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Holding both commercial real estate and reits
Old 11-29-2010, 08:33 PM   #1
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Holding both commercial real estate and reits

Greetings. I have retirement portfolio that includes a bricks and mortar commercial/industrial real estate holding that is a major compent of my retirement income. Its value compromises about 1/3 of the value of my total retirement portfolio. The other 2/3s is at Schwab with equity and fixed income investments at 55/45. Included in the equity portion is a single reit that owns the same type of property as my real estate holding. This reit is about 4% of my equity/fixed income portfolio and pays a substantial divvie. I have always thought of two separately. My question is should I treat the REIT and my real estate holdings as one investment class in the overall portfolio. If the answer is yes, the result is I probably should sell the REIT. I have followed this board and appreciate the comments. Comments appreciated.
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Old 11-29-2010, 08:57 PM   #2
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I would treat them as one investment class but I would sell the commercial/industrial property and either buy REIT's up to about 10% of my portfolio and split it up the rest between equities:bonds as needed. I would feel very uncomfortable holding 1/3 of my portfolio as a single piece of real estate.

DD
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Old 11-29-2010, 09:51 PM   #3
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I would feel very uncomfortable holding 1/3 of my portfolio as a single piece of real estate.DD
We own a rental home, and because of that we won't hold any REITs (other than what ends up in our ETFs DVY and IJS).

The after-tax equity in our rental home is about 20% of our total after-tax ER portfolio, but that's dead equity the high cost of Hawaii land.
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Old 11-29-2010, 10:17 PM   #4
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I would treat them as one investment class but I would sell the commercial/industrial property and either buy REIT's up to about 10% of my portfolio....
I'm just guessing you've never tried to sell a part of a commercial RE property
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Old 11-30-2010, 07:26 AM   #5
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I would treat them as one investment class but I would sell the commercial/industrial property and either buy REIT's up to about 10% of my portfolio and split it up the rest between equities:bonds as needed. I would feel very uncomfortable holding 1/3 of my portfolio as a single piece of real estate.

DD
Your suggestion would be a good way to do it but 1) I have a long term reliable tenant 2) the commercial industrial market is not good right now 3) It would generate a fairly substantial state and fed. cap gain tax. Yes, I am uncomfortable every day of the week with 1/3 of my stash in a single property. I guess I kiss the REIT goodbye and all those great divvies.
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Old 11-30-2010, 11:45 AM   #6
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Your suggestion would be a good way to do it but 1) I have a long term reliable tenant 2) the commercial industrial market is not good right now 3) It would generate a fairly substantial state and fed. cap gain tax. Yes, I am uncomfortable every day of the week with 1/3 of my stash in a single property. I guess I kiss the REIT goodbye and all those great divvies.
So, you're uncomfortable with the risk of a loss but you feel comfortable waiting until it can hypothetically turn into a profit? Those "long term reliable tenants" have a surprising way of making all three descriptors vanish literally overnight.

If you sell it at the right price you won't have any cap gains to worry about paying taxes. You'd eliminate (1) and (3) even if (2) didn't make you filthy rich.
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Old 12-01-2010, 09:17 PM   #7
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So, you're uncomfortable with the risk of a loss but you feel comfortable waiting until it can hypothetically turn into a profit? Those "long term reliable tenants" have a surprising way of making all three descriptors vanish literally overnight.

If you sell it at the right price you won't have any cap gains to worry about paying taxes. You'd eliminate (1) and (3) even if (2) didn't make you filthy rich.
That is a sweeping statement well grounded in ignorance of all the facts. I never said anything about the risk of a loss. I have owned for property 20+ years and basis in very small. I don't have to wait for a hypothetical profit. I have one business tenant (you made it plural) that occupies the building on a long term lease. I have always been uncomfortable as this property that has grown to be such a large percenage of my net worth. The proceed could not be reinvested for the same return. If you can think of anything constructive to say let me know.
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Old 12-01-2010, 09:57 PM   #8
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Hey, apparently some comments are appreciated more than others. if you're offended by my commentary then stop reading here. But if you want to have a thorough discussion about the asset-allocation decision then let's dig into it. You've brought up a very good situation worthy of further analysis.

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That is a sweeping statement well grounded in ignorance of all the facts.
It sure is. You're absolutely right, the quality of my comments is very dependent on the available information. There just seemed to be an inconsistency of the logic tying together those three points.

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I never said anything about the risk of a loss.
Maybe I over-interpreted your sentence "Yes, I am uncomfortable every day of the week with 1/3 of my stash in a single property." If you're not talking about the risk of loss (from its current value or from your cost basis) then what are you uncomfortable with? I don't think it's "risk of further gain"-- I've never heard anyone complain about an asset gaining even more than it already has.

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I have one business tenant (you made it plural) that occupies the building on a long term lease.
My plural is referring to the category of tenants who, for whatever very valid and imperative (and unfortunate) reason, are unable to continue to pay the rent. Your tenant hasn't joined this (hopefully small) club but someday if the tenant ain't got no revenue to pay the rent then the lease isn't worth the paper it's printed. It's just as useful to diversify among tenants (by using, say, for example, a REIT or a commercial property with multiple tenants) as it is to diversify among assets. Vocabulary like "long term" and "reliable" is only as good as last month's rent check.

But that's just based on my two-decade experience with a variety of civilian tenants. I occasionally get uncomfortable with them too, but I've made myself more comfortable by focusing on the military/veterans tenants.

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I have always been uncomfortable as this property that has grown to be such a large percenage of my net worth. The proceed could not be reinvested for the same return. If you can think of anything constructive to say let me know.
I don't want to put more words in your mouth, but you seem to feel that it's necessary to make the property a smaller percentage of your net worth. (If that's indeed your opinion, then I agree with it.) There seem to be only three ways to accomplish that objective-- raise the value of your other assets, reduce the value of your property, or have something else reduce the value of your property. The first two are great ways to accomplish it, and they're under your control. The third is not so much under your control.

The answer should be straightforward-- if you're uncomfortable and experiencing difficulty sleeping at night with your asset allocation, then start selling assets until you have an allocation you can live with.

I'm frequently faced with the same decision to rebalance Berkshire Hathaway and some of our other asset classes. The one time I was really struggling with Berkshire I got a not-so-subtle nudge from another member of this board. I could have chosen to grumble about their ignorance, but instead I rebalanced. I cashed out a large portion of our shares in early 2008... thereby saving our kid's college fund and a healthy chunk of our ER assets.

I think everyone struggles with asset allocations and rebalancing, which is perhaps why there's so much discussion about it. It's probably also why there are so many different kinds of rebalancing schemes.

It seems to me that a more constructive asset allocation would spread your eggs among more baskets. That would appear to be a REIT, or maybe a different commercial property with a variety of tenants, but not a commercial property with just one tenant.

The reason you're not getting the same return is because you're reducing your risk for the privilege of a better quality of sleep. Perhaps it's better to have a lower-risk lower return rather than a higher-risk higher return interrupted by unexpected periods of no (or even negative) returns.

But that's just a fundamental principle of diversification & asset allocation. Another principle is that the longer you stay in a certain asset class, the higher the probability that something bad will happen to it.

I look forward to continuing a constructive discussion.
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