Common Financial Mistakes High Net Worth Real Estate Investors Make
High net worth individuals (HNWI) is a classification used by the financial services industry to denote an individual or a family with liquid assets above a certain figure. Although there is no exact number, high net worth is generally referred to as those who have liquid assets of $1 million or more. These individuals accrue and grow their wealth by making calculated risks and letting their money work on their behalf. However, wealthy investors can make mistakes too.
Here are four investing mistakes HNWIs (and those who wish to join their ranks) should avoid making.
1. Deciding to Invest Only in the U.S. and the E.U.
As developed countries, the United States and the European Union offer a lot of security when it comes to commercial and residential real estate investments. However, ignoring the opportunities in nations that may be considered riskier excludes higher earnings that often accompany higher risks. For example, some ultra-high-net-worth individuals (classified as those worth more than $30 million) often invest in other parts of the world such as Chile, Singapore and Indonesia. Individual investors or their advisors often can find emerging markets that match up to their investment strategies. Just keep in mind that you also don’t want to make the mistake of not thoroughly researching the local market before investing in a property. This research should take into account local information regarding price-per-square-foot comparisons, commercial construction activity, cap rates, zoning regulations and economic growth
2. Playing Lone Ranger
For those looking for wise ways to invest their assets, it’s important to also build up a team of trusted professionals. It’s fine to act as the point person or to appoint a trusted ally to do so. However, trying to make all the decisions on your own can actually slow you down and cause you to miss out opportunities. Establishing good relationships with a real estate broker, home inspector, appraiser and real estate attorney are essential if you plan to concentrate your investment within a certain area. In addition, finding a lender for personal deals and joint ventures is key to being able to act quickly when opportunities arise.
If your preference is flipping or renting single-family or multi-family units, your team should include reliable, reasonably priced electricians, plumbers, roofers, painters and HVAC contractors, among others. Having other people you can trust lets you concentrate on investing.
3. Not Thinking Outside the Box
Commercial assets don’t have to include buildings or complexes. Thinking outside the box can help you diversify your investment portfolio even more. For example, investing in parking garages addresses concerns over the rising unavailability of parking in an urban area. Industrial and warehouse themes are other options that are often overlooked when it comes to diversification, and renting out warehouse space can be quite lucrative near ports and transit hubs. Distressed assets may require a little TLC but they often present opportunities for the highest returns. Following up on the advice to avoid going it alone, these are perfect opportunities to join an investment cohort to mitigate the risks without giving up the potential upside.
4. Forgetting to Save as Well as Make Money
Another common mistake that high net worth investors make is setting unrealistic expectations when budgeting expenses. There’s a tendency to underestimate capital expenditures and maintenance costs. A good rule of thumb is to budget 2 percent of the property’s value into a reserve fund. This gives you cash on hand when major repairs are needed. Although this mainly applies to commercial assets, such as buildings, it’s also important to set aside funds for residential properties. If you’re flipping homes, leave some slack in the budget in case problems arise. The older the property, the more can go wrong, so pad your budget accordingly to keep your cash flow liquid and allow multiple investments.
While some of these mistakes may seem rudimentary, many of them arise when you act too quickly or don’t properly prepare before jumping into an opportunity that may include some unwelcome surprises.