How Much Real Estate do I Need in My Portfolio?
We all know that real estate is an important investment, but just how much of it should be in our investment portfolios?
Most individuals are sorely underexposed to real estate in their portfolios and retirement investment accounts. Remember that your personal residence does not count as a true investment, nor towards your net worth. So, how much other real estate do you have in your portfolio?
Portfolio Diversification 101
Diversification is important. It helps to balance risk and upside potential. We’ve all heard that we shouldn’t put all our eggs in one basket.
If all of your money is in one stock and the company goes bankrupt, you may be completely cleaned out. Your whole life’s worth of work and sacrifice can be gone forever. So, spreading your dollars across seven or so investments can offer much better protection. If there are a good balance and true diversification, you should never be wiped out. One year one investment may underperform, but another should overperform and the rest may do just as expected. It balances out. You won’t be left high and dry right when you need some money.
Advice on how broad or narrow you should be differs between experts. Peter Thiel, believes in great focus. Fund manager Fuquan Bilal believes in diversification within a specific industry, such as flipping houses, rental properties, and mortgage lending. Go down to your traditional broker like Edward Jones and you’ll probably walk out with a tiny piece of dozens of funds and funds of funds of stocks. The problem with this is the extreme volatility and irrational nature of stocks. Once the market gets spooked, everything goes down due to the stampede of sell-offs. There’s no real diversification or protection from the downside. You don’t have any hard assets in stocks.
Types of Real Estate for Your Portfolio
Real estate is a hard, tangible asset. One which can also produce passive income and capital growth.
Publicly traded REITs do not really provide any diversification from the stock market, but there are many other types of real estate investments which do.
- Private Lending
- Private partnerships and syndications
- Direct investment
- Commercial real estate
- Residential real estate
- Mixed-use properties
Getting the Mix Right
Getting your portfolio mix or allocation right, is really a personal calculation. It can depend on the times, your goals, personal financial needs, and personal timeline, as well as how active or passive you intend to be.
Most income-producing real estate is good for short, medium and long-term investing. Provided you invest with sound principles. It can provide cash now and ongoing, wealth building over the long term, including equity building with leverage and value-add improvements. It also typically provides a strong hedge against inflation and good tax breaks.
Some types of real estate may be more sustainable in both good and bad times, for example; multifamily apartments, local shopping plazas, and mixed-use properties. Commercial real estate can also give owners and asset managers more control over performance, regardless of the wider market.
Real estate delivers a great balance between the extreme risk of venture capital and the stock market and the negative returns of bonds and cash. This is no doubt one of the reasons that the world’s largest. Richest and smartest funds have been weighting their portfolios with more real estate. Take a look at Harvard, Yale and Stanford’s endowment fund portfolios and you’ll see their allocation to alternative assets can range from 20% to over 40%. These big funds in addition to national pension funds and international sovereign funds have often become nothing more than super-sized real estate investors (versus actually being in the education business).
How much of your investable capital should be in real estate? That may depend on what you other investments are and how risky or conservative they are, as well as if you recognize the need for passive income and tangible assets in your portfolio. Still, 30% seems to be a solid target, with some putting far more into these types of assets. Especially if they are diversifying deeper with multiple types of real estate related investments.
ABOUT THE AUTHOR
Bill Zahller is the Managing Partner of Park Capital Partners, LLC and resides in Asheville, NC. As a Multifamily Real Estate Investor and Syndicator, he founded Park Capital Partners, LLC in 2016 after 14 years involvement in real estate investment. He works with accredited investors and professionals who are interested in real estate investment, diversification, and financial freedom.
Bill has been flying since high school. His father was a Naval Aviator and Captain for TWA. Bill has been flying professionally for over 25 years, 23 of those at his current company. He has accumulated over 12,000 hours and 7 Jet type ratings. He has also held Instructor, IOE Instructor and NRFO pilot positions with a large fractional flight company. He is currently flying the Global 6000 in a long range mission capacity. This keeps it interesting – one week its Beijing or Sydney; the next Rio or Rome.
Bill is also the founder of the Asheville Multifamily Investor Club. Visit www.ParkCapitalPartnersLLC.com for more information.