{"id":179250,"date":"2024-11-22T12:57:50","date_gmt":"2024-11-22T19:57:50","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=179250"},"modified":"2024-11-22T12:57:52","modified_gmt":"2024-11-22T19:57:52","slug":"how-much-of-your-net-worth-should-each-real-estate-investment-make-up","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/how-much-of-your-net-worth-should-each-real-estate-investment-make-up","title":{"rendered":"How Much of Your Net Worth Should Each Real Estate Investment Make Up?"},"content":{"rendered":"\n

If you invest <\/span>right<\/span>, real estate can offer asymmetric returns: high potential returns with relatively low risk. Sure, it requires a degree of skill, but by investing alongside others in an investment club, you can instantly draw on others\u2019 experience. <\/span><\/p>\n\n\n\n

Skill aside, traditional real estate investments come with another challenge: the money required to invest. <\/span><\/p>\n\n\n\n

If you buy a rental property, you\u2019ll likely need $50,000 to $100,000 between the down payment, closing costs, cash reserves, and any initial repairs. <\/span><\/p>\n\n\n\n

If you invest in a real estate syndication, you\u2019ll likely need $50,000 to $100,000 as a minimum investment mandated by the operator. <\/span><\/p>\n\n\n\n

That makes it hard for the average investor to diversify. It begs the question: How much of your net worth should each real estate investment make up? <\/span><\/p>\n\n\n\n

In the beginning, it should be small, under 1%. As you gain confidence and expertise, it can grow. <\/span><\/p>\n\n\n\n

\u201cBut in the beginning, I don\u2019t have a high net worth, so investing in real estate will require a high percentage <\/span>of it<\/span>!\u201d <\/span><\/em>Not if you can start <\/span>by<\/span> investing $500 or $5,000 at a time. But we\u2019re getting ahead of ourselves. <\/span><\/p>\n\n\n\n

Control Group: Standard Investment Advisors<\/span><\/h2>\n\n\n\n

If we grabbed an average investment advisor off the street and asked them about asset allocation, they\u2019d probably talk only about<\/span> stocks and bonds<\/span><\/a>. <\/span><\/p>\n\n\n\n

They might say something like, \u201cFollow the Rule of 100: Subtract your age from 100, and put that percentage of your portfolio in stocks and the rest in bonds.\u201d If they were particularly aggressive, they might bump that to 120 or propose holding 5% to 10% of your portfolio in <\/span>REITs<\/span><\/a>.\u00a0<\/span><\/p>\n\n\n\n

Yawn. <\/span><\/p>\n\n\n\n

I <\/span>literally<\/span> chatted last night with a close friend of mine who\u2019s an investment advisor. I asked her point-blank: \u201cFor your high asset management fee, does your team beat the stock market <\/span>at large<\/span>?\u201d<\/span><\/p>\n\n\n\n

Her response: \u201cNo, <\/span>and<\/span> we\u2019re not trying to beat the market either. Our clients are mostly wealthy people who want to minimize risk so they don\u2019t run out of money before dying.\u201d <\/span><\/p>\n\n\n\n

Not only does her advisory team not beat the S&P 500, they significantly underperform it, especially after adding <\/span>in<\/span> their 1% to 2% advisory fees each year. <\/span><\/p>\n\n\n\n

It\u2019s hardly a plot twist when I tell you <\/span>that I<\/span> invest differently.<\/span><\/p>\n\n\n\n

My Asset Allocation<\/span><\/h2>\n\n\n\n

I aim for around 50% of my net worth in stocks and the other 50% in real estate. I don\u2019t bother with bonds at all, as a 40-something. <\/span><\/p>\n\n\n\n

\u201cBut Brian, how do you protect against risk?!\u201d<\/span><\/em><\/p>\n\n\n\n

First, I\u2019m not retired, so stock market corrections don\u2019t scare me. Second, bonds aren\u2019t as low risk as you might think. They\u2019re susceptible to inflation risk, for starters. Rewind the clock just two years to when inflation hit 9.1%, and ask someone holding a 2% Treasury bond how they felt about losing 7.1% in real dollars.<\/span><\/p>\n\n\n\n

Then, there\u2019s interest rate risk, which causes the value of existing bonds to bounce up or down. The <\/span>Morningstar US Core Bond Index<\/span><\/a> fell 12.1% that year. <\/span><\/p>\n\n\n\n

Instead of bonds, I invest in real estate. And I expect my real estate investments to earn twice as much as my stocks, with <\/span>half the risk<\/span><\/a>. <\/span><\/p>\n\n\n\n

Speaking of stocks, I invest in a mix of ETFs that give me broad exposure to the <\/span>entire<\/span> world: small-cap, mid-cap, large-cap, all sectors, all geographical regions, you name it. If you <\/span>don\u2019t know anything<\/span> about stocks, try investing in just two funds: VTI (the Vanguard Total Stock Market Index Fund) and VEU (the Vanguard FTSE All-World ex-US ETF). <\/span><\/p>\n\n\n\n

But how do I manage the risk in my real estate investments? <\/span><\/p>\n\n\n\n

