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How a targeted real estate strategy can help high-net-worth families grow generational wealth.

As high-net-worth individuals consider their estate plans, building generational wealth is top of mind. Investing in real estate is one effective way to achieve portfolio diversity and grow wealth that can be passed on to younger family members—while still offering flexibility.


“Real estate is a pretty unique asset class with a range of underlying characteristics and strategies that can serve multiple purposes for an investor,” says Reuben Bianchin, Senior Portfolio Manager of Private Equity at BNY Mellon Wealth Management. The asset class inherently has lower volatility and low correlation to stocks and bonds, which can improve the risk/return profile of a portfolio. Real estate investments can help high-net-worth families:


  • Offset a low-yield, inflationary environment
  • Shelter capital gains and offer a tax-efficient investment option
  • Diversify their portfolio


Here are six key tips for how to leverage real estate investment strategies to grow generational wealth.


Offset low interest rates


“With interest rates at all-time lows, there’s an insatiable demand for yield,” notes Bianchin. “And at this point, you’re not seeing clients get substantial income from their traditional fixed-income investments.”


Because of the cashflow nature of real estate, where long-term leases can enable stable occupancy that drives income yield, clients can find stability with real estate to complement other parts of their portfolios, notes Bianchin. The right vehicle can depend on a client’s risk tolerance and investment goals; while some investors with an active approach may want to directly own property, there are also a number of more passive options, including private real estate funds and traded or non-traded real estate investment trusts (REITs), which provide similar benefits for those who don’t want to actively manage a physical property.


Hedge against inflation


With inflation expected to rise in the U.S., investors are seeking strategies to offset that risk in their portfolio. Historically, REITs have performed better than the broader equity market during periods of moderate or high inflation, making them an effective hedge, says Tim Barker, Managing Director at BNY Mellon Wealth Management.


The conversation has changed from a year ago, Barker says, because while interest rates were low then, and remain low, the “fear of inflation” is a new factor.


Due to the embedded characteristics of the asset class (rents typically rise in line with inflation measures), real estate income during the last 25 years has increased at a slightly higher level than inflation. This differs from fixed-income investments, which are tied to interest rates and don’t offer the same inflationary protection.


Adjust your exposure


Investors new to real estate opportunities don’t necessarily need to recalibrate their portfolio extensively to expose themselves to the benefits of the sector.


“Growth investing is not going away as long as interest rates remain low,” says Barker. “But for many of our higher-net-worth clients, exposure of around 5-7% of a portfolio in real estate, including liquid REITs and illiquid real estate investments, would be appropriate.”


Consider gifting strategies


Real estate is also a flexible option for gifting—allowing for appreciation while also giving the current owner of the asset liquidity during their lifetime, says Jere Doyle, Senior Wealth Planning Strategist at BNY Mellon Wealth Management. A vacation home, for example, can be a meaningful gift that has both sentimental and financial value for future generations. Investing directly in other types of property can also be a vehicle for wealth growth and transfer, while avoiding estate tax headaches.

“Gift tax valuation discounts can be obtained by giving fractional interests in real estate,” says Doyle. The lower valuations of the minority interests in the assets create future tax savings for the estate owner. “The same valuation discounts at death are available for the [original owner] who retains only a minority interest in the real estate,” Doyle adds. That said, real estate can also be complicated to navigate within an estate plan, and it can be helpful to work with an estate planning strategist to ensure that real estate is transferred as tax-efficiently as possible.


Invest in emerging opportunities


Over the last year or two we’ve seen the pandemic drive significant change across various property types, enabling investment opportunities.  


The e-commerce boom has created new challenges and opportunities for certain real estate property types. While brick-and-mortar stores have suffered, demand for property relating to warehousing, supply chain management and logistics has increased and likely will remain robust for the foreseeable future.


Bianchin points to the Covid-19 vaccine, which requires cold storage, as an example of how emerging societal needs can drive real estate opportunities. “We’re really looking at how the acceleration of business models are impacting real estate and how our clients may benefit from those changes,” he says.


Leverage capital gains


One strategy for high-net-worth families to shelter capital gains, says Barker, is to invest in Opportunity Zones and Opportunity Zone funds, which are designated economically distressed communities where new investments qualify for tax benefits, including tax deferral of capital gains.


This vehicle also serves a dual purpose by adding real estate investment exposure to a client’s portfolio. “When you think about how the equity markets have recovered, clients have a lot of unrealized capital gains,” says Barker. “So this is a chance to realize gains, make some portfolio changes, and defer the tax on some of those realized capital gains and invest in real estate through the Opportunity Zone fund.”


With the potential for 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 can be a compelling opportunity for clients to do good through a targeted real estate strategy.

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