Can real estate substitute for bonds in asset allocation?

[Luck_Club]

Quote:

Originally Posted by pb4uski What risk of losing principal? Credit risk?

Yes credit risk, and rising rate risk. The rising rates are the larger risk on the immediate horizon, and 1 which you can't diversify out.

If you think back to the late 70's and early 80's bonds have been a great investment. rates have been declining most of the past 30+ years to the paltry interest levels we now have. If you look at the performance of bonds, they have been lock step solid safe returns the entire time.

Everyone agrees that bond prices fall when rates rise. So as the fed begins to adjust rates up, what is happening to all those bond portfolios?

Bonds & Bond funds aren't an asset class I see as favorable for the foreseeable future. two things are going to happen as rates rise.

1) Get locked into sub-market rates if you hold to maturity.
2) Take principle loss to increase your returns.

[Senator]

Quote:

Originally Posted by Texas Proud I just cannot get my head around all the RE investors who are trying to wrap their head around RE being 'similar' or 'the same as' or whatever word used to a bond... why? so you can say you are invested in bonds? It is NOT a bond... period... You keep trying to pound a square peg into a round hole and say it fits.... Live with the fact that it fits your needs and be done with it...

Wouldn't a bond fund that invested in mortgage backed securities be a considered a bond?

And if I invested $100K to pay off a mortgage, and my cash flow increases by $1,000 a month, would that be just as good as a bond fund paying the same (or typically much less)?

Why do people invest in bonds? Cash flow? Tax free income? Low volatility/Stability? If real estate provides all of these things, isn't that like a bond?

Quote:

Originally Posted by Luck_Club Bonds & Bond funds aren't an asset class I see as favorable for the foreseeable future.

++1

[pb4uski]

Quote:

Originally Posted by Luck_Club Yes credit risk, and rising rate risk. The rising rates are the larger risk on the immediate horizon, and 1 which you can't diversify out. If you think back to the late 70's and early 80's bonds have been a great investment. rates have been declining most of the past 30+ years to the paltry interest levels we now have. If you look at the performance of bonds, they have been lock step solid safe returns the entire time. Everyone agrees that bond prices fall when rates rise. So as the fed begins to adjust rates up, what is happening to all those bond portfolios? Bonds & Bond funds aren't an asset class I see as favorable for the foreseeable future. two things are going to happen as rates rise. 1) Get locked into sub-market rates if you hold to maturity. 2) Take principle loss to increase your returns.

It's called interest rate risk... not rising rate risk... but it is temporary and if you hold the bond to maturity like a good long term investor then you get your entire principal back so no need to diversify out... interest rate risk only affects you if you sell prior to maturity... but at least a bond investor can sell at any time if desired... its called liquidity and it is a good thing.

[Senator]

Quote:

Originally Posted by pb4uski It's called interest rate risk... not rising rate risk... but it is temporary and if you hold the bond to maturity like a good long term investor then you get your entire principal back so no need to diversify out... interest rate risk only affects you if you sell prior to maturity... but at least a bond investor can sell at any time if desired... its called liquidity and it is a good thing.

Isn't one of the reasons to invest in bonds so that you can sell the bonds if the stock market is down? And if you have a set allocation formula, doesn't that also mean selling?

[Texas Proud]

Quote:

Originally Posted by Senator Wouldn't a bond fund that invested in mortgage backed securities be a considered a bond? And if I invested $100K to pay off a mortgage, and my cash flow increases by $1,000 a month, would that be just as good as a bond fund paying the same (or typically much less)? Why do people invest in bonds? Cash flow? Tax free income? Low volatility/Stability? If real estate provides all of these things, isn't that like a bond? ++1

Still trying to pound that peg in place...

Just because something has a few traits in common does not make them the same...

Pigs and humans share a large amount of the same DNA, that does not make a pig a human....

[knucklehead 61]

question for the other rental property owners: what is the point of holding cash reserves?
personally, i haven't had cash reserves for the last 30 years.
all of my $ is invested & working for me at all times, either in the stock market, real estate, or antique motorcycles.
i have a couple home equity lines of credit (5% interest) that i can use if i need to replace a roof, or buy another house with, so i don't see the point of having cash which at the best looses value at the rate of inflation.

[calmloki]

We hold a fair amount of cash. Making a whole 1.3-1.5% now. The amount held goes up or down depending on the size & number of RE loans we have out. I don't trust a bank to honor a line of credit if things get sticky - per normal, I trust me a bunch, my gal a bunch, a few others - but if sh!t happens others will protect themselves first. Not casting aspersions on character, just human nature to take care of yourself first. RE pays us a goodly monthly income; we own without mortgages, except for a small one on our house that can be paid off any time. If we needed to come up with cash in a hurry selling the places wouldn't meet the hurry part. Selling stocks or bonds would probably work, unless it didn't. Plain old cash though? That oughta cover emergency or opportunity and no one can stop me from using it.

