Whether you are buying a high-end property as your own place to crash, or because you see the market for luxury homes as a viable investment opportunity, there are some financial considerations that apply across the board.
It is important to be aware that this is a high risk business. There is much greater volatility in the upper end of the real estate market, than lower down where there are more buyers. A recession or even a mild economic downturn can send prices plummeting fast; also to be considered is the capriciousness of other countries, as the recent clampdown on Chinese investors moving capital out of China has shown. You could find your multi-million dollar home quickly valued considerably less than you paid for it, which effectively brings your own net worth down with it. You would do well to understand your personal appetite for risk; those who are considered “aggressive” investors will stomach the highs and lows much more easily than the “conservative”.
If you are borrowing to purchase a luxury home, you should run a stress test on your financials to see how you can handle interest rate rises. This low-rate environment will not last forever; eventually central banks across the world will lift the rates, and banks will be quick to apply the increase to all of their loans. Australian banks have already shown they will hike rates even without the Reserve Bank leading the way, and furthermore, investors should heed the emphasis on banks’ prudential requirements of late, which has seen the screws tightened on them ahead of Mr and Mrs Homeowner.
As explained in other articles in this series on buying a luxury home, there is much to consider and research, such as location, recent sales, local government restrictions and plans, viability or necessity of renovations, how the property can be further enhanced and so on. While using a buyers’ agency can help, if you are an investor for whom this all seems too hard, it may suit you to instead pool your money with like-minded people who wish to become stakeholders in this niche asset class.
Just as venture capitalists back entrepreneurs whom they think have good start-up businesses, it is possible for private individuals to fund property developers, and you can choose to do this in the high-end property market if you wish. If you would like to diversify, and spread your money and risk across a number of luxury homes, it may suit you to invest in a real-estate trust specialising in this area. Some private equity funds will even give investors rent-free holidays at the luxury properties managed by the fund, which makes for a particularly pleasant way of keeping an eye on your investment.
In a similar vein is the option of fractional property investment of a luxury home. It is now possible to own a small piece of property for less than a week’s rent. At this level of investment owners won’t have physical access to the property, but moving up the scale of fractional investing allows investors to have the right to occupy the luxury home for certain periods of time each year. It is a rapidly developing segment of the real estate market and for many investors will be an excellent opportunity to get their foot in the luxury door that would otherwise be closed to them.
If you decide you would like to buy a luxury home, or part of one, then you should obtain advice on the different facets. This means building a trusted team of professionals – a specialist realtor, a property solicitor, a thorough accountant and an independent financial adviser. Be careful to select individuals or firms who don’t have a vested interest in your decisions; they should be renumerated in a manner that enables them to give you objective information and unbiased advice so that your money ultimately works for you, not anyone else.
Jacie Taylor has a Masters of Applied Finance (Financial Planning) with Distinction and is an independent financial adviser at Periapt Advisory in Adelaide, Australia.