I was speaking with a friend of mine the other day about asset classes, and the topic of real estate as an asset class came up. We were under the impression that there are really two ways to hold real estate:
- Investing in Real Estate Investment Trusts (REITs) that purchase and hold real estate investments; or
- Investing in actual real estate (houses, buildings, land)
If you look at my portfolio, I could argue that I hold real estate. My iUnits REIT fund holds a number of real estate investments. Through this fund I invest in hotels, office buildings, shopping centres, and multi-unit rental communities. I have lumped this asset into trusts, but I could easily separate it out as real estate.
In addition, I probably satisfy #2 above through the my personal residence, which I own (but am still paying off). However, I am not sure I would include this in my asset mix as it will not be providing me with any income in the foreseeable future. So what about rental properties?
Should an investor who is holding individual rental properties or buildings include this as a component of their asset mix in their overall portfolio? To answer this question I did some Googling and came up with the following articles:
- The Asset Allocation Decision: This article makes the claim that because real estate tends to be negatively correlated to equities, one can balance risk by adjusting the asset mix.
- Investor Home: Real Estate: Again, makes the claim that real estate is negatively correlated to equities and that this helps provide a cushion during bear markets.
- Dummies: Fitting Real Estate into Your Financial Plans: No discussion here, just a way to allocate for real estate in your portfolio.
Result: I still don’t have an answer. I stopped looking after about 20 minutes and left the above link list as is because I found a lot of information about REITs and overall statements that real estate is good to own, but none covering the topic of individual rental properties as a component of ones asset mix. I don’t know the answer. I need some help here. If anyone else has some insight into this topic, I would love to hear it.