Chapter 11
Real Assets—Real Estate
Real estate is probably the most widely held alternative investment. It provides equity-like returns that are relatively low in correlation with traditional equity. In his book Unconventional Success (2005), David Swensen of the Yale endowment recommends that ordinary investors consider real estate for as much as 20 percent of the portfolio rather than pursue the other, more exotic, types of alternatives that Yale focuses on.
By real estate, we mean investment real estate such as office buildings, shopping malls, apartment buildings, hotels, and other types of commercial real estate. Such real estate usually provides a stream of investment income based on the rents charged to tenants. There may also be capital gains when the properties are sold. So they resemble stocks in their payout structures, although real estate usually provides higher rents than the dividends offered by stocks. Residential homes are not usually considered investments, at least by investment advisors (though many home owners may disagree). When he wrote a column for the Wall Street Journal, Jonathan Clements would periodically devote a column to the question of whether homes constitute a good investment. His conclusion was always that the investor would be better off choosing a smaller home and investing the remainder in a conventional portfolio. The last part of this chapter will provide an analysis of residential housing that will support Clements’ point of view.
The total ...
