When markets get choppy, some investors start looking to alternatives. Rental real estate in particular tends to come up early in that conversation because it feels familiar. You’ve bought a home before. You understand what a house is. It seems like a natural place to start.
But before you move forward, there are a few things worth getting straight about how alternatives actually work, what real estate investing really involves, and how to approach this decision in a way that holds up over time.
Alternatives Is a Big Bucket
The first thing to understand is that “alternatives” covers an enormous range of investments. Anything that isn’t a publicly traded stock or bond falls into this category. Real estate, private equity, oil and gas, venture capital, hedge funds. These are all alternatives, and they have almost nothing in common with each other in terms of risk, liquidity, and the knowledge required to invest well.
So when someone asks whether they should diversify into alternatives, the more useful question is: which alternatives, and why those specifically?
This also isn’t a decision that should be made as a reaction to market volatility. If alternatives belong in your portfolio, that should be determined strategically, with a clear sense of how much of your overall allocation makes sense to put there. For most people, that range falls somewhere between 10 and 20 percent, depending on risk tolerance and what types of alternatives are being considered.
Invest Where You Have an Edge
One of the reasons residential real estate tends to be where people start is that it’s familiar territory. You’ve been through the process of buying a home. You understand neighborhoods, what a property is worth, what condition looks like. That familiarity is actually worth something.
Alternative markets tend to be opaque. The way you get an edge is by bringing more knowledge to the table than the competition. If you’ve spent your entire career in medicine and you want to invest in a startup, a medical device company makes far more sense than a technology company you know nothing about. The same principle applies to real estate. Buying in a market you know gives you an informational advantage that a broader fund investor simply doesn’t have.
That’s not an argument for always staying close to home. It’s an argument for being honest about where your knowledge actually gives you an advantage.
The Real Costs of Owning a Single Rental Property
Real estate has genuine advantages as an investment. Leverage lets you control 100 percent of an asset while only putting 20 to 30 percent down. Depreciation provides a meaningful tax benefit over time. Rental income adds cash flow. These are real, and they can produce strong returns.
But the most common mistake people make with residential real estate is underestimating how much time it actually takes to manage a single property. This is not a set-it-and-forget-it investment. Contractors need to be coordinated, repairs need to happen, tenants need to be managed. A lot of people start doing this work themselves, which isn’t necessarily wrong, but you need to honestly assess what that time is worth. If you’re spending your weekends painting walls and fixing floors, your returns might look good on paper, but you’re effectively working for minimum wage.
When Real Estate Starts to Work Like a Business
The math changes when you start treating real estate as a business rather than a single investment. With three or four properties, you start to see economies of scale. You can buy materials in bulk, standardize finishes across properties, and negotiate better rates with contractors because you’re offering them consistent, repeat work. You also reduce your income risk because one vacancy no longer means 100 percent of your rental income disappears.
That’s a different proposition from being the solo landlord of one house. It requires more capital and more intentionality upfront, but it starts to function the way a real business does.
The Further You Move From Direct Ownership, the More It Looks Like the Market
On the other end of the spectrum, REITs and broader real estate funds offer more diversification and more liquidity, but the tradeoff is that the returns start to look a lot more like the broader market. REITs historically have a high correlation to the S&P 500, and that makes sense. You’re not in there managing properties, handling tenants, or leveraging local knowledge. When you remove those elements, the advantages that make direct real estate investing attractive start to disappear along with them.
More diversification does lower risk, but it also lowers potential return. That’s not a reason to avoid REITs entirely. It’s just worth understanding what you’re actually getting when you choose that path.
How to Approach This Decision
If you’re thinking about adding alternatives to your portfolio, start by deciding how much of your overall allocation belongs there. Then get specific about which types of alternatives you actually want to pursue, and why those make sense given your knowledge, your time, and your goals. Don’t rush it, and don’t concentrate everything in one investment or one time period. Diversifying across both the type of alternative and the timing of when you invest helps spread risk across different points in the business cycle.
The goal isn’t to react to what’s happening in public markets right now. It’s to build a portfolio structure that holds up across all of them.
This post is adapted from a recent episode of the Scholar Wealth Podcast. For more perspective on alternative investments and real estate, listen to the full podcast episode here.