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Re: do you count your house as the RE part of your allocation?
Old 04-01-2006, 07:51 AM   #21
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Re: do you count your house as the RE part of your allocation?

Random first cup of coffee:

I'm with Audrey - renting gives one the most flexibility.

My sister's H a mining engineer is the family poster child for bad RE - always bought/sold houses in their moves in yucky markets - in the hole after thirty years. Currently renting in the PacNW. The one exception - the house they owned in CA.

I'm periodically hit with pangs of jealousy toward people I know who did well in RE and were successful in converting some of the gains toward ER.

A slice and dicer probably wants some RE as well as commodities and foreign fixed in his portfolio.

There is enough variation among ER plans - that there is no one answer. For me - RE was so so and the historical period for my savings 1966 - 1992 stocks did the heavy lifting. In a different location easily could have been RE.
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Re: do you count your house as the RE part of your allocation?
Old 04-01-2006, 09:00 AM   #22
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Re: do you count your house as the RE part of your allocation?

In my RE planning, I count the house as a component of my net worth, but not as a cash flow generating asset. I do not want to depend on the house to provide sufficient cash flow to enjoy retirement. I tend to be more conservative in my approach and this may not work for some.
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Re: do you count your house as the RE part of your allocation?
Old 04-01-2006, 09:04 AM   #23
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Re: do you count your house as the RE part of your allocation?

Real Estate is worth as much as someone is willing to pay and I am often surprised by people who shirk at borrowing monies to Buy Bonds etc, but are quite willing to leverage themslves to the hilt to buy a pile of Bricks and Sticks??

In order to break EVEN on R.E it must go up at least 10% in order to cover the Transaction Costs of divestiture.

$500,000 worth of R.E costs you about $40,000+ to sell, that's a lot more than ETrade.
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Re: do you count your house as the RE part of your allocation?
Old 04-01-2006, 09:07 AM   #24
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Re: do you count your house as the RE part of your allocation?

Quote:
Originally Posted by Maximillion
Real Estate is worth as much as someone is willing to pay
Same as investing (e.g. stocks/bonds/hard assets)...
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Re: do you count your house as the RE part of your allocation?
Old 04-01-2006, 09:09 AM   #25
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Re: do you count your house as the RE part of your allocation?

i consider my house an asset which i plan one day to use to purchase a boat which is "a hole in the water into which one throws money," not an asset.

but sometimes even a mobile home can be an asset. certainly the 488 lucky residents of briny breezes, a tiny trailer park town on the beach in palm beach county, fl, think so. their $80-200k investments are about to pay off as someone just offered $500 million to purchase the entire town. they are considering the offer but some holding out for that billion dollar offer. now i'm not yet very financially astute, but one million bucks for a trailer park site? yeah, i'd call that an asset.
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Re: do you count your house as the RE part of your allocation?
Old 04-01-2006, 09:24 AM   #26
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Re: do you count your house as the RE part of your allocation?

I don't count my house value except in a sort of theoretical way. Like everyone points out, ff we were to sell, we'd either buy something else or rent. And unless something bad happens to us financially, the replacement house/retirement community will cost about the same as the value of the current house. If we switched to renting, we'd hopefully have the wherewithal from the sale to provide the additional income we need to cover rent and moving expenses.

Two couples we know sold their homes locally last year and started renting, in both cases for the flexibility to spend a lot more time with their children & grandchildren up north, and also for the men to get out from under yard and home maintenance--both had health events that contributed to their decisions (heart attack, prostate cancer).

-- Couple A cleared ~$450k from their house sale, and now has $2000/month rent on a pretty townhouse where they can now walk to most errands and have a shorter drive to downtown Charleston. They got rid of one car, but also moved out of their golf community.

-- Couple B traded a small mortgage for a $2300/month seasonal house rental in downtown Charleston--they cleared ~$550k on their house sale.

Both couples enjoyed a hearty run-up in their house values over ~10 years, both couples have reliable pensions that provide (I'm guessing-) ~ half their living expenses,*and both are happy with to the decisions to buy when they did and sell when they did.
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Re: do you count your house as the RE part of your allocation?
Old 04-01-2006, 10:24 AM   #27
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Re: do you count your house as the RE part of your allocation?

If you own your home free and clear, and your total payment each month is a couple hundred bucks in property taxes, and renting the equivilant home in the neighborhood costs $2,000, there is some value in that. I'm willing to entertain arguments that one shouldn't claim the full market price in your net worth, but I think you should take the difference between rent and property tax and figure out what lump sum you would need for an annuity to pay you that, or something like that.

