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How to view asset allocation % when holding both rental RE property and REITS
Old 07-12-2009, 02:24 PM   #1
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How to view asset allocation % when holding both rental RE property and REITS

I have a commercial rental property I consider part of my retirement holdings. I also have REITs (commercial real estate) within my retirement portfolio. I never considered looking at the asset allocation percentages with everything as a whole. On a combined basis I figure the rental real estate is 40% of the total. Because of that heavy weighting of the bricks and mortar real estate I am wondering if I should sell the REITís in my portfolio to cut my overweighting in real estate. Of course the REITs are geographically diversified whereas my property is a single site specific but it is not be feasible to sell the rental real estate at this point. Comments welcome on this asset allocation question.
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Old 07-12-2009, 02:33 PM   #2
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Personally I wouldn't want to put so many of my "eggs in one basket", so to speak. But then, I do tend to worry about diversification.

It is hard to imagine real estate going any lower than it has. That said, I still wouldn't chance it.
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Old 07-12-2009, 04:06 PM   #3
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I would definitely consider the REITs in the "real estate" category. While 40% may seem high, consider that many people in Europe, where equities are heavily taxed, have much higher allocations of real estate in their portfolios. Personally, I wouldn't be adding any more real estate, but I wouldn't sell the REITs unless it made sense to do so otherwise.

Myself, I include my house in this asset class as I plan to sell it when I ER. My current AA to Real Estate is 15%.
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Old 07-12-2009, 08:16 PM   #4
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I too would consider that overallocated to real estate and underdiversified. How you improve on it is another question. Helps me to have a "10-year" portfolio composition in mind and work towards that as there are buy/sell opportunities. I aim for 15% real estate, of equities. I think Four Pillars recommends that.
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Old 07-12-2009, 09:18 PM   #5
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Want2, I am not sure from your reply what, if anything, your recommendation is for your humble servant on this board. My over weight in real estate stems from some transactions from 25 years ago, (a failed real estate deal where I was a small partner having to buyout the property from the FDIC to protect myself when they were bailing out banks and doing deals, etc,) and this turned out to be a great deal and has appreciated to this point. I did not end up with this over weighting intentionally. Additionally, I have zero basis in the property due to forgiveness of indebtness when I took title to the property. A situation that could have ruined me turned out to be a good deal but is a large % of my assets.
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Old 07-12-2009, 10:00 PM   #6
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Originally Posted by cashflo2u2 View Post
Want2, I am not sure from your reply what, if anything, your recommendation is for your humble servant on this board. My over weight in real estate stems from some transactions from 25 years ago, (a failed real estate deal where I was a small partner having to buyout the property from the FDIC to protect myself when they were bailing out banks and doing deals, etc,) and this turned out to be a great deal and has appreciated to this point. I did not end up with this over weighting intentionally. Additionally, I have zero basis in the property due to forgiveness of indebtness when I took title to the property. A situation that could have ruined me turned out to be a good deal but is a large % of my assets.
I would not recommend selling low. In the long run, though, like Meadbh I would suggest eventually reducing your real estate as the opportunity arises. On the other hand, it sounds like you are happy with what you have, so more power to you. It isn't what I would choose, but then I am no investment guru. Just providing some comments, since you invited them and nobody else had given any at that point.
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Old 07-13-2009, 08:34 AM   #7
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Want2retire, and I thank you for it. Yes, I agree and my goal will be to reduce my exposure to re. Right now the rental prop provides a good income and I don't think I could replace it with an alternative investment.
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Old 07-13-2009, 11:46 AM   #8
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Personally, I never counted my house as part of my retirement portfolio. And when I sold it, I put it into a different investment account for when I would buy a house again in the future. To me the house is something to be lived in, not an investment.

Your situation is different. You are also using your commercial real estate for income, I presume? That sounds like a good thing. So perhaps your allocation point of view is the prudent one. HOWEVER, if you already own REITs and have for a while, I just cannot imagine selling them at this point when they have been so severely punished. Why change the allocation NOW when that asset class must be the smallest it has ever been in your portfolio? Personally I think it would be more prudent to trim REITs as they recover and not let the allocation get above the current percent. Another prudent strategy might be to gradually shrink the allocation over several years if you truly want a lower allocation in the long run.

Remember in AA you are supposed to sell high and buy low. Not change your allocation so that you are forced to sell low.

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Old 07-13-2009, 02:41 PM   #9
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Originally Posted by cashflo2u2 View Post
I have a commercial rental property I consider part of my retirement holdings. I also have REITs (commercial real estate) within my retirement portfolio. I never considered looking at the asset allocation percentages with everything as a whole. On a combined basis I figure the rental real estate is 40% of the total. Because of that heavy weighting of the bricks and mortar real estate I am wondering if I should sell the REITís in my portfolio to cut my overweighting in real estate. Of course the REITs are geographically diversified whereas my property is a single site specific but it is not be feasible to sell the rental real estate at this point. Comments welcome on this asset allocation question.
Real estate is 40% of the value.
How much of the income does it provide, as a % of total income? Compare the REIT income with the commercial property income?
What is the other 60% invested in?

I am not going to advise buy or sell anything.

If the total portfolio needs to generate X income and the RE at 60% generates that level of income, or significantly contributes to that level of income, I would not sell unless you had another investment which would equal that amount of income to buy on flip side of transaction.

My FIRE portfolio will probably have between 25% and 33% in real estate because it is a diversifier. RE will not follow the same trends as bonds, cash, equities or foreign stocks. That alone makes it a good investment for around 1/5 of the portfolio. RE also generates lots of income, and in some cases significant tax shelters and tax advantages not available to other investments. These should also be factored into the decision.

How much of a tax break does the RE contribute to your financial plan?
How did you acquire the RE?
How long have you held the RE?
What are prospects to sell the RE (legal and financial)?
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Old 07-13-2009, 11:41 PM   #10
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Want2retire, and I thank you for it. Yes, I agree and my goal will be to reduce my exposure to re. Right now the rental prop provides a good income and I don't think I could replace it with an alternative investment.
If you got the real estate for nothing and it's generating "a good income" then that's been a great investment!!!

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