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Perkins on Real Estate

The affluent often don't boost their real estate investments

By Broderick Perkins

The booming second-home market is helping the greater housing market continue rolling like thunder, but most affluent investors are adding quieter investments to their portfolios.

Last year, the National Association of Realtors said the median price of investment homes increased by 24 percent nationwide--twice the rate of resale homes, more than three times the rate of new homes and more than many other non-real estate investments--but most affluent investors aren't adding property to their portfolios.

Perhaps for good reason.

Among the 42 percent of affluent households looking to make net increases to their investment portfolios in the next three months, only 21 percent of them will increase real estate holdings, according to Phoenix Marking International.

Much larger shares are going to retirement accounts, deposit accounts, mutual funds and stocks, according to Rhinebeck, N.Y.-based Phoenix, a marketing research and consulting firm.

In February, Phoenix asked 1,100 affluent households--those with $250,000 to less than $1 million in invested assets--to specify where they would invest additional assets.

Affluent households planning to increase their investments (42 percent of them) are plowing their assets into: retirement accounts (said 70 percent of households); deposit accounts (62 percent); mutual funds (46 percent); stocks (42 percent); real estate (21 percent); fixed income (13 percent); business investments (11 percent); and alternative investments (3 percent).

Why not put more investment dollars to work in the still booming real estate market?

The fundamentals apply;

1. Affluent investors already have sufficient investment risk in real estate.

The group of people Phoenix polled have 46 percent of their total assets locked up in real estate, including their primary residence and other real estate, said David M. Thompson, vice president of affluent practice at Phoenix Marketing International.

"As wealth grows, they typically become better diversified, with larger allocations to investable asset groups. So there is little room for large growth in real estate among this segment," Thompson said.

The affluent households surveyed have another 40 percent of their assets in more liquid investments, stocks, bonds, mutual funds and deposit accounts, he added.

"I'm not surprised that less than a quarter of those surveyed said they'd add to their real estate portfolio. After all, these people have seen very large increases in the value of real estate and, quite logically, probably think the market is overheated, as many do here in the Bay Area," said Romeo Danais, a Silicon Valley real estate investor for years who says he's now pulling up stakes to invest in real estate in Oklahoma, New Hampshire and Texas.

Thompson said it's about diversification.

"As wealth increases there is less percentage-wise in real estate, though not necessarily less in the total dollar amount. As affluent households get wealthier and become more complex, they get advice from professionals about diversification," he said.

2. Affluent investors typically need more readily available cash.

"Real estate is illiquid, and when you're a baby boomer looking ahead to retirement, you want to invest in instruments with a fairly predictable record of appreciation that can quickly be converted to cash," said Alfred Glossbrenner, co-author of How to Make Your Vacation Property Work for You (FireCrystal, $149.95), a workbook and CD package.

The same tangible aspect that imbues the home investment with added value (you can live in it) detracts from the asset as a liquid investment.

"Retirement accounts continue to get top billing as they provide immediate and substantial tax deductions at the federal and state income tax levels. More sophisticated investors continue to be concerned about a slowdown in the real estate market, so they are being more selective about what and where they buy," said Eric Tyson, co-author of Real Estate Investing for Dummies (John P. Wiley, $21.99) and other real estate guide books for Dummies.

3. Real estate is getting riskier.

Indeed, a study just revealed that while long-term home ownership nearly guarantees a sizable investment return, longevity also inevitably opens the door to a downturn in the market cycle. Long-term investors don't want to get caught with that door open.

Walnut Creek-based PMI Mortgage Insurance Co.'s Spring Economic and Real Estate Trends report says from 1986 to 2005, if you owned a home in one of the 50 largest metropolitan statistical areas, your home has enjoyed a sizable increase in value.

However, 48 of the nation's 50 largest MSAs face a greater risk of declining home prices this quarter than they did the last quarter, according to PMI's Market Risk Index.

4. Emotions tug harder than potential returns.

An emotional factor often comes into play after buying that first home. Second, third and subsequent home purchases are more likely to be discretionary buys rather than hardcore investments.

Real estate writer Broderick Perkins, executive editor of San Jose-based DeadlineNews.Com, writes regularly for this newspaper.