Real Estate can be a meaningful diversifier in a portfolio of financial assets. By itself, it's very difficult for an investor to have a diversified portfolio of real estate. Most holdings become pieces of a few similar assets (condominiums, apartment houses, office buildings) in the same areas. The result is often under-diversifying, both by location and by property type. Here are some important facts:
1. It is a myth that one's home provides a significant growth of capital. Since 1945, American single family home prices have risen at a rate of about 4% per year. (Case-Shiller Index - Nobel laureate Robert Shiller). So after inflation, Net return on property has totaled about 1% per year. By comparison, the return of the S&P 500 index has been about 10% (Net 7%) per year - a return which requires no maintenance, repairs or tenant vacancies.
2. The advertised returns of real estate usually rely on high leverage, which increases risk significantly. The loss of a tenant, or their financial distress can force a leveraged property into negative cash flow which the investors may be liable.
3. Real Estate is by nature illiquid, costly to buy and sell, and requires time and effort to manage effectively.
4. Local legislation and tax policy can regulate rents and restrict a landlord from evicting tenants.
If there is an insistence to own a large percentage of real estate, there are options to avoiding risky concentration such as a diversified Real Estate Investment Trust. However REITs still have liquidity restrictions and the properties in them still mirror historical real estate returns of annualized 1% Net (versus 7% Net annual returns for owning equity in 500 of the largest companies of the world).
Sources: Nick Murray, Robert Shiller
http://www.econ.yale.edu/~shiller/data.htm
https://wealthtrack.com/robert-shiller-nobel-prize-winning-economist/
https://awealthofcommonsense.com/2013/03/real-estate-investment-performance/