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What are Independent Advisors seeking in Real Estate Alternative Investments?

Jan 18, 2013 by Robert from Irvine, CA in  |  Flag
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Robert - I'll see if I can answer your question. There are two or more reasons to consider Real Estate as part of a balanced portfolio. I'll hit two.

First, Real Estate is generally not closely correlated to the Stock Market. Under Modern Portfolio Theory an advisor attempts to build a portfolio of assets that don't move the same way, for the same amount at the same time. Real Estate helps with that. But it is not always the case...as I'm sure you know and can remember in 2007 & 2008, both Real Estate and the Stock Market moved down in a pretty big way. The theory (which not everyone agrees with) would indicate that the correlated move was abnormal.

Second, Real Estate is considered by many to be an inflation hedge . In inflationary times rents and potentially property values go up. This helps you keep up with inflation.

Hope I answered your question.


Comment   |  Flag   |  Jan 19, 2013 from Alexandria, VA

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Robert, I'm not sure if you are asking from the perspective of an individual investor or a real estate investment manager who might be looking to financial advisors to invest client monies, but I'll answer as though you are an individual investor. Curt is correct above, advisors who recommend real estate investment as an alternative to stocks are looking for investments whose values don't move with the stock market. The way we say this is that they have low correlation to stocks. Another asset class with low correlation to stocks, for example, is currency futures. Most advisors find that publicly traded real estate investment trusts (REITs) actually have unacceptably high correlation to the stock market, and so we don't typically refer to public REITs as alternative investments.

Another thing we are looking for is diversification. The problem with you purchasing individual pieces of real estate as investments is that it violates the principle of diversification (since you only own one, or two or three), and diversification IS the one principle in investing that should NEVER be violated. It has been said that 30 different stocks is the minimum to provide safe diversification, and most of the individual investors I know simply would never be able to afford 30 pieces of real estate (this is why Warren Buffett recently said that he could see in the marketplace the opportunity to make a lot of money by buying thousands of houses - he wasn't kidding about the 'thousands'). Professionally managed real estate can offer individual investors the opportunity to pool their money with others and invest in dozens, if not hundreds, of properties. This can be residential real estate, retail, apartments, commercial, etc. The more exposure to various types of real estate, the better.

Another positive quality of real estate investments is that they are professionally managed. Real estate funds will be run by long-in-the-tooth managers with a track record of high returns, and will have a distinct niche in the marketplace, enabled by a proprietary strategy. Most will NOT be buy-and-hold.

Finally, appropriate portfolio weighting. Most investing experts recommend that real estate occupy no more than 15% of the portfolio. For many Americans, simply owning their HOME means they are far over-weighted in real estate. Professionally managed funds offer accredited investors the opportunity to purchase the appropriate amount of real estate for them, and to rebalance as necessary.

Here is a link to a Youtube video I did about whether or not buying real estate is a good idea:


Comment   |  Flag   |  Jan 19, 2013 from San Jose, CA

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When looking to add Real Estate to my Clients' portfolios, I look for consistently growing dividends and reliable tenant base such as medical facilities, research facilities, and other tenants who are unlikely to move because of their unique facility needs.

Comment   |  Flag   |  Jan 19, 2013 from Reading, PA

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Jason Hull Level 20

I'll come at this from the perspective of someone who's made some pretty good real estate investments and someone who's made some pretty bad ones. I am assuming that you're talking about real estate as an investment and not a REIT, so if you're talking about REITs, this isn't the answer for you!

Here's where I screwed up: I got overleveraged. I had a great builder who was building some beautiful houses that we were doing on spec, but we wanted to make sure that he kept his crew together, so we kept going, even after we couldn't sell one of the houses right away. I invested in something which I couldn't rent out to cover the payments. We were building in a ski resort community, and the HOA fees were crazy. It was a pure flip play, and when it didn't flip right away, we were having to continue to reach into the wallet. Ouch. * Raw land in the middle of nowhere. Pro: it had BEAUTIFUL views. Con: Did I mention the middle of nowhere?

Here's where I've done it right: Bought foreclosures or in distressed situations (see http://www.hullfinancialplanning.com/the-endowment-effect-why-you-should-buy-a-foreclosure-and-never-sell-to-an-investor/ for more on the psychology of buying from banks). Gave myself plenty of wiggle room for expenses. Biggerpockets.com recommends you account for expenses by setting aside 50% of rents each month. The rest goes to mortgage service/profit, although, I'm pretty dead set against debt (http://www.hullfinancialplanning.com/there-is-no-such-thing-as-good-debt/) * Paid cash. You can give yourself a lot more leeway when you're paying cash than if you're wondering if you can make a mortgage payment if the renters bail.

The adage of making your money on the purchase has held true for me. Find great deals and don't get over your head in some major slabjacking or foundation repair if you don't already know how to do all of that yourself.

Comment   |  Flag   |  Jan 22, 2013 from Fort Worth, TX

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