How Much Should You Invest in Real Estate?
Look to the Wealthy for Clues
Why Real Estate in the First Place?
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. (“Buying a home doesn’t make you an investor any more than buying groceries makes you a chef.” — Gary Keller, millionaire real estate investor and best selling author)
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. So let’s start with some actual data.
According to the members of TIGER 21, an investment club for high-net-worth individuals, real estate now accounts for 28% of high-net-worth investor’s holdings. The same report from Q3'19 also revealed that real estate is the highest percentage of their portfolios and is increasing while stocks and holdings are pulling back.
What would others suggest? 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 private multifamily real estate investments (some do offer public REITs) and in most cases these advisors aren’t legally licensed to talk about anything except stocks and bonds — so naturally they are not going to recommend real estate. 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 individual 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 with OpenPath. OpenPath Investments is a social impact real estate investment firm where I have been a partner and investor since leaving Google in 2007.
“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
If you’d like to hear more about my thoughts on this subject or learn more about OpenPath and our approach to social impac real estate investing I’m happy to discuss.
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.