{"id":18768,"date":"2025-01-09T15:21:12","date_gmt":"2025-01-09T15:21:12","guid":{"rendered":"https:\/\/peraltafinancing.com\/business\/finance\/how-to-build-a-balanced-investment-portfolio-with-real-estate\/"},"modified":"2025-01-09T15:21:12","modified_gmt":"2025-01-09T15:21:12","slug":"how-to-build-a-balanced-investment-portfolio-with-real-estate","status":"publish","type":"post","link":"https:\/\/fivemor.com\/?p=18768","title":{"rendered":"How to Build a Balanced Investment Portfolio with Real Estate"},"content":{"rendered":"


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I believe real estate investment is a powerful tool for building wealth.\u00a0<\/p>\n

If you\u2019re familiar with the Passive Income MD community, you already know that about me.\u00a0<\/p>\n

When people do <\/em>know that about me, I get this specific question all the time: \u201cHow much of my net worth should be invested in real estate?<\/em>\u201d Everyone hopes that there is some specific, universal number that is a silver-bullet shortcut to success. I wish there was one, but it\u2019s unfortunately not that simple.\u00a0<\/p>\n

So, today we\u2019ll explore how to answer this question. Spoiler alert:<\/strong> It entirely depends on your situation and goals.\u00a0<\/p>\n

But before we dive into the details, a general rule of thumb is that balance is the key. Another word for balance is diversification<\/a>\u2014or making sure you don\u2019t over-expose yourself to risk.\u00a0<\/p>\n

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Steps to Take Before Building Your Portfolio<\/h2>\n

With that said, here are some things to consider when answering this question for your own investment portfolio.\u00a0<\/p>\n

1. Understand Your Financial Foundation<\/h3>\n

In order to answer this question, laying the groundwork is important. That means understanding your financial foundation\u2014a core set of financial habits and practices that form your personal investment needs.\u00a0<\/p>\n

Let\u2019s look at how you can start building that foundation.\u00a0<\/p>\n

2. Define Your Financial Goals<\/h3>\n

Defining your financial goals involves knowing where the finish line is. Are you seeking passive income, wealth accumulation, or portfolio diversification? How does real estate investing come into play while doing it? How much cash flow do you want to generate monthly? How much money do you want to retire with? When do you want to retire? These are some introductory questions that can help you find your purpose.\u00a0<\/p>\n

Knowing your purpose<\/a> will ultimately guide your allocation strategy.\u00a0<\/p>\n

For me, I put an emphasis on cash flow. I look for real estate investments that produce cash that goes into my pocket every month. With that money, I reinvest and also live the life that I want. And I wanted enough cash flow that I could decide to do whatever I wanted with my time, such as not working or taking extended time off.\u00a0<\/p>\n

But you might have a different strategy. Maybe yours is accumulation\u2014creating the biggest pile of money possible. That would change how much and what type of real estate investments you choose in order to create that appreciation potential.\u00a0<\/p>\n

3. Evaluate Your Net Worth<\/h3>\n

If you want to know how much of your net worth should be in real estate, you also need to know what your net worth is. Not a general idea. A specific number.<\/p>\n

If you don\u2019t know, don\u2019t go any further because you\u2019ve got some homework to do<\/a>.\u00a0<\/p>\n

Here\u2019s the napkin math. List all of your assets\u2014cash, investments, real estate, and everything else. Subtract your liabilities from that total value. (That includes any debt like a mortgage, student loans, etc.) The remaining number is your net worth.<\/p>\n

Reevaluate your net worth every quarter. Once you know your net worth, you can allocate a percentage of your funds into real estate investment that also aligns with your goals.\u00a0<\/p>\n

Take frequent stock of your total assets and liabilities to determine how much capital is available for real estate without sacrificing financial stability.\u00a0<\/p>\n

Diversification Strategies for Stability and Growth<\/h2>\n

Stability of investment returns is extremely important for building wealth. It also helps us sleep at night. Why? Diversification helps reduce risk. Any portfolio will have its high and lows, but there are ways to make sure your investments are working for you in a reliable way. Let\u2019s take a look at a couple.\u00a0<\/p>\n

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Balance Your Portfolio\u00a0<\/h3>\n

Real estate is a powerful tool, but it should complement other investments like stocks, bonds, or mutual funds for risk reduction.\u00a0\u00a0<\/p>\n

The last couple of years have really demonstrated this principle. Although there are moments in time where various asset types\u2014stocks, real estate, gold\u2014all move in phase together, that\u2019s not what we\u2019re experiencing today. Most of the time, different investment types move up and down at different speeds.\u00a0<\/p>\n

So if you want to create stability through balance<\/a>, including the security of always having cash flow and building your net worth, you need to build up all of the different asset classes in your portfolio in a way that hedges against risk.\u00a0<\/p>\n

That way, if one investment type is having a tough time, everything else should keep your portfolio healthy.\u00a0<\/p>\n

Diversify Within Real Estate<\/h3>\n

If there\u2019s anything I\u2019ve learned over the years within real estate, it\u2019s the importance of not putting all your eggs in one basket.\u00a0<\/p>\n

