolios because of the cash flow nature of the real estate, where long-term leases can enable stable occupancy that drives income yield, according to Bianchin. While some investors with a dynamic approach may want to own property directly, there are also a number of more passive options, for instance, private real estate funds and traded, non-traded real estate investment trusts (REITs), that provide similar interests for those who do not want to manage a physical property actively.
- Hedging Against Inflation
With inflation expected to rise in the United States, investors are looking for strategies to mitigate that risk in their portfolios. REITs have historically outperformed the broader equity market during periods of moderate or high inflation, making them an effective hedge, according to Tim Barker, Managing Director at BNY Mellon Wealth Management.
Barker claims that the conversation has changed from a year ago because, while interest rates were and continue to be below, the “fear of inflation” is a new factor.
Due to the inherent characteristics of the asset class (rents typically rise in line with inflation measures), real estate income has increased at a slightly higher rate than inflation over the last 25 years. This contrasts with fixed-income investments, tied to interest rates and not provide the same inflationary protection.
- Advance Your Exposure
Investors who are new to real estate opportunities do not necessarily need to rebalance their portfolios extensively to reap the benefits of the industry.
“Growth investing will not go away as long as interest rates remain low,” says Barker. “However, for many of our high-net-worth clients, real estate exposure of around 5-7 percent of a portfolio, including liquid REITs and illiquid real estate investments, would be appropriate.”
- Consider Gifting Strategies
According to Jere Doyle, Senior Wealth Planning Strategist at BNY Mellon Wealth Management, real estate is a flexible option for gifting. It allows for appreciation while also providing liquidity to the asset’s current owner during their lifetime. A vacation home, for instance, can be a meaningful gift with both sentimental and monetary value to future generations. Investing directly in other property types can also be a vehicle for wealth development and transfer while also avoiding estate tax headaches.
“Gift tax evaluation discounts can be acquired by giving fractional interests in real estate,” says Doyle. The lower valuations of the less marginalized interests in the assets result in future tax savings for the estate owner. “The same valuation discounts at death are accessible for those who retains only a minority interest in the real estate,” Doyle adds. However, real estate can be difficult to navigate within an estate plan. Working with an estate planning strategist to ensure that real estate is transferred as tax-efficiently as possible can be beneficial.
- Invest in New Business Opportunities
Over the last year, we’ve seen the pandemic drive significant change across various property types, opening up investment opportunities.
The e-commerce boom has also created new challenges and opportunities for certain real estate property types. While physical stores have suffered, demand for property related to warehousing, supply chain management, and logistics has increased and is expected to remain strong for the foreseeable future.
Bianchin cites the Covid-19 vaccine, which requires cold storage, demonstrating how emerging societal needs can drive real estate opportunities. “We’re looking at how the acceleration of business models impacts real estate and how our clients can benefit from those changes,” he says.
- Capital Income Leverage
According to Barker, one strategy for high-net-worth families to shelter capital gains is investing in Opportunity Zones and Opportunity Zone funds. These are designated for economically distressed communities where new investments qualify for tax benefits, including capital gain deferral.
This vehicle also serves a dual purpose: it adds real estate investment exposure to a client’s portfolio. “When you consider how the equity markets have recovered, clients have a lot of unrealized capital gains,” says Barker. “So this is an opportunity to realize gains, make portfolio changes, defer tax on some of those realized capital gains, and invest in real estate through the Opportunity Zone fund.”
With the possibility of higher tax rates, combined with the significant tax benefits provided within Opportunity Zones—where investments in property types such as multi-family and affordable housing will be prevalent—there may be a compelling opportunity for clients to do good through a targeted real estate strategy.
Yes, you don’t have to be a millionaire to accumulate wealth for yourself or your children. Use these strategies to build generational wealth through real estate for your family and to be able to pass it down from generation to the next generation. The most important thing you can pass on to your children is financial wisdom. This is critical so that your energy spent in accumulating assets is not squandered by a careless generation. Be wise and plan ahead.