How Much Real Estate should be Included in Your Portfolio?

Diversify Investments – How Much Real Estate should be Included in Your Portfolio

With the stock market recently reaching a record breaking level at 22,000, you may be looking for other investment alternatives.  Real estate is an important element for a diversified portfolio.  Most individual investors do not consider real estate when allocating assets among investment alternatives.  However, North American pension funds, insurance companies and high net worth individuals allocate from 8.5% to 24% of their portfolio to real estate assets.  Globally, the allocation of real estate is higher at 32%.

Real estate has low correlation to stock market

Real estate is an important element for a diversified portfolio.  It is relatively stable and has a low correlation to the stock market.  Real estate is part of a long term strategy for investment performance.  Typically, holdings should be kept for 5 years or more.  Real estate is not as liquid as stock investments but is more stable over time.

How about REIT’s?

Real estate investment trusts (REIT) are one form of real estate investments that are more liquid since some REIT allow redemption prior to the fund being liquidated in 5 to 10 years.  Many experts would argue that REIT are more a component of your stock portfolio than holding real estate since they behave and correlate more like a stock.  I would suggest these investments more appropriate for an investor that seeks a more passive real estate investment.

Millennial’s & Home Ownership Rates

The American dream of home ownership is alive and well.  The US Census released the 2nd quarter 2017 home ownership rate at 63.7%.  Households ages 65 and older have the highest rate at 78.2% while households under 35 have the lowest at 35.3%. 

The under 35 age group is one of the largest age groups in recent history and will likely drive demand for housing in the decades ahead.  The Millennial generation (75.4 million) has overtaken the baby boomer generation (74.9 million) as the nation’s largest living generation.  The millennial generation is projected to peak at 81.1 million in 2036.  This group is increasing purchasing real estate and has generally skipped purchasing a starter home to find a home they can hold for a longer period of time. 

What about your personal residence?

Most experts agree that your personal residence does not count as a part of your real estate allocation for your investment portfolio.  The main reason is it is not disposable.  Should you sell, even if you realize a large gain, you will still need to most likely reinvest the gain in a new home to maintain the same standard of living. 

A vacation home that is treated as an investment can be considered part of your real estate allocation for your portfolio.  The operating income from the vacation home provides partial liquidity and appreciation can be a significant portion of your total return.

Seller gains highest since 2007

According to ATTOM Data Solutions, homeowners who sold in the 2nd quarter 2017 gained an average price appreciation of $51,000 since purchase.  This is the largest average price gain for home sellers since the recession. The last time appreciation was this high was 10 years ago when sellers made an average profit of $57,000.

Time to rebalance and diversify?

Now that the stock market has reached a record high level, it may be time to look to re-balance your portfolio and include more real estate.  Like the saying goes…”buy low and sell high”. 

Selling excess stock assets to create the proper portfolio balance can fund the down payment required for a real estate investment.  Add this to a mortgage on the property to leverage “OPM” or other people’s money will magnify your returns. 

So, if you put 20% down and the price appreciation on the real estate is only 3% per year, you realize a 15% cash on cash return.  In only 5 years you can double your equity.  In addition, the operating income you receive from the rentals will push your returns higher. 

Vacation rental property also has some favorable IRS tax rules for deductions that can complement your tax planning efforts.

Vacation rental demand

Real estate markets are very local.  The Outer Banks market is a strong vacation rental market.  Many investors continued to hold investments through the downturn and had a full summer of bookings.  For some folks, the summer beach vacation is as necessary as breathing.  While an investor could add real estate to his portfolio with purchases in the same market where his primary residence is located, diversifying to an outside market area provides a better hedge and less exposure to a single market.

Tangible asset

Investing in a vacation home is real and tangible.  It is a source of pride, a place to visit and a place to make lasting memories with your family and friends.  Stocks are not nearly as satisfying; even when increasing.  After all, you don’t even get a stock certificate any more.  It is just blips on a computer screen or digital device. 

Real estate investing also provide a level of control and self-direction not realized in stock investments.  You are the master of your own destiny and your actions will have an impact on your success.  What improvements will you make to the property and what amenities will you include to attract guests? As a stock investor, you have little control over the direction and decisions made by the management of the companies you invest in.

Technology improves vacation rental management

Technology and new platforms like VRBO and Airbnb allow vacation rental investors to have more control over their investment without the use of a property management company.  Smart home technology, like keyless entries or HVAC monitoring, can provide peace of mind even when the owner is a distance from the property.  Of course, vacation rental owners can still employ a property management company to be more hands off and passively manage the investment. 

What percentage should real estate occupy in your portfolio?

Unfortunately, I don’t have a magic number or percentage of what should be invested in Real Estate for every investor.  It will vary by age, risk tolerance and the degree to which you are willing to work the real estate. 

Gains can be impressive and one should at least have a nominal percentage of assets, like 10%, in real estate not including their primary residence.  For investors who are more aggressive and will actively manage their vacation rental properties, up to 30% of their investment portfolio should be in real estate to maximize gains.

The Outer Banks has a diversified group of vacation rental housing and even commercial properties.  Homes available range from 1 bedroom condos to 24 bedroom homes and everything in between.  There are also co-ownership homes and time shares, town homes, patio homes.  The barrier island features the sound to the west and the Atlantic Ocean to the east, so every location is just a short distance to the water and recreation.  The Outer Banks has consistently been named in “top beaches” lists year after year.

Let Eillu Real Estate Agents help you find the perfect Outer Banks investment property.  Find the best neighborhood for you and your family, investment objectives or vacation rental.  Wiggle your toes in the sand and get positive cash flow from Outer Banks investment property.  Best of all, create memories to last a lifetime. Schedule an appointment today!

vacation home locations compared from Maine to Florida; charts and statistics

Yes, You Can Expect More With Eillu!