Real Estate as the Anchor of a Diversified Portfolio.

At this stage of your life, real estate is undoubtedly a part of your economic game plan, even if you don’t think of it that way. “Financial planning” brings to mind equities, exchange traded funds (ETFs), fixed income investments and other purely financial vehicles. But you very likely have a home and possibly additional real estate properties, such as a vacation home or even an inherited house from parents or relatives, that is a low-stress investment. If so, you are already a real estate investor.

But it remains true that many investors do not really think of real estate as a formal part of their investment strategy. This happens for a few reasons. For the most part, financial advisors and wealth managers favor financial products. After all, the markets have largely done well over the past few years, and we all accept that our money should be working for us through a variety of means. But relying on financial products alone doesn’t maximize your hard-won wealth, nor does it have the same wealth impact and legacy as real estate.

It is important to note that your financial advisor is not trying to steer you wrong. 

Financial advisors earn their keep from selling and trading proprietary financial products, and they have limited channels through which to participate in real estate investing – retail real estate investment trusts (REITs), for example, are a very recent phenomenon – and they do tend to of course be mindful of your personal property assets when they help build your long-term financial plans, so they are assuredly doing their best.

For the most part, however, when financial planners working with retail investors promote the idea of portfolio diversification, what they are really promoting is the traditional 60/40 split between equities and bonds, with diversification coming to simply mean the choices made within those buckets. They will promote the merits of, say, technology versus healthcare stocks and munis (municipal bonds) versus corporate debt. As bonds have not produced much in the way of yield in recent years, planners have sometimes moved to a 70/30 or 80/20 split favoring equities. But that starts to belie any notion of diversification and introduces an element of greater risk. What if there is an overall market correction?

And what if we are re-entering a time of inflation, as many analysts and economists fear? One way to think about the role of real estate in an inflationary environment is to take yourself back forty years. Many of our parents and grandparents wrestled with the inflationary years of the 1970s and 1980s, when inflation often outpaced yield in many investment categories. The only actual wealth many people possessed to any extent was, in fact, their homes and other real estate properties. Real estate was, as it always has been, a hedge against inflation, as historically, depending on location, property values rise at a pace that outpaces inflation. And this was true even when inflation was very high. Between 1970 and 1980, the median home price rose 9.9% a year, well ahead of the decade’s averaged inflation rate of 6.8%. In the volatile and inflationary “malaise era”, real estate offered more yield than any other investment and was rightly considered a source of stability at an unstable time¹

Give the nature of real estate investments, how much of an investment portfolio should be dedicated to it? One interesting window on the right answer comes from, of all places, the Endowment Fund of Yale University. Why Yale? Because Yale’s endowment fund has gained a certain positive notoriety for beating the stock market over many, many years. According to a study from Lazard Advisors, Yale’s fund allocates an average of 20% to real estate every year.² Another study from several years ago, one of the first to truly assess this on a scientific basis, quotes an optimal figure of 26%. This was based on a comprehensive analysis undertaken by the Bayes Business School at the City University of London.³

Certainly, the performance of real estate combines many of the most favorable aspects of robust market growth with the ability to hold tangible, real assets that not only appreciate over time but build true wealth and a family legacy. As I have discussed elsewhere, there are also notable tax advantages that are not available with other types of investments. Ballard Global focus on the fast-growing Austin and Miami markets is designed to maximize returns and minimize risk. This builds on a solid foundation of research about these specific real estate markets, which constitute three of the most dynamic metro areas in the United States.

The durability of real estate as an appreciating asset remains one of the best kept secrets in the world of investing. A few years ago, Oscar Jorda of the University of California at Davis worked with a team of researchers from around the world to publish a groundbreaking study entitled The Rate of Return on Everything, 1870–2015. ⁴ This was an unprecedented comparative analysis of virtually all investment categories. The authors surprised themselves by discovering the power of real estate investments. From the paper (emphasis added):

“Equity returns have experienced many pronounced global boom-bust cycles, much more so than housing returns, with real returns as high as 16% and as low as −4% over the course of entire decades. Equity returns fell in WW2, boomed sharply during the post-war reconstruction, and fell off again in the climate of general macroeconomic instability in the late 1970s. Equity returns bounced back following a wave of deregulation and privatization of the 1980s. The next major event to consider was the Global Financial Crisis, which extracted its toll on equities and to some extent. Housing returns, on the other hand, have remained remarkably stable over the entire post-WW2 period. As a consequence, the correlation between equity and housing returns was highly positive before WW2 but has all but disappeared over the past five decades. 

The low covariance of equity and housing returns over the long run reveals attractive gains from diversification across these two asset classes that economists, up to now, have been unable to measure or analyze.”⁵

Looking at the historical record and where we are today, no one can deny we live in an era of potential uncertainty and volatility. Diversification is the only viable pathway to mitigating financial risks in such an environment. But carefully selected and researched real estate investing arguably remains a more stable, higher return asset than most financial vehicles.

Successful real estate investing and the ability to secure a high performing return is also dependent on the oldest and most reliable rule of thumb regarding real estate, “location, location, location.” Ballard Global three core markets of Austin and Miami are, as noted, far from accidental. Each is in the top 10% nationally for real estate appreciation. For real estate to be the anchor of a diversified portfolio, the properties, neighborhoods, quality of assets and actual physical environments must be of a commensurate quality to the highest quality equities or fixed income assets. In other words, real estate investing requires that same combination of art and science that successful brokers and financial advisors bring to the table in selecting their most successful investments, those that balance superior yield and minimized risk.

Here in Austin, home values have appreciated by nearly 90% since 2012. During this time, the value of the Austin Metro housing market grew by $141 billion, or 126% in the past decade. In 2010, the metro Austin market was worth about $111 billion. In 2019, Austin’s total housing value grew $22 billion, or 9.5%, year-over-year. Home value growth in Austin has outpaced the national average since 2010. This constitutes real estate appreciation of 102.01% over the last ten years, which is an average annual home appreciation rate of 7.28%. During the latest twelve months, Austin’s appreciation rate was 6.20%.⁶

In south Florida, the Miami-Fort Lauderdale-West Palm Beach MSA – basically wider metro Miami-Fort Lauderdale – home values have gone up 14.7% over the past year and Zillow predicts they will rise 12.9% in the next twelve months. Miami-Dade real estate appreciated 123.65% over the last ten years, which is an average annual home appreciation rate of 8.38%.⁷

Unlike more speculative investments, the underpinning of these three urban economies ensures they will each continue to experience ongoing dynamic housing growth. Each build on a diversified economic base, a fast-growing population and strong demand for housing of all types and in all price categories.

Compared to many other categories of investments, anchoring real estate investments within a diversified portfolio is a proven vehicle for high quality portfolio growth and successful wealth management.