My parents are selling their house in Coastal San Diego and bought ten acres in the foothills to build their dream home on and put a couple hundred thousand in the bank to boot. I'd like to see a renter do that.
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Re: do you count your house as the RE part of your allocation?
Old 04-01-2006, 11:14 AM   #28
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Re: do you count your house as the RE part of your allocation?

I am not sure about what the argument is. I am typical of most of my - home owning - peers. My mortgage and property tax may have been a bit higher than renting an equivalent house in the early days, but it very quickly became much cheaper than rent as prices (and rents) rose. Now I am living in a rent free house that I can pass on to my heirs or tap with a reverse mortgage in case of emergency. If I had rented the entire time, I would not have been able to save more and I would have to rent for the next thirty years of retirement. Case closed.
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Re: do you count your house as the RE part of your allocation?
Old 04-01-2006, 11:24 AM   #29
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Re: do you count your house as the RE part of your allocation?

Quote:
Originally Posted by ladelfina
I'm getting a vibe that a smallish REIT portion would not be bad. House is in Italy but all investment accounts are in the US for numerous reasons. Matters are complicated as I earn dollars but am spending euros. That introduces a wild card that can effectively vary my 'earnings' by as 40-50%, taking the past several years of exchange rates into consideration (!)* * Euro at .85 => 1.32; now 1.20 or thereabouts.

For me buying was preferable to renting since I knew what I was paying at a fixed point in time (versus the spectre of paying euro rent with an ever-plummeting dollar). Also, renting the type of property we have would be more expensive relative to the purchase price than would have been the case for a 'normal' apt.

brewer, thanks for the references to commodities and foreign bonds. I will check those out.

now as far as REITs go, I'm not sure how to go about evaluating.. is there an REIT fund or ETF? Or is it better to pick a couple individual ones?
Holy cow do you have a big currency mismatch! Assets in USD, spending/liabilities in Euros. <shakes head>

delfina, I think it would be a very good idea for you to hold a reasonably sizeable weighting of euro-denominated bonds. GIM has a hefty european weighting, but they also have a lot of asian bonds. Might be worth looking around to see if you can find a bond fund that concentrates on euro-denominated bonds. Either that, or periodically spend a little money on call options on the new Euro etf that was recently put out there. That way you are hedged if the USD really takes a beating vs. the Euro.

I don't think REITs are the bargain they once were, but having at least some in your portfolio would be a good idea. If you have access to it, I think highly of VG's REIT fund (VGSIX). If not, ICF (an etf) is a decent choice.
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Re: do you count your house as the RE part of your allocation?
Old 04-01-2006, 11:50 AM   #30
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Re: do you count your house as the RE part of your allocation?

ladelfina,

Vanguard has an REIT index fnd, VGSIX.

Gillette Edmonds, author of "How to Retire Early and Live Well with Less than a Million Dollars" has a web site:

http://theretiredinvestor.com/how_to_retire_early.htm

where he once had investment information on REITs. I haven't looked at it carefully lately. You might look for yourself.

Cheers,

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Re: do you count your house as the RE part of your allocation?
Old 04-01-2006, 12:15 PM   #31
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Re: do you count your house as the RE part of your allocation?

whether it counts depends on the ground rules of what others are doing in the survey..a house can be excluded if others are not counting it in there figures and all agree not to count anything that is not something that you can not convert to cash at this point in time... ...if you never sell the house it only counts when figured as part of yourt estate...you cant swap your house if your living there for a different asset group like a true "investment" if economic climate exists..i think net worth is sometimes defined as anything that can be converted to cash at that moment if desired...if you want to sell your house now well count it,if your not ready to turn it into cash dont count it yet......same would be true of fine art,,,if you wheel and deal art work as an investment count it...if your not parting with your favorite erte' painting dont count it..while it may have value to you its more a personal possession at that point than an investment.
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Re: do you count your house as the RE part of your allocation?
Old 04-01-2006, 08:11 PM   #32
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Re: do you count your house as the RE part of your allocation?


We live in a four unit building owned by us. It is mortgage free and is an income producing asset. If I want a true financial picture of where we are at, I include the building as part of our net worth, but should include a hypothetical rent as an expense.

If we were to sell the building we would either have to convert some of the value to a non-income producing asset (a home) or pay rent.

The funny twist on this is the reverse mortgage. Because of the availablity of reverse mortgages, you can turn your home into an income producing asset.
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Re: do you count your house as the RE part of your allocation?
Old 04-02-2006, 05:41 AM   #33
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Re: do you count your house as the RE part of your allocation?

a reverse mortgage is a liability no matter how you figure it..
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Re: do you count your house as the RE part of your allocation?
Old 04-02-2006, 08:26 AM   #34
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Re: do you count your house as the RE part of your allocation?

