Reassess Your Portfolio: Real Estate Investing

It’s a low-yield world out there. Investors looking for decent returns have faced a tough challenge in the years since the 2008 financial crisis, with interest rates for high-quality debt hovering near zero as a result of central bank policies around the globe. As Kathy A. Jones, Chief Fixed Income Strategist at Charles Schwab, said in early 2016, "The lack of attractive yields from Treasury bonds has been hard on savers."

Investors seeking higher returns now have to include real estate in their portfolios, according to a recent report from investment consultant firm Callan Associates. The report recommended investors allocate 13% of their portfolios towards real estate to hit a 7.5% return.

Portfolios aren't what they used to be

Low interest rates have forced investors to reevaluate the composition of their portfolios. Treasury notes, long considered the quintessential safe place to park money while earning some interest, offered yields of just 1.59% for a ten-year bond as of mid-July 2016. That’s an all-time low. It’s also barely higher than recent inflation rates and solidly lower than the 6–7% range of the 1990s. Many analysts believe that these low yields show little sign of abating in the near future.

Historical nominal interest rates on a 10-year US Treasury bond. Image via US Treasury.

The Callan Associates research examined the types of assets investors could use to build a portfolio targeting an overall nominal return of 7.5%. In more high-yield times like the 1990s that return was attainable just by placing money into investment-grade bonds. Now, as the Wall Street Journal noted in an article about the research, pension funds and other large endowments must reallocate their investments into riskier asset classes like global stocks, private equity instruments, and real estate investments to achieve anything close to a 7.5% mark.

Image via The Wall Street Journal

Bond portfolios can no longer be relied on to drive returns. Traditionally, bonds have played a diversification role in a well-balanced investment portfolio. When stock indices fall, bonds generally do fairly well, thus diversifying away some of a portfolio’s risk. As Jay Kloepfer, the head of capital markets research at Callan Associates said to the WSJ, an investment in either a stock or a private equity play has the risk of falling to zero, while bonds rarely will do so. This quality means that safe-haven bonds still have a role to play in a portfolio, but investors must look to other assets to drive returns in the current climate.

Bonds should make up just 12 percent of an investment portfolio that’s aiming for a 7.5% return, according to the Callan Associates research.

High return investments in real estate

Of course, individual investors are affected by the same issues, leaving many wondering if it’s possible to get a good return on investment in the current climate. Real estate as an asset class has been looking increasingly attractive to return-seeking investors, and several alternative investment opportunities, from peer to peer lending to real estate crowdfunding, have opened up in recent years.

Returns on these investments are relatively high for example, individuals can invest in short-term mortgage loans to real estate professionals on Kiavi’s platform, where returns range from 7 to 12% based on risk and have historically averaged more than 10%. With these returns, of course, comes higher risk investing in online real estate doesn’t offer as much security as U.S. Treasury bonds. It does, however, offer the benefits of diversification from the stock market, and all investments are backed by real assets, making them more secure than peer to peer or small business options. Plus, each loan offered by Kiavi is carefully examined for quality by an expert underwriting team.

If low yields really are here to stay, investors will need to continue finding new ways to build portfolios that offer solid returns. And if present trends continue, real estate investments will increasingly be part of that mix.