What Percentage of Your Assets are in One Specialty?

Question

So I am an investor in the general sense of the word - meaning, real estate, stocks, etc.

I am not that comfortable with the market, and was thinking of going to 40% of my assets in real estate - namely, good apartment syndications. Ones that are diversified by sponsor, and by market, and by complex (that is, not more than 6-8% in any one apt complex).

Any thoughts on this? Is 40% of one's assets in real estate (apartments, specifically) too much allocation - to the point that it is overly risky?

I am wondering if most of you will be like "Hell no, I have 100% of my investable assets in real estate - It's what I do!" or no.

Lynnette E. · Answer

I don't do syndications as I would rather be more hands on.  I do not trust the syndicators, especially in the current times.  For the past decade many of the syndicators had everything good going on with real estate and did very well, as most people do in good times, but they will struggle during the current times with eviction restrictions, rent delay, potentially rent forgiveness and possibly more time in confinement in the future.

I'd rather do it myself and be able to choose where based on local laws, choose the tenants, etc. and manage the risk myself.

I would think that 40% in real estate is good, but I would not put it all in syndication, and especially in one class-apartments.  Many of them will be going belly up if the situation continues.  If rent forgiveness, rent delays, and eviction holds are in the future the prices will not appreciate, so investors with syndicators will not do well.  The syndicators will do well, the deals are written to their advantage.  The investors will not do well.

I would think that looking into other ways to invest in RE would be worth considering.

I do invest in stocks, bonds, etc. as well, but I put less than 40% in RE.  Hoping RE will appreciate to 50% though.  Might not happen though as the other investments are flying.

Pat L. · Answer

Lived through the Oct '87 pullback & watched older colleagues panic, so I went 100% REI ever since. My colleagues at the time told me I would go broke.

My consultant/stock broker BIL is a life long stock investor/fanatic & always told us we were taking significant risks & doing REI "ALL WRONG", but he still can't afford to retire @ 65, I retired from my W-2 very early in life & will NEVER need Soc Sec coupled with a menial PT job to survive.

We do have equities in a couple of old tax advantaged accounts, but the sheer luck of APPL & AMZ have kept them alive.

Jason Merchey · Answer

Indeed, I feel that way about multifamily. I printed out a few articles I want to read, but unless/until I hear that the southern US is just way overheated with low low low cap rates, newbies throwing money at deals, or excessive development, I'm still bullish. When you find something that generates 10-15% a year for three to five years straight, with a failure rate of less than 5%, it definitely catches your attention.

Reece Iovine · Answer

I believe it depends on what point you are at with your investing. Do you have $50K that you are trying to grow or $3M that you are trying to diversify etc.

If you are trying to grow a smaller sum, then I think diversification if a bad idea. I'm 60% in real estate and 50% in cash looking for another investment property. However that is because I'm in the growth phase of my career.

However TBH if I had $3M I would most likely still be in cash flowing multifamily real estate as I find it the safest high growth investment option out there and just pop it into a few different larger assets diversified by class and location.

Jason Merchey · Answer

Thanks for the info everyone. I can say that I saw one of my two current sponsors deal pretty effectively with the major disruptions that multifamily faced in 2020 and got the LPs through without even interrupting distributions. Amazing, I say. The other admitted that less than 20% of the holdings are "troublesome" but has not given up on any of them. I think that level of indefatigability and character says a lot. Unlike you, Lynette, I'm just not capable or interested in "doing it myself." So if I like multifamily, which I do, and if I like two sponsors, which I do, I think it makes sense to place my bets and be patient and optimistic. Unlike your perspective, I would be surprised if any of the apartment complexes do worse than having episodic interruptions in distributions, maybe having to hold for 5-7 years instead of 4. But "going belly up" I do not predict will occur.

And Mike your point is well-taken. Unfortunately, a barrier to entry for me is the fact that I don't know anything about any other asset classes besides SFDs, nor do I know any good outfits. I do get appreciate the idea of radical diversification you propose, but I'm thinking of this analogy: if you as a team managers have a pitcher who performs pretty consistently and is in a 5 year contract, it's questionable whether you should try to acquire more than one or maybe two back-up pitchers, due to the challenges and the opportunity costs of spending that kind of time and money. Even the great Michael Jordan tried playing professional baseball once and was only average. He quit to concentrate on basketball.

Mike Dymski · Answer

40% total with 6-8% max in each opportunity is good diversification (that's 12-17 investments).  Most RE forum members will be even more tilted than 40% toward RE.

Many experienced LPs would recommend diversification by asset class as well (debt, equity, SFR, MF, industrial, SS, MHP, medical office, NNN, hard money, litigation finance, life settlements, retail, GP stakes, receivables financing, dorper sheep, the list goes on).

What Percentage of Your Assets are in One Specialty?

Most Popular Reply