What is real estate?
We’re familiar with houses, condominiums and other abodes as living options. As investments, you can buy other properties same as you’d buy a home, with deeds, mortgages, closing costs; the whole nine yards. You can also invest in real estate investment trusts (REITs), mutual funds, closed end funds and exchange traded funds focused in real estate. Some of these funds emphasize income, seeking malls and other complexes with paying lessees. Other funds aim for total return, seeking undervalued properties.
Broad index funds will have some exposure to real estate, as they do all industries. You can keep your investment process simple, invest in index funds and accept whatever their sector weights are.
If you are not a homeowner, you might view devoted real estate exposure as a way to keep some assets tuned to property prices. A fund screener at your discount broker or Morningstar.com can help you develop a list of real estate investments. Choose low expense, no-load products. Check the properties owned by the funds under consideration to ensure geographic diversification. Real estate is a notoriously local business; you do not want to share the pains of an unfortunate region.
If you are a homeowner, consider ruling this sector out.
Why you should avoid real estate if you own a home
Homeowners are already heavily exposed to the real estate market. As reported in the September 2014 Federal Reserve Bulletin reviewing family finances, the median home price in the U.S. in 2013 was about $170,000. Meanwhile the median level of financial assets of any kind was $21,200. Less than half the households surveyed have retirement accounts; the median balance of these was $59,000. Disturbingly, more than half have no retirement related accounts at all.
Clearly, your house is an important investment. Citing the national figures above, a home represents between 68% and 89% of an average family’s total investable assets. You may be among the lucky who are well above the median in terms of wealth and savings; if so, your home is probably well above the median value as well. The key here is recognition of your home as part of your portfolio. Owning a home and then buying more real estate for investment purposes is like a corn farmer buying more corn after a successful harvest.
What you should do instead
Estimate the value of your home (or homes). Add up the value of all of your other investments. Combine these two numbers for a grand total. Divide the home value into the grand total to obtain the percent of your assets already invested in real estate.
If this percentage is under 20%, you have room to consider other real estate investments. You certainly have no obligation.
If the percentage is over 20%, you already have more than adequate exposure. Avoid REITs and funds concentrated in real estate. Consider selling any you own and deploy the proceeds in a manner consistent with your overall investment regimen. If you have yet to develop a proper regimen, click here for guidance.
* Data source:
Federal Reserve Bulletin Volume 100, Number 4, September 2014; Survey of Consumer Finances