How much real estate should I have in my portfolio?

Stumping Google

 

If you Google this question, your browser won't return much.

Access to direct, real estate investing had been limited to the country-club network for more than 100 years. The average accredited individuals only got access in 2013 (via real estate crowdfunding) and the average ordinary investor in 2015.  

This is just too recent for most financial pundits and even many financial advisors to even know about … let alone make recommendations.

Take your best guess?

Without specific knowledge, many traditional advisors fall back on rules of thumb. Traditionally it was believed that the best and safest wealth generator over the long term was investment in public markets (stocks, bonds, mutual funds, ETF's etc.). So advisors might recommend 80-90%  (or more) of your portfolio in that. Anything left over would be where you could dabble in other things, like real estate. 

However, this advice was never data-driven, because until 2017 the long-term returns of the stock market versus real estate had never been comprehensively studied. (More on this below).

So in the absence of this, institutions and academics tried to create their own rules.

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Institutions
 

Deutsch Bank Real Estate Division (RREEF) found that most institutions average 10% real estate, with the majority in core (very conservative) assets.
 

And in the paper "The Impact of a Real Estate Allocation in a Diversified Portfolio", Lazard Advisors found that the Yale endowment allocated 20% to real estate that year. (The Yale endowment is famous for beating the stock market over many years). Yale nudged it down to 17% at the end of 2014

 

Academics attempted to answer the question, using the limited data they had at the time. For example:
 

• A Urdang (BNY asset management company) report, quoted a study by Stephen Lee, of the Cass Business School in London, which concluded that: "Optimally investors would include a 26 percent allocation to private real estate, but actual allocations are much lower, due to perceived risks and illiquidity."

Can't someone just show me the data?!

However, all of the above was thrown into question by a bombshell. At the end of 2017, the first comprehensive study of the returns of different investments was completed. And to the surprise of almost everyone, it found that a certain type of real estate investment (un-leveraged residential properties) returned much more than bpnds/treasury bills. And it was roughly the same as stocks (and with less volatility). This was a seismic discovery.

(Note: The study didn't take into account the substantial tax benefits of real-estate over equities. And we're still waiting to find out about different types of real estate. For more information on all of this, see Investing Myths Debunked).

So as I write this in early 2018, I suspect a lot of investors and data-driven financial advisors are going to be considering a higher allocation. In the past, I've thought that a 10-25% allocation seemed right for me. Now I might consider bumping it up to 20-45% (Especially since I own a good number of unleveraged residential properties.)

 

And I feel a lot better about some investors I know with an 80%-90%+ allocation to un-leveraged residential properties. They no longer seem so crazy!

The exact percentage for you will depend on a lot of things, such as your risk tolerance, and where you are in life (working, retired, etc.).  I highly recommend that you consult with a financial advisor knowledgeable in real estate investing, to find out what works best for your portfolio.

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