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February 9, 2015

Why is Real Estate so Important to my Wealth?

By Hayden Horowitz, COO, Head of Real Estate Solutions

A 2014 Wealth Report survey found that primary and other homes accounted for nearly 30 percent of wealth for high net worth families. On average, high net worth families own 2- 4 properties, and 20 percent of the survey subjects were considering adding another home.

Wealth Report found that real estate investments accounted for almost 25 percent of investment portfolios for high net worth families; nearly half of the respondents expected to increase that allocation in 2014. A 2014 Christie’s International Real Estate Luxury Property Market report noted that real estate is a natural way for high net worth families to safely distribute money to their children and to diversify into different countries.

Overall, properties can be a very visible reflection of the values and personal tastes of an owner, whether in a personal or investment context.

What are the most significant real estate challenges high net worth families face?

Despite the tendency high net worth families have to accumulate real estate for investment or personal enjoyment, in our experience these families are often not adequately focused on proper management of those properties or improvements. In particular, high net worth families often begin construction projects without proper representation, planning or oversight. That situation may leave them at the mercy of contractors or vendors whose interests are not aligned fully with their own, especially with respect to cost and time management. And, given sizable project costs and complexities, even relatively minor errors in the planning or execution of a construction project may mean millions of dollars in additional expense, delays in project completion, compromises in the final design, legal entanglements, emotional distress or all of these issues.

What are some common construction pitfalls?

Specifically, we see three types of construction pitfalls that occur with some frequency: Escalating construction costs: Design-scope creep, schedule delays, lack of proper budgeting and poor cost reporting may all lead to higher total costs for a given project.

The most common causes of schedule delays are failures by the owner to: 1) appropriately manage and monitor contractors; and 2) make timely design or construction decisions. By not implementing appropriate safeguards, owners put themselves at risk for physical harm, project delays and incremental costs arising from accidents and contractor defaults.

How can high net worth families avoid the pitfalls without having to become project management experts? Construction projects require a very detailed knowledge base, careful planning and ongoing management in order to avoid the numerous scenarios that may threaten their success. Yet high net worth families do not necessarily need to learn this subject matter themselves nor devote the requisite time to manage a project on a daily basis, as these skills are available through outsourcing.

They should, however, make hiring expert representation a priority at the outset of a project, since that is the best opportunity for mitigating or eliminating problems throughout the course of construction. Ideally, this expertise will reside within their multifamily office or come from someone who has a successful track record executing similar projects.

Working with a multi-family office that has real estate and project management experts on staff can provide the client both the expertise for the project itself and the capability to assess how real estate assets fit within a broader wealth plan.

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This article was originally published in the February/March 2015 issue of Worth.

View Hayden’s bio

Contact Hayden at hhorowitz@gellerco.com