By Peter Miller, Guest Post
The idea of a “balanced” portfolio has always been a matter of debate. What goes into a balanced portfolio? How do you allocate percentages? How often should your portfolio strategy change? These are just some of the questions associated with portfolio development. Another one goes like this: Should your portfolio include investment real estate?
Let’s approach this question a little differently and argue that your portfolio—right now—reflects a series of real estate decisions. In fact, the central issue is not whether you have real estate investments, but what choices you’ve already made.
In a modern society, we either rent or own, and either option is effectively an investment choice. If we rent, we’ve decided that property ownership is an unattractive financial alternative and that our housing dollars are best spent elsewhere. If we own, we’re effectively saying that real estate is a commodity; we can offset our housing costs through ownership; and over time, the benefits of ownership will hopefully outweigh the option to rent.
Some might argue that residential real estate is not an “investment” in the sense of stocks and bonds. The alternative view is that all real estate is inherently an investment. After all, if the value of your house goes up or down, it surely impacts your net worth.
What about the more traditional question: Should investment real estate be part of your portfolio?
To answer, we first have to define “investment real estate.” Are we talking about single-family homes, apartments, or commercial properties that you own and manage? Or are we talking about the ownership of real estate in a less direct manner, such as with a REIT or shares in a corporation that has large real estate holdings? What about a company that originates mortgages, a homebuilder, or a listed corporation that owns real estate brokerages?
The Buffett Approach
A look at Warren Buffett, the famous investor and one of the richest people in the world, suggests a diverse approach to investment real estate. It’s well known that Buffett lives in the same Omaha house he bought in 1958 for $31,500. He’s also well-known for his 2012 comment that if he could buy large numbers of single-family homes he would “load up on them, and I would take mortgages out at very, very low rates.”
A lot of people on Wall Street apparently agree. Large institutional investors such as Blackstone (Invitation Homes) and AmericanHomes4Rent snapped up an estimated 90,000 single-family rental properties between 2011 and 2013.
In early 2014, a survey released by BlackRock found that “major institutional investors around the world are poised to increase their allocations to alternative investments, with a bias towards real estate and real assets, during 2014.”
According to BlackRock, “approximately half of institutions surveyed—49 percent—expect to increase their real estate allocation and over 40 percent indicated they would increase their investment in real assets this year. At the same time, about one-third of the institutional investors surveyed intend to reduce their cash holdings in 2014.”
Look at Berkshire Hathaway, the company Buffett heads. Among its many business lines is HomeServices, a real estate brokerage with more than 22,000 licensees that will be re-branded as Berkshire Hathaway HomeServices. Berkshire also owns Clayton Homes, the country’s leading producer and financier of manufactured homes. In 2013, Clayton produced roughly 29,500 units (4.7% of all manufactured single-family homes) and owned 326,500 mortgages. Finally, Berkshire has a 50% stake in Berkadia, a leading multifamily investment sales, advisory and research provider that’s also a principal and intermediary.
Individual Choices
Buffett’s portfolio has no shortage of real estate holdings, but what about yours? If you’re considering real estate investments, ask yourself several important questions:
- Our population is increasing, but is it increasing in the areas where you might want to own? Some states are seeing a net out-migration, while others are building up.
- Mortgage rates are around 4.2% at this writing, about half the 8.6% average seen during the past 40 years. If you lock in a mortgage at today’s rates, will it be a hedge against higher mortgage costs tomorrow?
- Not every community has an equal playing field for investors. In many cases, there are higher tax rates and special rules. Some areas have rent control. What about the areas where you want to invest?
- Between 1999 and 2012, household incomes dropped 9%. Can rental rates increase when household incomes are declining?
- It’s possible to buy real estate with little down, meaning that real estate purchases routinely involve leverage. The catch? Leverage magnifies both profits and losses.
- Rather than buy directly, does it make more sense to hold real estate or mortgages through a REIT or a corporation with a strong presence in the field?
- Can you use retirement-account funds for real estate-related investments?
No matter what your answers to these questions, talk to your investment adviser and real estate brokers in your area.
Peter G. Miller is a nationally-syndicated real estate columnist. His books, published originally by Harper & Row, sold more than 300,000 copies. He blogs at OurBroker.com and contributes to such leading sites as RealtyTrac.com, the Huffington Post and Auction.com. Peter has also spoken before such groups as the National Association of Realtors and the Association of Real Estate License Law Officials.
