« Where to invest your monthly income if you spend only 45% a month? How to include your property with a home loan in your portfolio? »

How much real estate should you hold in your portfolio?

Posted on 06 Aug 2023
Author: Sayan Sircar

Tags: Real Estate

7 mins read
📢Join 2300+ readers on WhatsApp and get new post notifications!

This article discusses the role of real estate as an asset class. It shows a few options for valuing and including it in your portfolio.

How much real estate should you hold in your portfolio?

📚 Topics covered:

Is real-estate a part of your net worth or portfolio?
Classification of the primary residence
Classifying real estate as an asset class
Asset rich cash poor
- Portfolio without plot
- Portfolio with plot
Liquidity considerations with real estate
Are there any thumb rules with asset allocation to retirement?
What if there is excess investible surplus after primary goals are funded?
How to include your property with a home loan in your portfolio?

Is real-estate a part of your net worth or portfolio?

Net worth = Assets owned - Outstanding loans

Real estate is always a part of your net worth. Calculating the net worth of your property, whether plot, residential or commercial, requires market price and any outstanding loan balance.

Net worth of real estate = Value of the property minus Any loan on the property

The property will be the market value (circle rate or above) minus selling costs like brokerage. If there is a home loan or loan-against-property, then the principal owned on that loan should be subtracted to get the net worth.

We will examine if real estate is to be a part of your investment portfolio and how much real estate should be there.

Classification of the primary residence

Many investors are still determining if they should include the value of their homes in their portfolios. Given that real estate is the most significant thing most people buy, it is normal to have this doubt. It gives a feeling of accomplishment and comfort to increase the networth by such a large number.

The primary residence has only one purpose: to give the investor’s family a place to live. Under normal circumstances, a family will not be willing to sell off their home and stay on rent. They will either upgrade or sell the older house. Alternatively, they might move to a rented house in a different location and put their old home on rent.

What are financial goals

Additionally, the purpose of the investment portfolio is to fund goals like retirement, children’s education and others, as in the image above. Unless plans go drastically wrong, the family home will not be sold. If an investor has a portfolio of ₹1 crore and lives in a house of ₹1 crore, adding the house to the portfolio value will provide a misleading picture since the house is not for sale.

Therefore, we will exclude the primary residence from the investment portfolio.

Our discussion will therefore focus on investment real estate over and above the primary residence. Examples are flats, houses, plots and commercial real estate.

Did you know that we have a private Facebook group which you can join for free and ask your own questions? Please click the button below to join.

Classifying real estate as an asset class

Does real estate behave more like a stock or an FD?

Answering this question will allow us to understand which side of the risk/reward curve we should classify real estate. We know that real estate does not wildly fluctuate like stocks and instead tends to offer steady rental income and capital appreciation. These characteristics make real estate more of a debt asset class than equity.

Real Estate Is a Debt Asset

Suppose you use the Arthgyaan goal-based investing calculator. In that case, you should enter real estate as a debt asset, as in the image above.

Asset rich cash poor

I will take this hypothetical example of a 30-year-old FIRE aspirant looking for a ₹6L/year (₹50,000/month in today’s money) lifestyle 15 years from now. They currently have ₹50 lakhs in assets like PPF, MF and FD. Additionally, they have an ancestral plot of land worth ₹1 crore.

They want to retire early at age 45 (15 years for now) and are expected to live until 85, i.e. 40 more years. The current expenses are ₹50,000/month, and there is ₹50,000/month available for investing.

We use the Arthgyaan Goal-based investing calculator to formulate the investment model with all the above assumptions and goals. There is a link to download a pre-filled copy of the Google sheet via the button below.

Important: You must be logged into your Google Account on a laptop/desktop (and not on a phone) to access the sheet.

Once you get your sheet, you can get access to video tutorials in the howto tab.

Portfolio without plot

Asset Rich Without Plot Asset Table

Asset Rich Without Plot

In this example, the SIP required to reach the goal is ₹93,823, which is higher than the monthly available surplus. Therefore the goal is not achievable based on the currently held assets.

Portfolio with plot

Asset Rich With Plot Asset Table

Asset Rich With Plot

If we add the plot to the portfolio, we see that

the SIP amount is a manageable ₹44,793, which is possible with the current income and surplus available
the plot needs to be sold and invested in equity. The asset allocation requires ₹89 lakhs to be invested in equity
the remaining portfolio should be invested in suitable debt assets

Liquidity considerations with real estate

The case above is an excellent example of how liquidity and ticket size work in real estate. The plot has to be sold in its entirety to reach the required equity allocation. You cannot sell a half or quarter of a plot or apartment. You can sell parts of a house if it is modular, like allowing multiple floors with individual registration.

Liquidity is also an issue with real estate. You might not get the right price when you need the money. If you need cash immediately, you might have to take the distress sale route, where the money you get will be even less.

