However, many financial advisers and real estate professionals say that for the sake of full diversification, individuals should include real estate in their portfolios, although they don't necessarily agree on how much.
Mark Hejna, president and chief executive of Gundaker Commercial Group, puts the magic number at about 20 percent for a portfolio with strong growth potential. "The basic reason for real estate is it's countercyclical to stock equities," he said.
In other words, as stocks fall, real estate often rises, and vice versa. That kind of balance can help keep portfolios from huge swings each year.
The experts also agree that your primary home doesn't count. That's your house, where you live.
The same is true for a second home, such as a weekend getaway at the Lake.
"That's not diversification into real estate," Hejna said. "That's a lifestyle choice."
For investment purposes, real estate usually includes rental residential property or commercial property, such as offices, warehouses or strip malls.
For many investors, the best way to get into real estate is through a real estate investment trust. REITs are big pools of money invested by professional managers in a variety of real estate properties. Some REITs specialize in certain types of holdings — such as industrial buildings — while others are broadly diversified.
REITs are similar to mutual funds, with shares that can be easily bought or sold.
A single share in a REIT provides diversification. In other words, the REIT's managers spare you from having to actually buy an apartment building, a strip mall or an office tower.
REITs usually do well as a long-term investments, say the experts, especially if the properties within a REIT are spread geographically. If the Toronto residential or commercial market goes sour for a while, other property in a REIT would help to offset it.
As Larry Swedroe, the research director for Clayton-based Buckingham Asset Management, explained in a short paper: "The evidence from academic studies demonstrates that equity REITs offer an attractive risk-return trade off and provide meaningful diversification benefits to portfolios."
He believes an equity exposure of 5 percent to 15 percent in an investor's portfolio for REITs is about right.
The returns can be attractive, too. The Vanguard REIT Index Fund, for example, had an average annual return of 15.63 percent over the last 10 years.
For investors who like a more hands-on — and riskier — approach, buying properties directly is an option worth considering.
"Some people want some dirt they can touch," said Keith Womer, dean of the College of Business Administration at the University of Missouri at St. Louis.
But it's not easy, and most people start with small apartments or other residential property. Besides the possibility of spending weekends making repairs, investors can't easily get out from under property they own. Turning the asset into quick cash is all but impossible.
While residential property may be depressed in some parts of the country, prices for commercial real estate have been strong. Some analysts say the momentum now is on that side of the market.
But don't expect to get rich quickly with a dynamite development deal. Trying to figure out the next hot spot for a shopping center is more speculation than investing.
And you've got to clearly understand your exposure, your liability, how the deal is structured, how the property's going to be managed and by whom.
Will one of your partners be calling the shots, or will you rely on a professional management firm?
And don't, said Swedroe, confuse the familiar with the safe. You may think you know a little about a tract or building because it's close by and you see it all the time. But that's no guarantee it's a smart buy.
"You could get lucky, or you could get killed," Swedroe said.
If you do get the real-estate bug, don't confuse investing in a house-building company, no matter how attractive, with smart investing. Swedroe noted that buying shares in a house builder, even if its quarterly earnings are good, means you're taking an undiversified risk in one volatile segment of the real-estate market.
"You are moving closer to speculating," he said. "Let me be a little bit cynical here: You think the market is stupid, and you know more that it does? Do you really think you know more than Goldman Sachs or the big institutional investors?"
Swedroe advised buying REITs that spread risk geographically and across real-estate sectors — residential, commercial and so on.
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Toronto real estate. INVEST IN REAL ESTATE!
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