How Much Real Estate Should You Hold?
Diversifying Your Portfolio in an Aging Bull Market
Many high-net worth investors and financial experts consider real estate to be the ideal investment — specifically commercial multifamily real estate. One such investor even wrote a book detailing why and went as far as entitling it The Perfect Investment. Similarly, a new study found housing has been the world’s best investment for the last 150 years.
Unlike your home, commercial real estate is a true investment owned for the primary purpose of appreciation and financial return.
Commercial real estate offers investors a number of attractive benefits compared to stocks and bonds. These include a greater annual income, favorable tax treatment, and the most favorable risk-adjust returns. What’s more commercial real estate returns have a low correlation to other assets, so it’s an excellent way to diversify. And in an environment of rising interest rates and prices, real estate can even serve as a hedge against inflation.
Multifamily, which is another way of saying large apartment complexes, is considered to be the safest, most stable and predictable class of commercial real estate.
Clearly there a many reasons to like investment real estate, but how much commercial real estate should you hold?
A Wide Variety of Opinions
I have found that there is no set answer the question of how much commercial real estate investors should hold and that the advice you get on this will often depend upon who you ask. Even amongst financial advisors you’ll find a wide variation in answering this question. At one end wealth advisors at the big banks (i.e. Merrill Lynch or Goldman) will typically tell you the number is zero or that “you have enough exposure to real estate via your home”. (Such advice is directly tied to the fact that these large firms don’t offer such multifamily real estate investments and in most cases aren’t legally licensed to talk about anything except stocks and bonds— so naturally they won’t recommend. But that is a subject for a different post).
Independent wealth advisors, who don’t have the same pressures and restrictions as those at the big banks are much more likely to advise clients to invest a significant percentage of their assets in multifamily. David Blain CEO of BlueSky Wealth Advisors, an independent firm that works with high net worth individuals in Silicon Valley and North Carolina, recommends that clients invest up to a third of their assets in multifamily real estate. Blain also believes more financial advisors need to educate themselves and their clients on the value of real estate.
Still further, if you were to ask any of OpenPath’s investors who have owned multifamily real estate for some extended period, they will most often tell you to hold as much housing investments as you can. This has been my personal experience as well. (OpenPath Investments is a social impact real estate investment firm where I have been a partner since leaving Google in 2007). The study mentioned above concurs with this strong bias towards housing. According to it’s authors investors ideally would hold “an internationally diversified portfolio of real estate holdings, even more so than equities.”
“Stocks will bring you highs, but periodically will seriously let you down. Treasury bonds will keep you safe, but they won’t make you rich. Housing? That’s the best of both worlds.” — Quartz’ Dan Kopf on the findings of a new study
Finding Your Comfort Level
The way I to look at the question of allocation is to ask yourself what asset mix would make you feel comfortable in both a bull market and a bear market? Let’s look at a few typical asset allocations. Assume your portfolio was allocated in each of these 3 ways — then assume a strong bull market and then a strong bear market:
Portfolio A: 70% equities and 30% bonds. In a Bull Market: You’re happy. In a Bear Market: You’re very concerned.
Portfolio B: 40% equities and 60% bonds. In a Bull Market: You’re wishing you held more equities. In a Bear Market: You’re happy you’re holding less equities but you are nevertheless not generating any growth. So if the bear market persist for any amount of time you will become concerned.
Portfolio C: 33.3% equities and 33.3% bonds, 33.3% real estate. In a Bull Market: You’re happy. Both the market and real estate are generating strong returns. In a Bear Market: You’re still relatively happy. The real estate is generating income and your bonds are likely contributing at least something. You are realizing return/annual income while you wait for the stock market to rebound.
Your own asset allocation will ultimately rest on how you feel about these different scenarios.
One last point about commercial real estate is that these properties can be invested in passively through firms that specialize in acquiring and managing this type of asset. And of course partnering with the right real estate investment firm is important.
Where’s the best place to invest in 2018?
If you are concerned about a big drop in the stock market but still looking for greater returns than those offered by bonds then consider diversifying your assets with multifamily commercial real estate.
“By standard measures of uncertainty, housing was about half as risky as equities, and slightly less risky than bonds.
The reason these findings are so remarkable is that they fly in the face of economic theories of asset valuation, which suggest risky assets like stocks should have higher returns than stable ones like housing. But that’s not so” — Quartz’ Dan Kopf on the findings of a new study
A couple other posts that I think you will like:
Note: OpenPath investment opportunities are for accredited investors. I am not a CPA or professional financial advisor. All opinions are my own. I encourage you to consult your accountant to fully understand your individual tax situation.
 The Perfect Investment by Paul Moore was published in Aug 2016
 OpenPath Investments is a social impact real estate company that acquires multifamily housing in stable, growing, inventory constrained markets and then adds value to the properties — with an eye on the environment — while building community for the residents.