Advisory Industry’s Classification Conundrum
One thing I’ve noticed through the years of investing in real estate—and this has been a real eye-opener—is that a significant factor in real estate’s “alternative” classification stems from the investment advisory industry’s business model rather than the asset’s inherent characteristics.
A bold claim, right? Perhaps, but the way I see it, investment advisors often categorize real estate as “alternative” primarily because they can’t easily earn management fees from direct real estate investments. In simple words, the classification is really more about business convenience than the investment’s actual fundamentals.
It gets better. The exception to this rule is telling: Real Estate Investment Trusts (REITs) and real estate funds, which advisors can manage and earn fees from, are often included in traditional investment portfolios. Funny how that works, isn’t it?
Comparing Investment Characteristics
So, upon examining the characteristics of investments, real estate behaves more like traditional business investments than alternative ones. Based on these aspects:
Tangible Value
Of course, real estate represents ownership of physical assets with utility value, similar to owning a business with physical assets. Its tangibility provides a floor for valuation, unlike many alternative investments where value can theoretically drop to zero.
Income Generation
Like traditional businesses, real estate generates regular income through operations. This income provides a basis for valuation and return calculations as well, similar to how business earnings drive stock valuations.
Market Efficiency
While not as liquid as public markets, real estate markets show relatively efficient price discovery through professional appraisals, comparable sales, and income-based valuations—more closely resembling traditional markets than alternative ones.
High-Net-Worth Individual (HNWI) Investment Patterns
Don’t want to take my word about the classification?
Fine—let me show you something that blew my mind about how the wealthy actually invest their money. I’ll tell you something pretty fascinating about the true nature of real estate investment. High-net-worth individuals are investing heavily in real estate, and not as some exotic “alternative” play either.
These investors, who have access to literally every investment vehicle under the sun, are putting a whopping 32% of their wealth into residential properties and another 21% into commercial real estate.
That’s 53% of their portfolio in real estate—more than double what they’re putting into stocks, which sits at around 26%. What’s more, these are the same stocks everyone considers quintessential “traditional” investments.
In my view, if the wealthy choose to put more than half their wealth into real estate, they see something that goes way beyond viewing it as just another alternative investment in their portfolio. I mean, come on—the numbers speak for themselves, take a look!
How Private Equity Real Estate Has Given the Wealthy an Edge
Something interesting occurred between 2015 and 2024. Billionaire wealth increased by 121%. To put that in perspective, during the same period, the MSCI AC World Index grew by 73%, and the S&P 500 increased by 77%.
That’s not just beating the market—that’s absolutely obliterating it.
Now, let’s look at how the wealthy approach real estate investment going forward. About 43% of them plan to pour even more money into real estate. That’s not something you’d expect if this was just another alternative investment, right? Even better, billionaires are getting more hands-on—38% of them are looking to increase their direct private equity investments in real estate.
Why? Perhaps they also learned what I’ve realized: real estate isn’t just about diversification or having an “alternative” in their portfolio. They see it as a stable foundation for wealth building, especially during market volatility. We all know stock markets can get choppy, and traditional investments start swinging wildly whenever that happens.
However, in my experience (and I’ve seen my fair share of market cycles), real estate provides that “stabilizer” that keeps portfolios grounded.