Our money isn't working as hard as it could, but it doesn't need to and gives a restful easy feeling.

[Luck_Club]

Quote:

Originally Posted by knucklehead 61 question for the other rental property owners: what is the point of holding cash reserves? personally, i haven't had cash reserves for the last 30 years. all of my $ is invested & working for me at all times, either in the stock market, real estate, or antique motorcycles. i have a couple home equity lines of credit (5% interest) that i can use if i need to replace a roof, or buy another house with, so i don't see the point of having cash which at the best looses value at the rate of inflation.

I hold too much cash. One of the problems of having more coming in then going out every month.

In all seriousness, it is something I should spend more time on finding places to park cash. However, it isn't a static number, it is constantly going up and down every month, then suddenly you notice you have too much cash on hand.

Remember investing in real estate has a minimum investment of $25K+ usually. Not exactly ETF entry points is it?

In my brokerage accounts I hold very low cash reserves.

P.S. Did anyone hear 10 yr yields are rising overnight? How does that effect bond prices again?

[Joylush]

Quote:

Originally Posted by knucklehead 61 question for the other rental property owners: what is the point of holding cash reserves? personally, i haven't had cash reserves for the last 30 years. all of my $ is invested & working for me at all times, either in the stock market, real estate, or antique motorcycles. i have a couple home equity lines of credit (5% interest) that i can use if i need to replace a roof, or buy another house with, so i don't see the point of having cash which at the best looses value at the rate of inflation.

Security, flexibility, emergencies. I don't want the hassle of dealing with banks/loans any more than necessary. Do I earn less that way? Yes, but the stress relief it provides is priceless.not to mention having ready cash is useful for taking advantage of unexpected opportunities that come along.

[pb4uski]

Quote:

Originally Posted by Senator Isn't one of the reasons to invest in bonds so that you can sell the bonds if the stock market is down? And if you have a set allocation formula, doesn't that also mean selling?

It can, but rebalance impacts are slight... if one has a 60/40 AA and stocks go down 10% and bonds are steady then to rebalance you would only sell 6% of your bond portfolio... and besides, commonly, when stocks zig bonds zag and those bons gains help offset the stock losses. Also, if your're still working you can rebalance by changing new money purchases.

[Senator]

Quote:

Originally Posted by pb4uski It can, but rebalance impacts are slight... if one has a 60/40 AA and stocks go down 10% and bonds are steady then to rebalance you would only sell 6% of your bond portfolio... and besides, commonly, when stocks zig bonds zag and those bond gains help offset the stock losses. Also, if your're still working you can rebalance by changing new money purchases.

So why do people buy bonds? And if an investment vehicle provides a similar function, why wouldn't it be a substitute? It is certainly not the same, but maybe just as good - or better. I have heard that if a pension and SS provides the majority of a households needs, the household can have a higher stock allocation. My real estate is safer than a pension.

It is not a bond, but it provides me similar features. And from what I see, it is likely safer. Especially if I am getting over ~12% return/$14K monthly on my original investment/equity. That 12% is extreme emerging market junk bond territory, yet very safe. If I would not have paid down my mortgages so much, it would be considerably higher.

From what I understand, my real estate provides me the same features as a bond. It has a stable income. The real estate values have a very low correlation to the stock market. The income very seldom gets cut. My gross rents will go up at least $6K this year, just under 2%. I could go even higher. Rents are up over $48K since Jan 2014 (as of Jan 2018).

Some people have stocks and bonds, and no real estate. That seems to be OK and considered a diversified portfolio. Some people have real estate and stocks, to me that is OK too. Some people have gold/silver, some do not. Some have international, some do not.

One thing for sure, with real estate, if you think you are going to blindly invest in it and come out ahead, you are taking a BIG risk.

[pb4uski]

Quote:

Originally Posted by Senator So why do people buy bonds?....

See orange line on linked chart. Note green line.

VTSAX Vanguard Total Stock Market Index Fund Admiral Shares Fund VTSAX chart

[Another Reader]

This period is unique in that interest rates were falling as the stock market dropped. The flight to "safety" worked. In a rising interest rate environment, bond yields decline, and a stock market shock might have an entirely different effect on bonds, especially if rates increase dramatically and quickly at the same time.

VNQ is in my opinion irrelevant to a discussion of individually owned properties. REIT's act like stocks, not like individually owned properties. The index is comprised of all sorts of REIT's. The values of a lot of real estate asset classes declined in the downturn. Therefore the value of the stocks based on the value of the properties also declined.

Again, for most direct real estate investors, it's about income, not the value on any given day. The higher cash returns of properly purchased and efficiently managed real estate protect you from the worry of a forced decumulation paper portfolio.

[Texas Proud]

Quote:

Originally Posted by Senator Some people have stocks and bonds, and no real estate. That seems to be OK and considered a diversified portfolio. Some people have real estate and stocks, to me that is OK too. Some people have gold/silver, some do not. Some have international, some do not. One thing for sure, with real estate, if you think you are going to blindly invest in it and come out ahead, you are taking a BIG risk.

