Open Thread, Jun. 15 - Jun. 21, 2015

Gondolinian

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If it's worth saying, but not worth its own post (even in Discussion), then it goes here.

Notes for future OT posters:

1. Please add the 'open_thread' tag.

2. Check if there is an active Open Thread before posting a new one. (Immediately before; refresh the list-of-threads page before posting.)

3. Open Threads should be posted in Discussion, and not Main.

4. Open Threads should start on Monday, and end on Sunday.

I'm trying to figure out what percentage of a balanced investment portfolio should go towards rental real estate, but I'm having a hard time finding reliable sources of advice on this question.

I have a friend who invests in rental real estate, and he says he can give me a guaranteed 10% ROI if I invest $10,000+ with him, or 15% if I invest $100,000+. From looking around online this does indeed appear reasonable - rental real estate often gives much higher returns than this, so it sounds reasonable that he can guarantee a lower rate and then either pocket the remainder (his reward) or pay up the difference out of pocket (his risk). So it sounds like a pretty decent investment as far as I can tell.

But I don't want to put all my financial eggs in one investment basket - I'm not an expert, but I've always heard that diversification and a "balanced portfolio" are the names of the game. My question is approximately what percentage of my assets should I put into rental property investments like this vs. e.g. a Vanguard targeted retirement fund. As I said, I'm having trouble finding reliable sources of advice on this question.

Anybody here know anything on this subject? Anybody know somewhere I could go to find accurate, reliable, and unbiased advice?

Theoretically, the market portfolio, which is the efficient portfolio according to Modern Portfolio Theory should replicate the world's assets weighted by value. For America, household (and non-profit) net worth is ~$85T and the value of real estate holdings is ~$14T (value less mortgages) (source), so about 16% is pretty justifiable. This is all pretty back of the envelope though.

4Shmi11y

I don't believe it. If he could guarantee it, he would instead borrow from a bank at 3-5% as much as he can (potentially using his house as a collateral) and invest that. Besides, at that rate of return, other investors would flock in, including fund managers, and saturate the market.

19Lumifer11y

Heh. Ask him to actually guarantee it -- that is, structure the transaction as a loan yielding 10% (or 15%) with him fully liable for the principal and the interest. See if he agrees :-/ Don't forget to check that the counterparty (the borrower) has assets to pay you back. There are financial securities called REITs (Real Estate Investment Trusts) which invest in property (sometimes commercial, sometimes rental, read the prospectus) and return the income to you less a haircut. As a sanity check you can take a look at how high returns do they provide.