I’ve hI’ve had more conversations about real estate investing recently than at any point in my career, and that dates back to the early 2000’s.
Behaviorally, I am fascinated by the questions, and the overall spike in interest.
These conversations usually begin with: “We’ve experienced 15 years of impressive returns in the stock market, shouldn’t we diversify into something else?”
I quickly learn that it was more of a leading question, with the underlying “something else” being real estate.
First, let me be very clear, diversification is a good thing.
That said [with a sigh], I can’t help but to theorize that humans LOVE to tinker.
It’s human nature—the desire to tinker, because doing “something” feels better than doing nothing, or simply “rebalancing.”
I remember the axiom that investing is like a bar of soap, the more you handle it, the less you have.
If you’ll indulge, let’s get back to the recent diversification questions I’ve been receiving about real estate and a few of my notes:
- Many clients have a large portion of their net worth already tied to real estate (i.e. your primary residence).
- Over the past 20 years, I have worked firsthand with families who’ve achieved financial independence and increased their wealth through real estate ownership.
- Historical real estate returns have been all over the map: Parabolic returns for families who have owned iconic beachfront and mountain homes, and very pedestrian returns for the townhouse in typical rural or suburban areas. Many single-family primary residences somewhere in the middle.
- The real estate ‘pitches’ I’m often hearing from folks almost exclusively involve non-liquid real estate investments:
- Crowdsourcing
- Non-publicly traded REIT’s
- Group investing with friends, family, or co-workers
Frankly, I do not favor investments that lack liquidity. As I reminisce about my 20+ years in this industry, unfortunate things happen, and when they do people in need of their funds run into one of two categories:
- Can’t access their funds (lack of liquidity, can’t exit quickly)
- People’s illiquid investments aren’t diversified, and the “unfortunate event” sinks all ships
If you want additional exposure to the real estate asset class, why not consider investing in a publicly traded real estate investment trust (“REIT”)?
- REIT’s trade on a stock exchange just like your favorite stocks
- With the click of your mouse, you can sell your shares of the REIT and the funds could be promptly returned to your bank account (just like a stock, there is no guarantee against loss)
- Liquid
- Nominal expense to purchase
I’ll leave you with this:
If you must tinker, let’s make sure that it fits responsibly within your financial plan. Let’s not tinker for the sake of “making a move” and break what you’ve worked so hard to earn.
And keep in mind that sometimes the best solution is the simplest solution (Occam’s Razer).
If you or someone you’re close to is a high-achieving professional that could use help aligning their finances and establishing a financial plan, please reach out to us, we’re accepting great new clients and eager to help.
–Nic
Every investor’s situation is unique and you should consider your investment objectives, risks, and costs before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification, and asset allocation. This is not a recommendation to buy or sell any individual security or any combination of securities. Be advised that investments in real estate and in REIT’s have various risks, including possible lack of liquidity and devaluation based on adverse economic and regulatory changes. Additionally, investment in REIT’s will fluctuate with value of the underlying properties, and the price at redemption may be more or less than the original price paid.
