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Real Estate Asset Allocation: How Much is Enough?

Modern Portfolio Theory provides the best assessment of how to allocate one’s investment assets. In short, the theory says that as risk on an investment increases the higher return an investor can expect to receive on that investment. Conversely, lower risk leads to lower returns. Therefore, to protect the investor from great losses, it is wise to spread one’s investments around to include some less risky assets as well as a few riskier ones. Real estate asset allocation can be considered one of the less risky assets.

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As a hedge against other asset classes, some of your investment portfolios should be in real estate. While there are some disagreements on how much of your risk should be allocated to real estate, a good rule of thumb is not less than 10 percent and not more than 30 percent.

Let’s say you decide to use the 20 percent rule offered by David Swensen in The Yale Model. If you have a total of $25,000 invested, then your real estate holdings should be around $5,000.

Asset Allocation Within Real Estate: Responding to the Market

Asset allocation doesn’t stop at the asset class. Even within real estate, you can invest in different types of properties and different kinds of investments. For instance, you might invest in apartment buildings, commercial properties, REITs, office buildings, industrial real estate, rental units, and rehab projects. Some of your real estate investment may be actual properties that you develop while others may simply be funds or online marketplace investments. In other words, you want to spread your assets within each investment class around in order to protect the asset class as well as your entire portfolio. Real estate crowdfunding platforms, such as Sharestates offer a variety of investments across asset class.

Asset allocation, of course, is not an exact science. Markets move up and down continuously based on the different events that occur in those markets over time. There can be small fluctuations over a long period of time or huge fluctuations in a short period of time. The key to successful long-term investing is adjusting your portfolio to match the market.

One way to do that is to slide more of your investment into real estate when there is a huge volatility in stocks. You probably don’t want to pull out of the stock market altogether, but you might shift a percentage of your stock investments into real estate or other asset classes not affected by the stock market.

When the real estate market is down, or experiencing turbulence, then you’ll move your money the other way– toward more stable investments.

What Kinds of Real Estate Investments Are Available?

There are two types of real estate investments– debt and equity. With debt investing, the lender gives money to a borrower at interest, just like a bank. There are different kinds of projects that may need funding at any given time. With marketplace lending, you can act provide short or long-term loans to sponsors looking for money to fund residential property rehabs, commercial property development, apartment buildings, or a variety of other types of real estate investments. If you lend money for a project, you can expect to receive monthly dividends as the borrower pays down the loan.

Equity investments are a little different. An equity investment in real estate means you own a part of the property. Just like with debt investments, you can invest in different types of real estate as you build your equity portfolio. Visit Syndicate Profile to learn more about equity real estate investments. Sharestates offers investors access to quality debt real estate investments.

If you own equity in a real estate asset, then you may or may not see a return on your investment depending on whether the property sponsor achieves his goal. For instance, if you put $10,000 into the development of an apartment complex that is never completed, then you won’t see a return on that investment. On the other hand, if the apartment complex is completed and then sold at the end of the investment period, you, like all the other investors in that project, will receive a portion of the sale proceeds based on how much equity you purchased. In some cases, as in rental units, you may see ongoing dividends, as well.

When it comes to real estate asset allocation, keep in mind the nature of your other investments and maintain a healthy balance.

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