Many people know that real estate can generate great returns but don’t know how much of their portfolio they should allocate toward this lucrative asset class. After all, traditional investing advice tends to focus only on stocks and bonds.
So in this article, we’ll dive into what an appropriate asset allocation looks like when it comes to real estate (especially single-family homes) and more.
First, it’s important to clarify that we are not counting your primary residence as part of your investment portfolio. Though your home can appreciate in value, its main purpose is to provide utility (i.e. shelter) now. For that reason, you should exclude your primary residence from any asset allocation calculations.
Your investment portfolio can include stocks, bonds, commercial real estate, single family real estate and other alternative investments like private equity, hedge funds, venture capital, art, and collectibles.
How much of each asset class makes up in your overall portfolio depends on many factors, including your risk tolerance, time horizon, target retirement date, and more. It also depends on what your short- and long-term investing goals are in the first place.
So there is not one “right” answer to how much of your portfolio you should invest in real estate. However, there are some guidelines that may help.
Investing expert Barbara Friedberg says a real estate allocation of 5% to 10% is a good rule of thumb since real estate is an alternative asset class.
At the same time, private equity and real estate investor and serial entrepreneur Ian Ippolito recommends putting as much as 13 to 26% or more into real estate. He cites a 2017 study, which shows that unleveraged residential properties return more than stocks with less risk. He also points out that the Yale Endowment (which consistently beats the market) allocates as much as 20% of its portfolio to real estate.
In fact, the Yale Endowment’s Chief Endowment Officer David Swensen recommends that investors who want a “well-diversified, equity-oriented portfolio” allocate 20% of their portfolio to real estate investment trusts.
Other institutional investors make similar recommendations. For example, Blackstone and Baird both emphasize the importance of allocating a significant portion of your portfolio to alternative investments like real estate.
So if you want to invest as the wealthy do, you might consider allocating about 20% of your portfolio to real estate.
That said, what makes real estate such an attractive asset class to expert investors? On top of the competitive returns, real estate offers many benefits not found in most other alternative assets. Here are a few of them:
If you’re ready to start investing in real estate, there are a few different ways you can do it. You can either buy an investment property on your own, invest in a real estate investment trust (REIT), or invest in a real estate fund like the Invest.net SFR Fund I.
Buying and managing your own investment property can be a lot of work and is the least diversified approach. It’s putting a lot of your eggs in one basket.
REITs have been around since the 1960s and are one of the easiest and cheapest ways to invest in real estate. However, they also offer the least amount of control.
Finally, a real estate fund or real estate investment group (REIG) offers investors the best of both worlds. You get the diversification of investing in multiple properties across the U.S. while also being able to pick funds tailored to your investment needs and strategy.