This is exactly what I have been saying... there is nothing wrong with having stocks and RE... nothing.... but it is NOT stocks and bonds....

And even in stocks and bonds there is a wide range of what people have... some have aggressive investments and some are conservative... so even if you say you are 70/30 stock/bond that does not tell the whole story...


Your last stmt is the big kicker IMO... If you blindly invest in RE and do not know what you are doing you can lose 100% (or even more) of you investment... if you buy bonds that is almost impossible to do (not talking one company bond).... just because you are successful in RE does not mean everybody will be.... but everybody who buys a particular bond fund will do the same no matter how smart or how dumb they are.... hence, safer for the avg investor...


I see you never responded to my pig analogy (just having a bit of fun, no harm intended)

[Texas Proud]

Quote:

Originally Posted by Another Reader This period is unique in that interest rates were falling as the stock market dropped. The flight to "safety" worked. In a rising interest rate environment, bond yields decline, and a stock market shock might have an entirely different effect on bonds, especially if rates increase dramatically and quickly at the same time. VNQ is in my opinion irrelevant to a discussion of individually owned properties. REIT's act like stocks, not like individually owned properties. The index is comprised of all sorts of REIT's. The values of a lot of real estate asset classes declined in the downturn. Therefore the value of the stocks based on the value of the properties also declined. Again, for most direct real estate investors, it's about income, not the value on any given day. The higher cash returns of properly purchased and efficiently managed real estate protect you from the worry of a forced decumulation paper portfolio.

But it can be used for a proxy of RE prices.... and home prices all over the US dropped during the crisis, kinda like stock prices did....

But, if I did not sell my stocks and kept getting the same amount of dividends then is it all about income? Also, why keep talking about how the houses are worth so much more than what you paid for them? That sounds like it is similar to stock appreciation.... individual bonds do not 'appreciate' if they reach maturity.... you get back what you invested... so RE looks more like stocks than bonds in this case....

[Another Reader]

Quote:

Originally Posted by Texas Proud But it can be used for a proxy of RE prices.... and home prices all over the US dropped during the crisis, kinda like stock prices did.... But, if I did not sell my stocks and kept getting the same amount of dividends then is it all about income? Also, why keep talking about how the houses are worth so much more than what you paid for them? That sounds like it is similar to stock appreciation.... individual bonds do not 'appreciate' if they reach maturity.... you get back what you invested... so RE looks more like stocks than bonds in this case....

What most retired people are worried about is meeting their living expenses, not their portfolio value, except to the extent the portfolio is converted to cash to pay those expenses. If you live off income, not decumulation, the relatively steady income from real estate mirrors the relatively steady income from bonds.

[Another Reader]

A more accurate way of looking at this is to say if you own a successful real estate investment "business," you can probably skip bonds as part of your overall asset allocation. You can live with the volatility of equities and reap the higher long term rewards because you have a solid base level income from the real estate. I believe that is what Senator does and it's what I do, although I have pensions and Social Security as well.

[Senator]

Great point.

That is exactly what I am trying to say. I also have social security at some point, and a pension whenever I am wanting to take it.

Real estate is definitely not a bond, but it does provide some of the same features. Assuming you are Savvy enough to acquire it and get a solid return out of it.

And as a bonus, you also get many of the same advantages of owning a business.

[Texas Proud]

Quote:

Originally Posted by Another Reader What most retired people are worried about is meeting their living expenses, not their portfolio value, except to the extent the portfolio is converted to cash to pay those expenses. If you live off income, not decumulation, the relatively steady income from real estate mirrors the relatively steady income from bonds.

But that means you have saved more than you need to retire....

I could have a big enough portfolio where the income distributions more than covered all of my expenses.... I would not have to worry about the portfolio value, just like you say about RE.... but that is not efficient IMO...


And don't get me wrong, bonds have some huge risks.... one is that the income is not as steady over the long term.... IOW, my dad invested in CDs earning 15% back when I was young.... there was no way to invest that money when it matured to get close to that same income level... that is interest rate risk... but it is known as a risk with bonds...

RE has its own risks.... you seem to minimize them.... I do not.... I look at them and say that it is not for me.... I just do not want to deal with all the issues RE presents even if the return is 'great'....


SOOO, is owning RE a substitute for owning bonds? No... is RE income a substitute for bond income.... maybe so... then again I could say that EBay income is a substitute for bond income also.... but then you are back to doing work (which BTW I put managing RE into that bucket)...

[Another Reader]

"But that means you have saved more than you need to retire...."


Yes, my net worth without my house is more than I need to retire using a 4 percent SWR. However, I accumulated the necessary income much faster than most people accumulate the paper asset portfolio to decumulate using the four percent SWR. Buying smart, using leverage where it made sense, and managing the portfolio efficiently made that possible. And that includes making a number of good-sized mistakes along the way.