If you invest right, real estate can offer asymmetric returns: high potential returns with relatively low risk. Sure, it requires a degree of skill, but by investing alongside others in an investment club, you can instantly draw on others’ experience.
Skill aside, traditional real estate investments come with another challenge: the money required to invest.
If you buy a rental property, you’ll likely need $50,000 to $100,000 between the down payment, closing costs, cash reserves, and any initial repairs.
If you invest in a real estate syndication, you’ll likely need $50,000 to $100,000 as a minimum investment mandated by the operator.
That makes it hard for the average investor to diversify. It begs the question: How much of your net worth should each real estate investment make up?
In the beginning, it should be small, under 1%. As you gain confidence and expertise, it can grow.
“But in the beginning, I don’t have a high net worth, so investing in real estate will require a high percentage of it!” Not if you can start by investing $500 or $5,000 at a time. But we’re getting ahead of ourselves.
Control Group: Standard Investment Advisors
If we grabbed an average investment advisor off the street and asked them about asset allocation, they’d probably talk only about stocks and bonds.
They might say something like, “Follow the Rule of 100: Subtract your age from 100, and put that percentage of your portfolio in stocks and the rest in bonds.” If they were particularly aggressive, they might bump that to 120 or propose holding 5% to 10% of your portfolio in REITs.
Yawn.
I literally chatted last night with a close friend of mine who’s an investment advisor. I asked her…