The impact of real estate allocation on investors’ ability to generate real income

ABSTRACT Endowments, wealthy families and retired individuals are often concerned, first and foremost, about preserving their wealth or avoiding the possibility of depleted funds during their lifetime. This paper examines the extent to which a variety of real estate asset types, in addition to a traditional stocks and bonds allocation, can help preserve wealth or avoid a financial shortfall event subject to periodic withdrawals over an extended time period. Using a Monte Carlo Simulation technique, we analyse the resiliency of eight different real estate investment vehicles as a rule of thumb of a 4% annual withdrawal. Our results show that some – in most cases meaningful – portfolio allocation to each of these investment vehicles reduces the chance of a financial shortfall over long-term horizons of 30 or 50 years. Similarly, when wealth preservation is desired, allocation to each of these investment vehicles increases investors’ wealth preservation probability. Overall, it appears that equity REITs provide the greatest benefit to the portfolio compared with other real estate investment vehicles. These findings support portfolio allocation into real estate vehicles for investors that seek to preserve wealth or avoid financial ruin.