We just talked about different investment types like stocks and bonds. But even within real estate, there are different asset classes and ways to invest. You have apartments, office space, debt, REITs, syndications, single-family homes, short-term rentals, and more. When I look at my portfolio, which has all of those, some are doing better than others depending on the current market. But because I\u2019m balanced, the suffering of one asset class doesn\u2019t have an overly negative impact on my portfolio.\u00a0\u00a0<\/p>\n

The beauty of having diversity within my real estate investments is that one asset class is struggling (and looking to make a comeback), my other investments help stabilize my portfolio.\u00a0<\/p>\n

Explore different types of real estate to spread your portfolio and reduce risk.\u00a0<\/p>\n

Your own portfolio diversity<\/a> will depend on where you are in your investment journey, which relates to your goals and net worth. For example, if you\u2019re a younger physician, you might prioritize riskier investments that take a lot of time, energy, and effort because of possible life-changing appreciation. That could mean more risk and more of your net worth tied into the investment.\u00a0<\/p>\n

If you\u2019re an older physician, on the other hand, you might want steady income to supplement your nest egg on your way to retirement. That would require less of your net worth to be allocated to real estate.<\/p>\n

Those are just two scenarios, but the circumstances are endless, which is why they\u2019ll be unique to you.\u00a0<\/p>\n

Deciding How Much to Allocate to Real Estate<\/h2>\n

With some of the foundational ideas out of the way, we can start getting closer to an answer to the question, how much of your net worth should be in real estate?\u00a0<\/p>\n

Here\u2019s the answer: It\u2019s totally up to you. That may be unsatisfying, but it\u2019s the truth. And the answer that\u2019s unique to you depends on your goals, net worth, and risk tolerance.\u00a0<\/p>\n

However, if you\u2019re still unsure, there are strategies that can help you land on a number.\u00a0<\/p>\n

Follow General Guidelines<\/h3>\n

For beginners, getting your feet wet in real estate<\/a> means that it usually starts out as a smaller part of the portfolio. For me, it was around 5%. Over time, I started pouring more and more income into it.\u00a0<\/p>\n

Of course, the real estate portion of my portfolio started to grow and appreciate. Then it started to snowball and compound. It became the perfect way to align my investments with my goals. After starting at 5%, it\u2019s probably closer to 75% of my portfolio.\u00a0<\/p>\n

But that doesn\u2019t mean that figure is right for you. Talk with your financial advisor. They\u2019ll tell you that allocating 10-30% of your net worth to real estate could be a good place to start, adjusting based on your goals and risk tolerance.\u00a0<\/p>\n

Start Conservatively<\/h3>\n

Having said all of that, it doesn’t hurt to do so conservatively<\/a>. Dip your toe in the water like I did. See how an initial investment or two goes and if they continue to align with your goals and objectives.\u00a0<\/p>\n

But because it can get complicated, begin with smaller investments like syndications or REITS to gain experiences without overcommitting your resources.\u00a0<\/p>\n

And make sure you educate yourself. There are lots of resources out there to help you with that education. Consider joining the waitlist of Passive Real Estate Academy<\/a>, a community where you will learn everything required to be an active and effective real estate investor while <\/em>getting connected with potential deals and like-minded individuals. After taking our course, you\u2019ll have more knowledge than 95% of investors out there today.\u00a0<\/p>\n

But why should you learn as much as you can? Right now in the real estate cycle, especially when it comes to commercial buildings, values have come down significantly over the last few years. That sounds scary at first, like markets are volatile. But it does feel like the winds are starting to shift\u2014big players are reentering the market now that interest rates are coming down. Generally speaking, that means there\u2019ll be more investment opportunities on the horizon.\u00a0<\/p>\n

Start small and learn along the way. As you learn more and get more comfortable, bigger decisions become easier. You can then allocate more of your net worth to real estate.\u00a0<\/p>\n

Evaluate Your Portfolio Today<\/h2>\n

I\u2019ve said it once and I\u2019ll say it again: I believe real estate is a powerful tool for building wealth and creating life-changing passive income. It\u2019s also a great way for high-income individuals to compound their earnings. And I haven\u2019t mentioned the amazing ways you can take advantage of tax benefits through real estate.\u00a0<\/p>\n

So how much of your net worth should you allocate?<\/em> You are starting to get closer to an answer, one that depends on your financial goals, your risk tolerance, and your stage in life. But always start small. From there, get diversified and try different things.\u00a0<\/p>\n

Then regularly revisit your strategies to course correct. Reassess your portfolio annually to ensure your real estate allocation aligns with your evolving goals and market conditions.\u00a0<\/p>\n

Peter Kim, MD is the founder of <\/em>Passive Income MD<\/em><\/a>, the creator of <\/em>Passive Real Estate Academy<\/em><\/a>, and offers weekly education through his Monday podcast, the Passive Income MD Podcast. Join our community at the <\/em>Passive Income Doc Facebook Group<\/em><\/a>.<\/em><\/p>\n<\/p><\/div>\n