Only Real Estate?

	By Harvey Bookstein, CPA Visionary Managing Partner Co-Partner In-Charge Real Estate Services (310) 478-4148 x416 | hbookstein@rbz.com
Publication Date: Winter 2007
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 It is generally accepted that investing one’s savings should be done in a way in which a significant diversification is included in the allocation of those assets. This includes both the standard type of classes of assets such as stocks and bonds, which should be diversified in its own groupings, as are alternative investments such as commodities, hedge funds, foreign and real estate.

Over 50% of my clients are real estate-oriented. They are developers, syndicators, contractors, architects, investors, etc. Most of them have one common theme in investing their personal capital – investment in real estate.

Generally, individuals in the real estate game believe that the real estate investment returns over the years have been some of the highest returns, which I agree with. They also generally come with some great tax benefits and leverage as well. Even I had approximately 85% of my available investment funds (not including my business nor my home) invested in real estate approximately five years ago.

As long as we do not have a repeat of the late ’80s or early ’90s, this would have been a great decision. Even with hindsight, it would still have been a great decision if you were not heavily leveraged or had great “holding power.”

But most of my clients and friends did not fare well during the weak period. Many had to start over or change their game plans for a while in order to give them time to recoup.

I have told my clients, however, that if they do not recognize the benefit of diversifying their assets, they should at least diversify in the real estate sector itself. If you are a “Class A” apartment house specialist, why not take a portion of your assets and invest in office, self-storage, industrial or even “Class C” apartments. Why invest only in their backyards when they can diversify in additional regions in the country or world with experts in those specialty areas or other regions?

The general response is, “I do not understand about those other areas to invest in.” I have responded in these situations that as good as you might do in your comfort zone, there are others who feel as good about their particular comfort zones. There is nothing wrong with allowing someone else to make a “promote” off your investment, any more than you making a “promote” off of your expertise. I know that generally means that you may not be in control of the particular investment, but why should you always be in control of all of your investments?

There is another matter to consider. As my clients get older (as well as myself), their knowledge of real estate may not have passed down to their heirs. Future beneficiaries may not have the desire or the knowledge of what to do with your real estate holdings. I believe it is much easier to find an expert to handle your traditional investments than an expert to handle your real estate investments. To make matters even worse, most trust companies have no interest in being a trustee of an estate in which your assets have a significant position of your holdings in real estate. They usually will try to liquidate your estate holdings over a short period time so that they can invest your assets in more traditional products. Why leave it to a non-expert to decide how to maximize the value of your real estate portfolio when you know that you can do it better yourself? Why be at the mercy of bad timing in liquidating when you can do it within your time frame?

I, for one, firmly believe that real estate investments give you the best bang for your bucks, but have chosen at this time to look at and invest in many different types of opportunities. Although I still believe strongly in real estate investment, I have dropped my percentage to 55% of my holdings (down 30% in five years).