North America boasts some of the wealthiest people in the world. Data from statista.com shows that the region alone is home to about 75,000 ultra-high net worth individuals (UHNWIs). As a result, there is a high demand for luxury residential properties in the US housing market.
Although it may be in demand among this group of individuals, does expensive real estate make for a good real estate investment? Or should you always avoid it, even if you have the budget? Let’s explore this question.
So, What Exactly Is Luxury Real Estate?
Contrary to popular thinking, property isn’t considered luxury just because it is costly. Expensive real estate should also be exclusive, unique, and viewed as superior in some way. Ultra-high net worth individuals want a property with state-of-the-art amenities such as a luxury pool, chef’s kitchen, car lifts, motion detectors, and jacuzzis. High-end buyers are also looking for a property with custom architecture, opulent finishes, and privacy. Access to luxury activities and the natural beauty of a mountainside or waterfront is another thing UHNWIs look for in luxury properties.
A luxury kitchen like this one would definitely add to the cost of a property!
Is It a Good Idea to Invest in Expensive Real Estate?
Before you go out to purchase the most expensive house in the real estate market, you should first understand the pros and cons of buying expensive real estate.
Advantages of buying expensive real estate
- Higher rental income – Ultra-high net worth individuals are willing to pay top dollar for a rental property that has impressive architecture, exquisite finishes, great landscaping, and state-of-the-art appliances. For example, you can earn between $6,000 and $8,000 from a luxury rental in Beverley Hills. Investing in luxury rentals in a great location will enhance your chances of generating a high return on investment.
- Spend less on improvements – Purchasing the most costly property in the neighborhood means that you are buying the best home. Besides having great amenities, expensive real estate is also likely to be in great shape overall. This means that you won’t have to spend much on home improvements before you rent it out or sell it.
- Higher resale value – Since it is in high demand, expensive real estate usually appreciates very fast. When you eventually decide to sell it, you will earn a good return on investment. You could even boost the real estate appreciation further by renovating it or upgrading the appliances.
Want to start your search for expensive real estate right now? On Mashvisor, you can find investment properties for sale priced up to $5 million. Start your search now.
Disadvantages of buying expensive real estate
- High property taxes – Property taxes are calculated based on property value. Buying an expensive investment property, therefore, means that you will be paying high property taxes. This will eat into your profits and lower your return on investment. Be sure to check out property tax history before you make a purchase. Many listings on Mashvisor have this info ready to go. Check it out now.
- Higher maintenance costs – With all its high-end appliances and features, maintaining expensive real estate can be a nightmare. You might have to spend hundreds or even thousands of dollars every year to keep everything running effectively. If you have low occupancy rates, you will have to foot all these costs from your pocket.
- Trouble with resale – When it comes time to sell, finding a buyer might not be very easy. As a result, you might be forced to sell your expensive real estate below market value. This means generating very little or even a negative return on investment.
Rather go for cheaper real estate? Check out: Top 7 Cheapest Cities for Buy-and-Hold Investment Properties
Clearly, buying an expensive house can be very tricky for any real estate investor. That doesn’t mean that it won’t make for a good real estate investment. You just have to know how to analyze expensive real estate to ensure you get a good return on investment.
How to Analyze Expensive Real Estate to Decide Whether or Not to Invest
Neighborhood analysis
Neighborhood analysis is the first thing you need to do before making an investment decision. This will help you understand real estate market trends and find the best performing positive cash flow properties in good neighborhoods. Using Mashvisor’s neighborhood analysis tool, you can compare different expensive neighborhoods using metrics such as median price, rental income, cash on cash return, and Airbnb occupancy rate.
Real estate investment analysis
Real estate investment analysis involves analyzing an investment property to establish its potential profitability. Mashvisor’s rental property calculator will help you calculate:
- Airbnb and traditional rental income
- Airbnb and traditional cash flow
- Airbnb and traditional cap rate
- Airbnb and traditional cash on cash return
- Airbnb and traditional occupancy rate
- The optimal rental strategy
Check out this real estate investment analysis for an expensive property for sale in the Los Angeles housing market.
Start out your 7-day free trial with Mashvisor now.
The Most Expensive Real Estate Markets in the US
If you’ve decided to go for expensive real estate, you have plenty of US cities to choose from to start your investment property search. According to Mashvisor, the most expensive real estate markets in the US include the following:
#1. Santa Barbara, CA
- Median Property Price: $1,612,955
- Price per Square Foot: $848
- Price to Rent Ratio: 33
- Traditional Rental Income: $4,079
#2. San Francisco, CA
- Median Property Price: $1,576,376
- Price per Square Foot: $1,075
- Price to Rent Ratio: 30
- Traditional Rental Income: $4,371
#3. New York City, NY
- Median Property Price: $1,149,506
- Price per Square Foot: $624
- Price to Rent Ratio: 34
- Traditional Rental Income: $2,815
#4. Pasadena, CA
- Median Property Price: $1,144,114
- Price per Square Foot: $615
- Price to Rent Ratio: 29
- Traditional Rental Income: $3,316
#5. Great Neck, NY
- Median Property Price: $1,128,137
- Price per Square Foot: $538
- Price to Rent Ratio: 26
- Traditional Rental Income: $3,549
#6. Los Angeles, CA
- Median Property Price: $1,119,531
- Price per Square Foot: $627
- Price to Rent Ratio: 27
- Traditional Rental Income: $3,522
#7. San Jose, CA
- Median Property Price: $1,082,675
- Price per Square Foot: $686
- Price to Rent Ratio: 29
- Traditional Rental Income: $3,072
#8. Lake Oswego, OR
- Median Property Price: $1,068,358
- Price per Square Foot: $354
- Price to Rent Ratio: 33
- Traditional Rental Income: $2,721
#9. Fremont, CA
- Median Property Price: $1,052,019
- Price per Square Foot: $685
- Price to Rent Ratio: 26
- Traditional Rental Income: $3,408
#10. North Hollywood, CA
- Median Property Price: $1,013,714
- Price per Square Foot: $558
- Price to Rent Ratio: 32
- Traditional Rental Income: $2,643
Related: Why Are Houses So Expensive in the US? 4 Reasons
Conclusion
If done right, investing in expensive real estate can be a very profitable venture. Just be sure to take the right steps:
Decide what you want ahead of time. Are you looking for condos, single family homes, apartments, or multi family homes? Do your due diligence and find the best location for your investment. Working with a real estate agent that has experience in the local luxury property market will enhance your chances of finding a home with good cash on cash return. If you are not paying in cash, be sure to get pre-approved by a lender before you start searching for expensive real estate. Remember, all that glitters is not gold. Therefore, you need to get the property inspected before signing on the dotted line. You might be surprised by the defects that will be uncovered in the seemingly perfect home.
Related: Should You Invest in the Luxury Real Estate Market in 2020?