Home Ownership and the Decision to Invest in REITs

Executive Summary. The purpose of this study is to determine whether or not real estate investment trusts (REITs) are appropriate investment vehicles for individual investors given that the family home is considered an investment asset. Mean-variance analysis is employed to find optimal portfolio allocations to stocks, bonds and equity REITs (EREITs) given varying valuations of the home and mortgage loan relative to the overall investment portfolio. The findings reveal that the addition of EREITs to the portfolio improves efficiency at most levels of home ownership and that optimal portfolios were often heavily weighted with EREITs. However, most of the portfolio allocation to EREITs comes at the expense of bonds. The increases in annual portfolio returns due to including EREITs in the portfolio ranged from 0.1% to 0.4% without adding any additional risk to the portfolio.