As you probably know, diversification is one of the fundamental concepts of successful investing. Any well diversified investment portfolio will have some portion of its assets invested in real estate.
Real estate investment, whether residential, commercial, or in infrastructure, has a multitude of benefits:
- Real estate has a low correlation with the stock market. When stocks go down, your real estate investments will remain steady and limit your loses. It also works the other way around. In an analysis that spanned many different countries and 14 years of data, researchers found there was no correlation between stock market and real estate prices.
- Real estate investment has competitive returns that can give the stock market a run for its money. For example, US commercial real estate gained an average of 8.4% per year between the years 2000 and 2010, and did so with less volatility than stocks.
- Real estate investment allows you to leverage your capital by taking out a loan to buy the property. If you put 20% down and borrow the rest, a 5% increase in the price of the property is equivalent to a 25% return on your investment.
- Some real estate investments enable you to both collect rent income and benefit from the appreciation of the property over time, providing two different sources of investment returns. Those looking for stable income can benefit from the predictable income from rents, while those looking for higher returns can look into properties that are likely to appreciate rapidly in price.
- Real estate has a high tangible asset value, which means that its value can be more easily ascertained than that of stocks or bonds. A stock’s value can go to zero, but a real estate investment, not counting total loss in cases of disaster, will always be backed by the value of the land and the value of the brick and mortar building itself.
Real estate investment tends to have one potential downside, and that is its illiquidity. While a stock or a bond can be sold relatively quickly if the investor needs to free up cash, real estate investments can take somewhat longer to liquidate. However, for those looking for exposure to real estate without losing liquidity, REITs (Real Estate Investment Trusts) and ETFs now allow investors to invest in real estate without actually owning hard assets, because these shares can be sold on the market at any time, much like a stock or a bond.
So what percentage of your portfolio should be dedicated to real estate? That will depend on your unique investment profile and goals, but the amount often recommended to institutional and high net worth individual investors is usually between 10% and 25% of the portfolio.
If you’re thinking about diversifying your portfolio by investing in real estate, contact RMC Realty Advisors to take advantage of our years of experience in asset management, receivership, and due diligence for real estate investments.