I cant imagine any way of figuring a reverse mortgage as a liability. You own an asset, the reverse mortgage pays you monthly while reducing the ownership of the asset until your death or the sale of the home, when the asset converts to ownership by the mortgager (unless the residual value exceeds that of the amount paid).

At no point do you owe money if you're alive and still residing there and until you die or sell the home, there is no loss of the usability of the home as shelter.

You've, as martha said, turned the home basically into an annuity or a cash stream for a period of time.

This is akin to putting 200k into a money market and taking a fixed amount out every month. At some point that asset is zeroed, but its never a liability.
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Re: do you count your house as the RE part of your allocation?
Old 04-02-2006, 09:04 AM   #35
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Re: do you count your house as the RE part of your allocation?

a reverse mortgage is an outstanding loan..if you arent ready to sell the house...you cant claim a 400,000 dollar asset (the home) and a 400,00 reverse mortgage giving you cash and then add the 2 together for a net worth of 800.,000....the reverse mortgage is really no different than an outstanding equity loan ..only difference is the manor in which its paid back.... net worth is assets minus liabilities........even as far as drawing income, for every dollar you get in income on a reverse mortgage you loose a dollar of equity unlike a true income property where you dont loose value for every dollar of income...
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Re: do you count your house as the RE part of your allocation?
Old 04-02-2006, 09:08 AM   #36
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Re: do you count your house as the RE part of your allocation?

Huh...you argue that a painting you dont intend to sell shouldnt be considered an asset, but a loan you dont have to pay is a liability.

Whatever works for you.
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Re: do you count your house as the RE part of your allocation?
Old 04-02-2006, 09:12 AM   #37
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Re: do you count your house as the RE part of your allocation?

Re: do you count your house as the RE part of your allocation?
« Reply #35 on: Today at 09:08:33 AM »

--------------------------------------------------------------------------------
Huh...you argue that a painting you dont intend to sell shouldnt be considered an asset, but a loan you dont have to pay is a liability
the paintings are not having money deducted from their value because of an outstanding loan...the home is having the outstanding loan value deducted from its equity....kind of like a margin account
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Re: do you count your house as the RE part of your allocation?
Old 04-02-2006, 09:40 AM   #38
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Re: do you count your house as the RE part of your allocation?

Like I said, whatever works for you.
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Re: do you count your house as the RE part of your allocation?
Old 04-02-2006, 10:58 AM   #39
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Re: do you count your house as the RE part of your allocation?

I agree with Martha et al.

Frankly, this has always seemed a bit of a silly discussion to me. Our rental homes are an investment, but our own home is not ... or a liability? If we move into one of our rental homes, all of a sudden it's not an investment?

Strikes me as an argument akin to "does a tree make a sound when it falls in the forest and no one is around" ... or, "is a man wrong, even when a woman is not around"?

Reality is real. Our homes are investments, as well as a portion of our consumption, and Martha puts it well.

For us, our task is to keep growing the non-real estate portion of our net worth, as our real estate portion is too large, but tax considerations make liquidation foolish, IMHO.
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Re: do you count your house as the RE part of your allocation?
Old 04-02-2006, 11:09 AM   #40
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Re: do you count your house as the RE part of your allocation?

Quote:
Originally Posted by Martha
We live in a four unit building owned by us. It is mortgage free and is an income producing asset. If I want a true financial picture of where we are at, I include the building as part of our net worth, but should include a hypothetical rent as an expense.

If we were to sell the building we would either have to convert some of the value to a non-income producing asset (a home) or pay rent.

The funny twist on this is the reverse mortgage. Because of the availablity of reverse mortgages, you can turn your home into an income producing asset.
It seems to me that net worth is an end-of-game concept (i.e., what's left if I die). So for net worth you don't need to figure in rent - no rent when you are dead. In other words, rent is not a liability you deduct from your net worth. A mortgage is, however, because your estate would have to pay it off in one way or another. Another way to think of it is that expenses are irrelevant to net worth, debt is not.

Asset allocation, on the other hand, is a game-is-on concept (i.e., what's the best way to secure an income while I am still alive). It seems to me that equity in a personal residence or second home could be considered part of the allocation mix if you plan on tapping them for income if needed (e.g sell the second home or reverse mortgage the primary). I think of my paid off weekend home as an asset I will likely sell when I get older since I don't think I will want to maintain it. So I count it as real estate and evaluate the risk in terms of the sellability in likely future scenarios. If on the other had, I would prefer to keep the weekend house and pass it on in my estate, I would look solely to other investments for income while alive and would need to determine how best to allocate them to assure the income I want.

Needless to say, despite being able to decide what class to put my house in, I still can't come to a satisfactory conclusion about what is the most sensible asset allocation. The risk equation keeps bouncing around with every doomsday or boom article I read :-( (I can't get these icons to work in Firefox)

Don



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