From a small northwestern observatory…

What a terrible thing to ask, and yet Kiplinger’s tells us that the top 1% of Americans (about 1.3 million households) have a minimum household net worth of about $6 million. Those households control about 23% of all wealth in America. Another block of about 1.3 million households — those between the top 2% and the top 1% — have a minimum household wealth of about $2.5 million, more or less. Of course, these numbers are highly inexact, because… well… I’ll get to that.

By some estimates, real estate makes up as much as 50% of the total net worth for the top 2% of Americans. Again, this is hard to estimate, since typical households don’t have their real estate re-appraised on a daily basis. However, some real estate sectors have done very well, particularly residences, real estate supporting private businesses, and some industrial properties. Before the pandemic, I generally used the VERY heuristic rule of thumb that the super-wealthy (lets say, half a billion net worth and above) had about 25% of their net worth in real estate of some kind or another.

If you’re Jeff Bezos or Warren Buffett or such, you have people who look at this stuff regularly. However, of you’re in one of those 1.3 million households who have a net worth between, say, $2.5 million and $6 million, you probably don’t give it much thought. But maybe you should. I wrote about this in my most recent book, Valuation and Strategy. Here are just a few points, in no particular order:

1. Have you considered intergenerational transfers? How exactly will your estate be divided? Is there a way to structure it in an advantageous fashion, considering the often onerous costs of selling property out of an estate?
2. Do you own real estate supporting a family business? Is it coupled with the business itself, or is it a separate entity? Do your children or other family members want to continue the business, and do all of them want to participate? Perhaps there are ways to separate the business from the real estate in order to equitably prepare your family members for the inevitable.
3. Is any of your real estate financed? What does that look like now? As I write this, interest rates are trending downward after a couple of years at uncomfortable levels. Does this change anything?
4. How has your investment real estate changed in value relative to your non-realty investments? Are your asset allocations where you want them to be? Are you comfortable with the risks moving forward?

I would note that the average registered investment advisor is pretty good at not losing you money in the stock market, but ill-prepared to advise on the nuances of real estate investing. That said, most real estate brokers are ill-equipped to advise on wealth management issues. There are people out there who can help you, and with the economy in some flux, now would be a good time to take a long hard look at your real estate holdings.

As always, if you have any questions about this, please don’t hesitate to reach out!

John A. Kilpatrick, Ph.D., MAI

john@greenfieldadvisors.com