How the rich stay rich

Reader note: This is part one of a four-part series

When most of us hear “The Kennedys,” we think of America’s most prominent, if beleaguered, political family. Whatever you think about their politics or private lives, you’ve got to be impressed with how the family has managed intergenerational wealth. Deep down, we all want to invest like a Kennedy.

There are many stories—some factual, some unsubstantiated, most somewhere in between—that describe how the family patriarch, Joe Kennedy earned his fortune: banking; insider trading (legal at the time); and liquor importation. But that was just the beginning.

By the 1940s, Joe was worth more than $100 million and he turned his attention from accumulation to preservation. And with that, his focus shifted to real estate. With the help of expert advice, and in concert with several other investment opportunities and wise structuring, it proved to be the financial foundation for generations to come.

In 1945 Joe made a deal that became the centerpiece of the Kennedy fortune: for just under $13-million he bought the Merchandise Mart in Chicago, the world’s largest commercial structure. In 1998, the family sold it for $600-million.

Real estate is an important component of any balanced high net worth portfolio and has many positive attributes, both behavioural and practical. Unlike equities and public markets, commercial real estate valuations are made infrequently; there’s no daily price volatility as there is feeding the fervor of stock watching and market timing. Also, returns are inflation adjusted, as rents can potentially keep pace with inflation.

Related articles

• Back to the land: Investing in real estate
• Seeking yield? Think real estate
• Real estate smoothes portfolio volatility

Smart real estate investing can definitely pay off, as hard assets, well-located in vibrant markets, tend to perform well relative to other asset classes.

Given the usefulness of real estate in an investment portfolio, it’s helpful that there is a wide variety of investment options available to investors of all account sizes. With proper research and due diligence, each can make for an excellent real estate investment vehicle that has the potential to provide good returns.

Publicly traded real estate investments are typically held by mass affluent investors, as the barriers to entry are very low. These options include real estate investment trusts (REITs), public companies with substantial real estate holdings and real estate mutual funds.

For high net worth clientele, there is separate array of privately held investment options available, including:

• Commercial real estate (office buildings, shopping malls, industrial parks)
• Residential real estate (homes, condos, apartment buildings)
• Recreational real estate
• Land for future development
• Real estate development and value-add opportunities to existing properties.
• Real estate Limited Partnerships (Open and Closed End)
• Syndicated investments

Building a portfolio from these options gets your client a little closer to that Kennedy-esque investment strategy. To decide which of the above options suit your client’s desired level of personal involvement, they need to consider the following questions:

• Do you have the expertise and real estate knowledge base to know you’re purchasing a good property?
• Do you have the time available to perform research, due diligence, and ongoing maintenance?
• Do you have sufficient capital / liquidity and access to appropriate leverage?
• Is your goal cash flow over capital appreciation?
• Do you have a network of potential partners who share your investment values, philosophy and time horizon?
• Are you willing to put in the hard work instead of pay fees to have someone else do all of the above?

If the answer is “yes” to each of the above, then perhaps making the leap to hard asset real estate is something they are prepared for, but we will revisit these questions in part three and examine just how important each is to direct real estate ownership.

In the following installment, we’ll look into what it takes to get started with a personal real estate portfolio and spend some time examining what financial circumstances and investment conditions are ideal for investing like a Kennedy.

Read Part 2.

David Sung is president of Nicola Wealth Management, a Vancouver-based investment management and financial planning firm. With 20 years of industry experience, David leads a team of dedicated and knowledgeable advisors, serving the needs of high net worth business owners, professionals, and their families.

Wayman Crosby is CEO of Nicola-Crosby Real Estate Investments Ltd. and oversees the management of SPIRE LP. A graduate of UBC in Urban Land Economics in 1978 Wayman has an extensive real estate career spanning over 25 years.