How Much of an Investment Portfolio Should be Allocated to Real Estate

Overview As an active syndicator and apartment owner, I’m often asked by investors how much of their investment portfolio should be allocated to real estate. Of course, each investor’s situation is different, so it’s difficult to give a standard answer. However, I’m laying out some ideas here that serve as a starting point. Recommended Allocation The ideal real estate allocation in an investment portfolio depends on the individual’s financial goals, risk tolerance, and overall investment strategy. There is no fixed rule or standard, but as a general guideline, experts suggest that real estate investments should not exceed 10-20% of an individual’s portfolio. It is important to diversify investments across different asset classes and regularly review and adjust the portfolio as needed to ensure it aligns with the individual’s financial goals. Why You May Consider More Than 10-20% As indicated above, a 10-20% allocation to real estate is a common starting point. But in some situations, it may make sense to allocate more of an individual’s portfolio to real estate. The most typical reasons to allocate more are: Longer investment horizon Real estate moves slowly, so for an investor with a 10-20 year investment horizon, real estate has been shown to outperform the stock market. A patient real estate investment strategy is typically rewarded with exceptional returns. Less Volatility The stock market tends to have a lot of volatility, which can be nerve-racking to observe and leave many people with a sense of helplessness. To avoid feeling like a victim of stock market gyrations, dedicating a larger portion of an investment portfolio to real estate tend to result in a more stable portfolio, reducing anxiety. Tax Benefits One of the most attractive attributes of real estate investing is its favorable tax treatment. This asset class offers more tax benefits than other types of investments, which is why people that can take advantage of the tax benefits often allocate a larger portion of their portfolio to real estate. Here’s the blog post I wrote about this topic. Why You May Consider Less Than 10-20% Real estate may not be the best investment class for some people. Some of the common reasons individuals may allocate less includes the following: Lack of Liquidity Real estate is not very liquid. If there is an urgent need for cash, the investor may be unable to sell the real estate quickly enough to meet the required liquidity. Short Time Horizon Investors with short time horizons may want to allocate a smaller portion of their portfolio to real estate. This asset class is not very liquid and tends to generate better returns over a longer time horizon. If the money is needed in a few years, stock investing may be more suitable. Summary Each investor’s objectives are different, and careful consideration should be given to the amount of real estate in a given portfolio. This article highlighted some arguments for a higher and lower allocation to real estate. Disclaimer This article has been prepared for informational purposes and is not intended to provide, and should not be relied on for, tax, legal, or investment advice. You should consult your tax, legal, and investment advisors before engaging in any transaction.