Are there any thumb rules with asset allocation to retirement?

Are there rules like 20% of a portfolio can go to real estate?

Real estate is another asset class, just like equity, debt and gold. There should be some allocation to real estate with some caveats:

real estate is difficult to value and exit since you may not get the right price all the time
real estate is not diversified: you will buy one plot, house or apartment. You cannot buy 1% in 100 different properties nationwide. We do have REITs now in India, and those offer fractional ownership, diversification and professional management

You can keep things more uncomplicated by assuming that:

real estate is a debt asset
exclude your permanent residence from your portfolio
add investment real estate to your portfolio as per your asset allocation

What if there is excess investible surplus after primary goals are funded?

You can fund a property by paying just 1% of the value per month for investment purpose. If you rent that out, you will get full tax benefits on the loan as well: How to Buy Your Dream Home Without Any Savings: A Step-by-Step Guide

How to include your property with a home loan in your portfolio?

The second part of this article deals with adding your investment properties to your portfolio:

How to include your property with a home loan in your portfolio?

What's next? You can join the Arthgyaan WhatsApp community

You can stay updated on our latest content and learn about our webinars. Our community is fully private so that no one, other than the admin, can see your name or number. Also, we will not spam you.

To understand how this article can help you:

If you have a comment or question about this article

The following button will open a form with the link of this page populated for context:

If you liked this article, please leave us a rating

The following button will take you to Trustpilot:

Discover an article from the archives

Worked out case studies for goal-based investing

Case study: how can this middle-aged investor with two children plan for retirement and children's goals?

This article shows how a single-income middle-aged couple with two small children reach their retirement and children’s goals.
Case study: can this double income single kid family reach FIRE at 50?

This article shows how a double-income couple with a 2-year old reach their FIRE dream at the age of 50.
Case study: how a family in their mid-30s with a newborn kid can FIRE and invest in real estate?

This article shows how a double-income couple with a newborn child can invest for their future goals of FIRE and real-estate investment.
Case study: how this double income recently married family can perform DIY goal-based investment planning

This article shows how a young just-married couple can invest for future goals using the Arthgyaan goal-based investing tool.
Case Study: How should couples in their 40s with a new baby plan their financial future?

Did you welcome a bundle of joy in your 40s? This article will discuss ways of planning the child’s (and your’s financial future)
Case study: how this double income single kid family can perform DIY goal-based investment planning

This article shows how a very typical salaried couple with one child can invest for future goals using the Arthgyaan goal-based investing tool.

Previous and next articles:

<p>This article answers a question about investing a certain percentage (here 55%) of your monthly income.</p>

Step by step Portfolio Construction

Where to invest your monthly income if you spend only 45% a month?

This article answers a question about investing a certain percentage (here 55%) of your monthly income.

Published: 2 August 2023

10 MIN READ

<p>This article shows the right way of valuing your property with a home loan for your investment portfolio.</p>

Real Estate Reader Questions

How to include your property with a home loan in your portfolio?

This article shows the right way of valuing your property with a home loan for your investment portfolio.

Published: 9 August 2023

4 MIN READ

Latest articles:

<p>This article shows how to understand the impact on your portfolio if you stop investing for a few years between today and retirement.</p>

Portfolio Construction

How much lower portfolio value do you end up with if you do not invest for a few years in between?

This article shows how to understand the impact on your portfolio if you stop investing for a few years between today and retirement.

Published: 24 April 2024

4 MIN READ

<p>This article explains what happens if you withdraw from your EPF to buy a house and who should or shouldn’t withdraw from EPF for this reason.</p>

House Purchase

Should you withdraw from your EPF to buy a house?

This article explains what happens if you withdraw from your EPF to buy a house and who should or shouldn’t withdraw from EPF for this reason.

Published: 21 April 2024

7 MIN READ

Topics you will like:

Asset Allocation (21) Basics (8) Behaviour (12) Budgeting (12) Calculator (25) Case Study (6) Children (17) Choosing Investments (40) FAQ (12) FIRE (13) Gold (21) Health Insurance (5) House Purchase (29) Insurance (16) International Investing (12) Life Stages (2) Loans (17) Market Data (7) Market Movements (16) Mutual Funds (46) NPS (7) NRI (19) News (18) Pension (8) Portfolio Construction (53) Portfolio Review (27) Reader Questions (8) Real Estate (7) Research (5) Retirement (38) Review (15) Risk (6) Safe Withdrawal Rate (5) Set Goals (28) Step by step (15) Tax (59)

Next steps:

1. Email me with any questions.

2. Use our goal-based investing template to prepare a financial plan for yourself.

Don't forget to share this article on WhatsApp or Twitter or post this to Facebook.

Discuss this post with us via Facebook or get regular bite-sized updates on Twitter.