Real Estate Investment: Tracking Your Portfolio And Managing Its Unique Risks

Investing in real estate, such as rental properties, could bring valuable diversification to your financial portfolio. And this is because physical real estate assets sometimes respond differently to economic factors than the stock market. For example, in a recession your stock portfolio is likely to lose value, but your tenants are not likely to move out of their housing unless they lose their income.

Real estate investments can provide:

• ✔️ Potential for steady cash flow from rental income
• ✔️ Potential appreciation in property value
• ✔️ A hedge against stock market volatility
• ✔️ Growth through leverage (borrowing) that is paid by tenants

But real estate investing brings a lot of unique challenges and requires a much more hands-on and disciplined approach to investing than stock market investing—and a lot more money upfront. Stock market investing can require very little time from you as an investor because you can—and in fact should—automate your investments across broad asset classes. But you can’t do that by owning one or more rental properties directly.

So you absolutely need to factor in—and plan for—the unique risks and challenges that come with direct ownership of rental properties:

• ❌ Cannot be a completely passive investor. You need to invest additional time to: find, inspect, buy, leverage, insure, fix or rehab, market, maintain, screen and evict tenants, or sell each unit.
• ❌ Not a liquid asset: You can’t sell it quickly if you need cash in a crunch, so it will show up as an illiquid asset on our Net Worth Card.
• ❌ Will incur high transaction costs on both purchase and sale—even if you’re not using a loan. This forces real estate investors to maintain a long-term outlook in order to spread those transaction costs over time.
• ❌ Leverage comes with borrowing risks, such as (i) continuing to pay mortgage if your tenant either gets laid off or can’t pay their rent; or (ii) rising mortgage costs if you have an adjustable interest rate mortgage.
• ❌ Risk for potentially costly and unpredictable capital expenditures and repairs. Your stock portfolio will not have a clogged toilet or leaky roof that would require your attention, nor would you be asked to do employee performance reviews.
• ❌ Harder to diversify across different geographical areas to protect against local market and geographic risks.
• ❌ Investing primarily in real estate is just like investing in any sector of the economy—such as technology, energy, utilities, biotech, and so on—but its net long-term returns are not necessarily higher than those of any other sector of the economy when you factor in the time and disciplined approach that direct ownership requires. If that were the case, then everyone would invest only in real estate and in nothing else. But because real estate investing through direct ownership requires significant capital and transaction costs to invest even in a single property, it exposes you to sector concentration risk by leaving you with less capital to spread across other sectors of the economy. Note that investing in REITs (Real Estate Investment Trusts), which are traded like stocks, can be a good way to address some of these risks.
• ❌ Direct ownership of one or more investment properties require that you maintain significantly higher cash reserves at all times to protect you in case of repairs and if you need to pay a mortgage loan if your tenant falls behind. Additional cash reserves should be un-invested in a savings account, which carries an opportunity cost. The opportunity cost arises from missing out on the opportunity to invest the extra cash to achieve its own long-term investment growth.

Why Tracking Real Estate Investments Is Essential

This all does not mean that investing in Real Estate is a good investment or not. It can be, but you need to approach it with greater diligence and follow the same investment principles that apply to all other investments—balancing investment time horizon, risk, and growth target. Real estate investors are often successful at building wealth over the long term, but this is primarily because real estate forces you to be a disciplined, long-term investor who constantly reinvests in the market and holds for a long period of time.

Owning real estate is more than just buying, holding, and renting.

• ✔️ Market fluctuations affect property value.
• ✔️ Unexpected expenses can impact cash flow.
• ✔️ Rental vacancies can strain finances.

Many investors struggle to manage properties through spreadsheets—so instead of juggling formulas, let’s simplify it.