Real estate: How much should you invest in it?

real estate

3 minute read

In one of our previous posts, we introduced the concept of asset allocation and explained the importance of dividing the investment portfolio between different asset classes.

Most investors are underweight in real estate

How much should you invest in real estate? Unfortunately, there is no single truth or proven formula for determining the optimal size of the real estate asset allocation. A highly regarded investment guru and manager for the Yale Endowment, David Swensen advises investors to invest 20% of their investable assets into real estate. A report by BNY Mellon Asset Management has quoted a study by Stephen Lee, of the Cass Business School in London, which concluded that: “Optimally investors would include a 26 per cent allocation to private real estate, but actual allocations are much lower, due to perceived risks and illiquidity.”

The suggested allocation of real estate and mortgage loans in their total investment portfolio would remain between 20 and 45% for the private investors. At the same time, there is strong evidence pointing to the fact that private investors tend to significantly underweight their real estate allocation in the total investment portfolio compared to professional and institutional investors. The actual real estate asset allocation in personal investment portfolios tends to be less than 10%. In comparison, professional and institutional investors tend to invest 20% or more of their investable assets or more into real estate assets.

Aim for 1/3 of your portfolio invested in real estate

There are several reasonable explanations for why your real estate allocation should be at least 20%, preferably between 30 and 40%. 

The first explanation is based on the combination of your age and the classical asset allocation theory, which contained only two asset classes – equities and fixed income – and stated that the share of equities in the investment portfolio should equal 100 minus your age. The emergence of real estate as a third major asset class has resulted in the revision of that model, and a widely used approach states that you should balance your investments into all three main asset classes around your mid-life. The younger you are, the more overweight you should be in real estate, and vice versa.

Another good approach considers the total value of the real estate in the whole economy and claims that private investors should aim to keep their real estate investments on the same level. For instance, as the total value of the real estate in the US is about ⅓ of the total value of all assets, US investors are encouraged to keep their real estate allocation around ⅓ of their comprehensive investment portfolio.

Real estate crowdfunding provides an easy access to real estate

While real estate investments have been the domain of the institutional and HNWI investors for a long time, real estate crowdfunding platforms like Crowdestate have made this lucrative asset class accessible for everyone.

With just a few hundred or thousand euros, you can start building a diversified real estate portfolio. Professionally managed and thoroughly pre-vetted real estate investments are just a few clicks away.

Summary

  • As a private investor, your should aim to have about ⅓ of your investment portfolio invested in real estate and mortgage-backed loans;
  • As real estate has been historically limited to institutional and HNWI investors, most of the retail investors are significantly underweight in real estate;
  • Real estate crowdfunding is a great tool to acquire a widely diversified real estate and mortgage loans portfolio. With a few thousand euros or dollars invested with Crowdestate, you could have exposure to more than 20 real estate investments across continental Europe.

Start or continue your real investing journey with Crowdestate!