Your Home is Not a Real Estate Investment
Most investors are under-allocated in real estate believing that their personal residence is part of this allocation. Excluding your home, do you own real estate? Your home, while looking like real estate, is not a real estate investment you look to for yield or income.
Investment real estate provides four different forms of yield. They are:
• Income – as derived from rents or other ancillary income generated
• Tax shelter – provided by depreciation of the physical asset over time
• Appreciation – the increase in value over time
• Mortgage pay down – the increase in value created as income is utilized to decrease debt
Allocation theory suggests that a portfolio should have between 5% and 15% of assets in real estate (excluding your personal residence). Thus, investors should have between $50,000 and $150,000 in real estate for every one million dollars in net worth.
When excluding your personal residence, what percentage of your investment portfolio is in real estate? Direct real estate ownership provides a buffer to the daily market swings in stocks and bonds. Real estate is an important part of a balanced portfolio.
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Comments (1)
Allocation theory also assumes you are purchasing the property at the intrinsic value. The whole name of the game in real estate investing is to identify equity and to purchase it at a discount. The weighting in a portfolio should thus be HIGHER than what the people in business school tell you. Another thing to consider it that most direct participation requires a time component and thus this straight portfolio weighting analysis is skewed. Purchasing SFRs or small complexes is different than asset allocating some dollars to REITs.
Bryan Hancock, about 15 years ago