A common question with investors is how much of my portfolio should be dedicated to real estate or alternative assets. I’ve read many articles on this subject and would say the best way to handle it is in ranges. Those ranges can be very large. I know partners in our commercial real estate business who have almost all their assets tied up in their business, which happens to be investing in these types of syndication deals. It’s not uncommon to see entrepreneurs have a large chunk of their net worth in their business. They know it well and are constantly reinvesting their time and energy into it. They may feel with this experience they have an “edge” and can outperform other assets that are available to them.
Experts, folks that manage large wealth portfolios for families (aka family offices) recommend anywhere from 10% to 50% of investor assets could be dedicated to real estate and private equity deals. Stocks and bonds typically make up the other piece of this pie. Investors often get exposed to stocks and bonds first through their employers 401K or through IRAs. The reason is due to being around longer. There are established public markets that are highly regulated and most importantly I believe is awareness, the financial industry has spent billions advertising to us. In contrast, syndication or private offering deals in real estate or other alternative asset classes, in general, cannot be advertised nor are they available unless you are an accredited investor and have a relationship with the deal sponsor. Some exceptions are emerging such as crowdfunding (SEC Reg D, 506c) but there is still a large gap in education and awareness of opportunities in real estate and alternative assets.
That is gradually changing as we see a strong appetite for real estate, more evidence of long term wealth being created by this asset class and other alternative assets that may not have a strong correlation with the overall economy or stock market. This may provide some balancing and downside protection to one’s stock and bond portfolio. When something is out of favor and falling, the idea is that some of your other assets don’t march off the cliff in unison. Additionally, real estate offers inflation protection, tax benefits and cash flow that is hard to beat.
So, here are my quick tips on the asset allocation question:
- Choose an allocation percentage that you feel comfortable with (10% to 50%). Start slow and as you get more sophisticated, you will probably increase towards the upper end of this range.
- Once you choose your overall percentage, start with low risk commercial real estate assets that have proven very durable in even down markets. You get a healthy dose of these opportunities sticking with value-add apartments, self-storage and manufactured home parks (MHPs) which have proven to be top performers in the commercial real estate space because they don’t crater in downtimes.
- I slightly favor apartment investing then add some MHPs and self-storage deals. I’m fine with single asset plays in apartments but prefer a fund approach when it comes to storage and MHPs to further reduce the risk of single asset investing.
- Within these 3 niches, I would like to further diversify and reduce my risk by geography and operator so that I’m not overly focused on one market or operator.
- Lastly, I keep my eyes on maybe a few very promising alternative assets plays if I’m a bit more comfortable with investing in businesses and slightly higher risk, looking to slightly sweeten overall returns while providing further downside protection that non-correlated assets can deliver. We have added the Velocity Fund (the business of factoring) and the ACAP Litigation Financing fund II for examples that have these characteristics.