Concentration Risk Among Real Estate Investments<\/span><\/h2>\n\n\n\n

Imagine you have a net worth of $100,000 as a young investor. If you go the traditional route and invest $50,000 to $100,000 in a real estate investment, it will take up 50% to 100% of your net worth. If that investment goes poorly, it could <\/span>cripple<\/span> your finances for the foreseeable future. <\/span><\/p>\n\n\n\n

You wouldn\u2019t put 100% of your stock investments in one company. Why would you do the same thing in real estate? <\/span><\/p>\n\n\n\n

Now imagine<\/span> you put $100 toward loans on Groundfloor (0.1% of your net worth). Then, you put $100 into real estate funds on Fundrise. Then you buy a fractional share of a rental property on Arrived for another $100. <\/span><\/p>\n\n\n\n

If Fundrise does poorly, like it did in 2022 and 2023, it won\u2019t break you. <\/span><\/p>\n\n\n\n

After dipping your toe in passive real estate investing with a few crowdfunding platforms, you discover private real estate investments. You start wrapping your head around <\/span>private partnerships<\/span><\/a>, real estate syndications, and equity funds. You <\/span>start<\/span> experimenting with private notes and debt funds for monthly income. <\/span><\/p>\n\n\n\n

In SparkRental\u2019s Co-Investing Club, I invest $5,000 at a time in these <\/span>types of<\/span> passive investments<\/span><\/a>. <\/span>Yes, that\u2019s higher than the $100 to $1,000 <\/span>that<\/span> you can invest in <\/span>some<\/span> crowdfunding platforms.<\/span> But we also aim for higher returns and lower risk than crowdfunding investments.<\/span><\/p>\n\n\n\n

This<\/span> is because crowdfunding investments, REITs, stocks, and bonds <\/span>all<\/span> share one thing in common: They\u2019re open to the public <\/span>at large<\/span>.<\/span> By definition, you\u2019ll earn average market returns because you\u2019re paying market pricing for public investments. <\/span><\/p>\n\n\n\n

You can do better\u2014if you\u2019re willing to leave the well-trodden path <\/span>that the<\/span> herd follows. <\/span><\/p>\n\n\n\n

How Your Real Estate Allocation Should Change Over Time<\/span><\/h2>\n\n\n\n

When I first started investing passively in real estate, I aimed for <\/span>no single<\/span> investment to take up <\/span>more than<\/span> 1% to 3% of my net worth.<\/span> <\/span><\/p>\n\n\n\n

Over time, I\u2019ve evolved as an investor. I know more, and so does the investment club of other investors that I vet deals with together. Collectively, we\u2019ve developed deep expertise. It\u2019s almost a \u201chive mind\u201d as we get together <\/span>each month<\/span> to vet investments. <\/span><\/p>\n\n\n\n

I also have firsthand experience with over 25 operators by now. <\/span>I <\/span>feel <\/span>extremely<\/span> confident in some of them<\/span> after having invested with them on multiple investments and seeing their communication style, how they handle hiccups, and so forth.<\/span><\/p>\n\n\n\n

Today, I <\/span>feel<\/span> comfortable investing 5% to 10% of my net worth with some of those operators.<\/span> I started small and have scaled up some of my real estate investments over time. <\/span><\/p>\n\n\n\n

That\u2019s the beauty of passive investing: You can invest a little with one operator, see how they do, and<\/span> then invest more with them if you like them. <\/span><\/p>\n\n\n\n

The risk is never zero, of course. The principal could die in a plane crash, or a major <\/span>war could come along and disrupt your real estate<\/span><\/a> and other investments. But I\u2019m comfortable that the risk is low compared to other investments\u2014especially given the high returns. <\/span><\/p>\n\n\n\n

Start Small, Then Expand<\/span><\/h2>\n\n\n\n

It\u2019s <\/span>a lot<\/span> easier to invest small amounts in passive real estate investments than active ones. <\/span>Despite all those gurus trying to sell you on \u201czero money down!\u201d real estate investing strategies, most <\/span>of them<\/span> require deep expertise if you hope to execute <\/span>on<\/span> them without enormous risk.<\/span> <\/span><\/p>\n\n\n\n

I mentioned that I aim for twice the returns on real estate with half the risk. That doesn\u2019t start with a $50,000 or $100,000 investment in a single property with an operator you don\u2019t know. It starts with $500 or $5,000, followed by a probation period where you see how that operator performs. In our Co-Investing Club, for example, we aim not to invest with the same operator within one year of our first investment with them. <\/span><\/p>\n\n\n\n

Small-dollar investing lets you build confidence, trust, and expertise <\/span>over time<\/span> before betting on the farm. From there, you can scale up to investing $50,000 with an operator or more. <\/span><\/p>\n\n\n\n

If you want to keep your risk low and <\/span>your<\/span> average returns high, start low and go slow.<\/span><\/p>\n\n\n\n

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\n \"\"\n <\/div>\n <\/div>\n<\/div>","protected":false},"excerpt":{"rendered":"

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