Are you throwing away money? According to some experts, if you don’t diversify your portfolio across multiple asset classes, including real estate, you’re quite literally throwing away money in the long term.
With every market dip, you’re overexposing yourself to risk. As a result, you’ll be less likely to meet your financial goals. Clearly, diversification is important. Real estate is one of the assets you should be looking at if you’re trying to diversify. Real estate in your investment portfolio has a variety of benefits.
Hard assets like commercial real estate can help you hedge against economic inflation. Investing in real estate reduces risk. Why? Because it’s less likely that real estate will be negatively affected by the same problems that cause stocks to decline. In other words, when you diversify, your assets can complement one another. Overall, you’ll have a more stable portfolio with a higher likelihood of earning great returns.
Real Estate in Your Investment Portfolio – The 20% Rule for a Diverse Portfolio
The 20% Rule has been popular for years. Created by David Swenson from Yale’s Investment Office, this strategy involves diversifying at least 20% of your portfolio into alternatives to the stock market – usually, real estate. For example, a sample portfolio following the 20% rule may look something like this:
- 30% domestic stocks
- 30% bonds and securities
- 20% real estate
- 15% foreign developed markets
- 5% emerging markets
However, recommendations vary. Some people recommend only investing 15% into real estate while increasing your investment in other alternative asset classes. It will depend on the current economic conditions and what is best for your finances.
It’s also important to note that it’s a good idea to rebalance from time to time. If the value of your real estate holdings drops, you may want to invest more into REITs. Or, if your stocks increase in value, sell enough to maintain a balanced portfolio so that you’re not over-relying on stocks.
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Other Benefits of Real Estate in Your Investment Portfolio
Besides diversifying away from stocks, other benefits of real estate investing include:
- Passive income opportunities: earn money without quitting your day job
- Tax breaks and deductions that mitigate the costs of owning and managing properties
- Stable cash flow that strengthens over time as you build equity
- Property values tend to go up over time, which helps you turn a profit if you decide to sell
- Rent values also increase over time, which can increase your monthly cash flow
- In addition, you can use your real estate as leverage to get better financing for other investments.
Ways to Invest in Real Estate
While many real estate transactions take a significant amount of time, money, and research, other options allow for quick buying and selling. Luckily for investors, there are plenty of options!
Real Estate Investment Trusts
REITs, or real estate investment trusts, allow you to invest in real estate without having to own, manage or finance a property on your own. Since REITs payout 90% of income to investors, they often offer higher dividends than stocks.
Residential Real Estate Investing
Fix and flip investments, traditional rentals, and short-term rentals are all investing methods in residential real estate. You can invest in residential real estate alone or with a partner, and you can hire a property manager to handle the day-to-day tasks.
Commercial Real Estate Investing
As a commercial real estate owner, you can invest in office, retail, multifamily, or industrial real estate, or you can purchase raw land and develop it with the intent of leasing it out to commercial businesses. Commercial real estate is one of the most rewarding ways to invest!
However you look at it, real estate in your investment portfolio is a smart option.
At STRATAFOLIO, we help commercial real estate investors stay on track. No matter how many properties you manage, we’re here to help you stay organized and harness your data for optimal returns! And, if you have already made the jump into real estate and need help automating your processes, schedule your personalized STRATAFOLIO demo today.
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