The Only Guide to Alternative Investments You'll Ever Need: The Good, the Flawed, the Bad, and the Ugly

Chapter 1. Real Estate

"Let every man divide his money into three parts, and invest a third in land, a third in business, and a third let him keep in reserve," advises the Jewish Talmud, which is dated somewhere between 1200 BC and 500 AD.

The quotation, one of the earliest descriptions of diversification we've found, shows not only that early civilization understood the need for diversification, but also that ownership of real estate was considered an important part of the process. Thus, it should come as no surprise that when investors begin to think about alternative investments, they usually turn first to real estate.

Excluding personal residences, the commercial real estate market consists of both private equity and public equity. Privately owned real estate—which includes ownership of property such as condominiums, commercial real estate, and undeveloped land—accounts for more than 90 percent of the real estate market. Public equity accounts for only about 9 percent of the total value of the real estate market. As a result, publicly traded real estate's share of the total U.S. equity market actually understates how U.S. investors allocate their capital.^[2] For example, real estate accounts for less than 3 percent of the Russell 3000 Index. Individuals seeking to allocate their capital in a manner similar to how capital is allocated by all U.S. investors must, therefore, dedicate a separate allocation to real estate.

From the days of the Talmud until the early 1970s, the only ...