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Asset Allocation w/ Rental Properties
Old 10-28-2015, 02:38 PM   #1
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Asset Allocation w/ Rental Properties

So the DW retires in 8 days (52) and I am semi-retired selling some real estate and managing my rental properties (53).

Currently own rental properties free and clear that will generate approximately 57% of our income needs. Not sure how to view the real estate from an asset allocation standpoint.

Asset Allocation with no real estate -

Stocks - 67%
Bonds - 20%
REITs - 3%
Cash - 10% (kind of high as I've been looking for 1 more possible rental to buy)

Asset Allocation if I include the fair market value of my properties -

Stocks - 39%
Bonds - 12%
REITs - 2%
Cash - 6%
Rentals - 41%

You'll notice that the rentals are 41% of my portfolio but are producing 57% of the income we need. I financed half the properties by taking out a $400k, 15 yr loan on a new house we were buying. Previous house was paid off. Therefore, in 11+ years house will paid off and rentals will provide over 75% of our needs projecting a SWR around 2.5. Therefore, I'm most worried about the interim 11 years.

So my questions -

- How would you view the rental properties as a part of an overall asset allocation?
- Given what I've described, does the allocation we currently have seem proper? Obviously, there are many opinions on this but would love feedback.

Happy to provide more info if needed.

Thanks!
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Old 10-28-2015, 02:50 PM   #2
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I put investment real estate in its own asset class. Every year I calculate the percentages of total assets including all real estate (including my home) and then I calculate investable assets (excluding my home). For me, last time I did the calculations, all RE as a percentage of total assets was 21% and investment RE as a percentage of investable assets was 12.5%. I also calculate leverage, which was 2.2% of total assets. All these numbers are now out of date as I recently purchased another investment property.

There is no "proper" asset allocation. All that really matters is sustainability of the portfolio and ability to sleep at night.
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Old 10-28-2015, 04:06 PM   #3
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You can add your REITs to your rental allocation.

Here is what I do. I consider my rentals my bond portfolio. I paid off several mortgages, so in effect I bought mortgage bonds. I figure they are worth a guaranteed 5% return. In the end, the rentals return MUCH more.

I also have a bit of cash, you never know when you need some to do a deal, or do a major repair.

My allocation, not including my personal residence looks like this. I am using property tax value, which may be a bit low.
59% Rental Equity
37% Investments (Roth, 401K, H.S.A)
4% cash

The cash position is a bit misleading, as it is about 10% of my entire investment portfolio, even though it is only 4% of my NW. I can’t spend real estate equity.

I will be living 100% on my rentals, letting my dividends reinvest, until at least another 5+ years after I leave my FT job.

Here is a good take on different retirees and their income, including real estate investors.
In this paper, we seek to answer these questions by examining the current retirement income of wealthier retirees—defined as those ages 60–79 with at least $100,000 in financial assets, whether in taxable, tax-deferred, or other types of accounts. Our survey sample included more than 2,600 households.

https://personal.vanguard.com/pdf/CRRRIP.pdf
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Old 10-28-2015, 04:39 PM   #4
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I think of my rental property as it's own asset class and a guaranteed source of monthly income. If I had to lump it in with something it would be pensions....maybe bonds. I subtract the net rental income (along with other guaranteed income sources) from my income needs and invest my remaining assets to provide any difference. Right now if we include rental property, and exclude my personal residence, my asset allocation looks like this.

Pension (using lump sum value) 12%
Rental RE 20%
TIAA-Traditional 20%
Bond funds 6%
Equity funds 40%
Cash 2%
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Retired Mar 2014 at age 52, target WR: 0.0%,
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Old 10-28-2015, 04:48 PM   #5
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Old 10-28-2015, 04:55 PM   #6
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Quote:
Originally Posted by nun View Post
I think of my rental property as it's own asset class and a guaranteed source of monthly income. If I had to lump it in with something it would be pensions....maybe bonds. I subtract the net rental income (along with other guaranteed income sources) from my income needs and invest my remaining assets to provide any difference. Right now if we include rental property, and exclude my personal residence, my asset allocation looks like this.

Pension (using lump sum value) 12%
Rental RE 20%
TIAA-Traditional 20%
Bond funds 6%
Equity funds 40%
Cash 2%
I do the same regarding the subtraction of rental income into calculating returns and withdrawal rates. Thanks for the breakdown of your AA.
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Old 10-28-2015, 05:13 PM   #7
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Quote:
Originally Posted by Meadbh View Post
I put investment real estate in its own asset class. Every year I calculate the percentages of total assets including all real estate (including my home) and then I calculate investable assets (excluding my home). For me, last time I did the calculations, all RE as a percentage of total assets was 21% and investment RE as a percentage of investable assets was 12.5%...
+1... separate asset class in the AA.

You can see from my signature that investment real estate is 15% of investable assets. This consists of two single-family rental homes and a REIT ETF (VNQ). Total real estate, including our primary residence, is 29% of net worth, which will come down when we downsize.

For calculating withdrawal rates, I include rental income with pensions/SS, and exclude their value from the portfolio which must generate the difference. Excluding real estate, the AA is 60/40.

I like rental real estate, but not as much as the OP or Senator. Too much like a job. I like just enough in the AA for diversification into hard assets. It provides a nice tax-favored income stream, should grow at about the rate of inflation, and provides some stability similar to bonds.
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AA: 55% stock, 15% real estate, 27% bonds, 3% cash
WR: 2.0% SI: 2 pensions, some rental income, SS later
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Old 10-28-2015, 06:39 PM   #8
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Using what the tax man has as our property values, and ignoring the massive tax hit selling our pretty depreciated out property would cost, we are at:

40% rental property
20% real estate loans and property sales contracts
18.8% cash (a number of loans paid off recently)
18.6% stocks, gold, HSA...
0.3% home equity (which sounds like a BSA pup tent, but really, we're comfortable)

fishingmn - your "So the DW retires in 8 days (52) and I am semi-retired selling some real estate and managing my rental properties (53)" statement had me going - you were referring to your age being 53, correct? or are you riding herd on 53 units?
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Old 10-28-2015, 08:57 PM   #9
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Originally Posted by calmloki View Post
fishingmn - your "So the DW retires in 8 days (52) and I am semi-retired selling some real estate and managing my rental properties (53)" statement had me going - you were referring to your age being 53, correct? or are you riding herd on 53 units?
Ages I have 11 rental properties.

Not all that much work - maybe 1-2 days/month of my time. For that I'm making close to a 10% return with low risk that it will deviate from that much and that doesn't count property appreciation or the tax depreciation benefits.
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Old 10-29-2015, 09:29 AM   #10
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My AA is 40% Stocks, 40% Bonds and 20% cash not counting Rental RE.


Counting RE, my AA is approx. 40% RE, 24% Stocks, 24% Bonds and 12% cash.


My RE covers my essentials and provides about 55% of my total cost of living. I'm 58 and have been using the cash to supplement my living.
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