Asset Allocation with Real Estate

While real estate has many advantages one big disadvantage is lack of liquidity. Despite what you may hear, it takes time to refinance or to see a property. If you need cash fast for an unplanned event, real estate is not the right answer. However, real estate is an important element of a balanced portfolio. Note that the information below is only my opinion and you should consult a financial manager or other professional before you do anything.

Below is a sample traditional asset allocation with 60% allocated to equity holdings (stocks) and 40% allocated to fixed income assets (bonds):

Next is asset allocation with real estate as a portion of the fixed-income assets. The following example shows three investment properties acquired with 20% down payment.

With real estate, leverage enables you to significantly increase your portfolio value while generating a better return.

 

Assumptions (based on a typical investment property in Las Vegas):

Note that the real estate appreciation and tax advantages are not included in the yield estimates. And, once the mortgage is paid off, the yield on real estate is going to increase significantly.

Summary

Real estate should be part but not be all of your portfolio. Real estate alone can be a risky option because of lack of liquidity and dependence upon a single market sector.