by John Wilhoit Jr.
My house is not real estate? Well, yes, it is â€œreal estateâ€. Itâ€™s just not a real estate â€œinvestmentâ€. Real estate investing represents an on-going part of a well diversified investment strategy.
Most investors are under-allocated in real estate believing that their personal residence is part of this allocation. Excluding your home, do you own real estate? Your home, while looking like real estate, is not a real estate investment you look to for yield or income.
Investment real estate provides four different forms of yield. They are:
â€¢ Income â€“ as derived from rents or other ancillary income generated
â€¢ Tax shelter â€“ provided by depreciation of the physical asset over time
â€¢ Appreciation â€“ the increase in value over time
â€¢ Mortgage pay down â€“ the increase in value created as income is utilized to decrease debt
Allocation theory suggests that a portfolio should have between 5% and 15% of assets in real estate (excluding your personal residence). Thus, investors should have between $50,000 and $150,000 in real estate for every one million dollars in net worth.
When excluding your personal residence, what percentage of your investment portfolio is in real estate? Direct real estate ownership provides a buffer to the daily market swings in stocks and bonds. Real estate is an important part of a balanced portfolio. The financial impact of owning your primary residence debt-free cannot be over emphasized. It stands right beside "always paying yourself" and "never spend more than you earn" as pillars of financial management. "Rental ownership" is less known and not available to everyone but is vital to serious building of wealth and reliable additional retirement income. Those that have a firm goal to retire in southern California must understand and apply the potential of long term rental ownership. Neil Fjellestad's comments are seen here in bold italics.