Investing in 93108 Montecito Real Estate within a Strategic Wealth Plan

“Buy land, they’re not making it anymore.” – Mark Twain

Over the long run, Montecito real estate has been an excellent investment. Indeed, price growth has averaged about 8% per annum over the past five years versus 7% for the greater Santa Barbara area and 6% nationally. These price premiums of Santa Barbara and Montecito real estate have even persisted over the past five decades. Further, if you would have rented your Montecito property, total returns would have approached 12%, the same as for large U.S. stocks over the same period.

Although Montecito real estate has generated attractive long-run returns, there have been some periods where property values fell significantly, and it took over a decade to recover the losses (e.g., after the global financial crisis). As such, it is important to appropriately integrate real estate into an overall strategic wealth plan. While Montecito real estate lost significant value over a decade, U.S. equities almost doubled in value during the same period of time. However, earlier in the 21st century, for the first decade, U.S. equities lost value while our local real estate had grown in value by 50%. 

Instead of trying to choose next decade’s winner, we can instead combine assets in a smart way, not only to offset some risk, but also to generate more overall return than the investments can generate on their own. For example, it is possible to take two 8% returning investments and combine them in such a way to generate an overall portfolio return of 10% per annum. The key is to properly integrate assets into an overall strategic wealth plan. To do so, we recommend focusing on three dimensions of your assets:

The first dimension is maximizing the current yield of any asset. For real estate, this means deriving the greatest total current benefit from an asset. To do so it is important to track all forms of value: in addition to cash flow (e.g., renting a property, at least part of the year), there can be tax benefits (e.g., using part of the property for a business venture), philanthropic benefits (e.g., using the property to host charitable events), and the benefit of joyfully living in a property that is how and where you would like it to be (i.e., this joy-value can be calculated by asking yourself what’s the most you would pay per year to live in your Montecito home). The grand total of all of these benefits forms the total current yield of your property. The strategic part then becomes identifying the right mix of these different kinds of payoffs across all of your assets, based on your own desires and needs.

The second dimension is minimizing the economic sensitivity of your current yield from each asset. For example, some current rental income can be invested to provide a return two years later. Thus, if rental income is lackluster in two years due to an economic slowdown, this future independent investment return can help offset that. It turns out that there are many economic factors: inflation, interest rates, economic growth, to name just a few. The key is to orchestrate all of one’s assets and liabilities to maximize your financial well-being regardless of what these factors happen to be for a given period. For example, while real estate can be a good inflation hedge (after all, its costs comprise 33% of the Consumer Price Index), private floating rate funds and certain hedge funds can better help minimize interest risk. A clever mix of these assets and others can help provide consistent benefits over time, regardless of economic factors.

The third dimension is minding the remainder. Any assets that you do not use up will ultimately be given to your family, charity, and the government (via taxes and fees). There are many things that can be done today to ensure your remainder is divided between those three in the way you best see fit.

In summary, Montecito real estate is, in many ways, an excellent asset to own. However, it can be made even better by integrating it into a strategic wealth plan through maximizing its total current yield, minimizing its value dependence on any particular economic outcome, and minding the remainder.  

Data for this article are obtained from the Federal Reserve Bank of St. Louis, U.S. Federal Housing Finance Agency, U.S. Bureau of Labor Statistics, Zillow, and author’s calculations.