Is your portfolio real estate heavy?

A friend of mine came to me asking if there were good investment opportunities in real estate. I was wondering why real estate, as he already had 2 houses. One he was staying in and another on rent. He used to save money and he had enough to make down payment, he would invest in real estate under development project and then keep paying off the loan. Now he is 53 and he want to purchase another flat. On probing he said real estate gives good returns and the rentals would give him regular income. While it is true that there will be appreciation, but when he needs the money liquidity would be an issue. Selling a property is time consuming. Another issue is market prices of real estate are opaque. When you actually try to sell, you will get a much lower value than you actually believe your property is worth and if you really want the money urgently, you would have to give further discount and also with a lot of running about. .

The other issue would be even for a small value you would need to get rid of the whole property as property is indivisible. We always look at the rental income, but we usually tend to discount the expenses which we have to bear on the property on a regular basis viz. property taxes, repairs, painting, maintenance bills, etc.  There could also be times when the property will be vacant. Now what happens is people who talk of investing in property always talk in absolute value terms, if you acutally look at the returns it would be around 3% of the current value. So in such a situation any other investment would have given better returns. But then they will not understand as they are emotionally attached to real estate. So I told this friend that not more than 50% of his portfolio should be in real estate. He said I’ll get back to you and I am still waiting.