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Old 11-22-2010, 08:36 AM   #21
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If you lived in a rented apartment would you have a 100% equity portfolio?
Why are things different if you live in a paid-off house? Sure, your annual expenses will be lower, but that just means selling fewer of whatever you have (stocks/bonds/collectible styrofoam lawn ornaments) to meet expenses.
But what's the argument (other than simplicity) for ignoring it altogether? If you sell your house and rent, you don't ignore the proceeds from the sale. Nearly everyone would just roll them into the existing AA. So implicitly, we're assigning to our houses an AA identical to the one we've chosen for our liquid portfolio. Is that the right approach? I'm not sure.

One way to think about it is that if the "yield" on your house is greater than your WR, your WR goes up if you sell and rent. Certainly it would make sense to change AA in the face of a changed WR. Maybe the answer isn't that a house is the same as a bond (which it isn't), but that owning a house impacts your withdrawals in a certain way, and that impact should, or at least could, affect your AA.

Consider our case where we've moved out of our house and put it up for rent. Maybe it's a temporary situation, maybe we'll move back in, maybe we'll sell it and move somewhere else, maybe we'll rent it out indefinitely. Do we still ignore the property? It doesn't seem like we can. It also seems like there should be a single answer that accommodates whatever decision we make. But I don't know what that answer is.
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Old 11-22-2010, 08:44 AM   #22
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It also seems like there should be a single answer that accommodates whatever decision we make. But I don't know what that answer is.
I think it all boils down to whether one is working from "net worth/total holdings" mindset or from a "portfolio to generate monthly income" perspective. To me, "net worth" is largely an abstraction that might be of importance to my heirs decades in the future. What I care about is maintaining enough portfolio assets, allocated in the right way, to generate income for the coming decades. My house is where I live, and I buy rather than rent because it does lower my expenses long-term and due to non-economic factors (the landlord can't tell me to leave). Yes, we could sell the place someday, but that's not part of the economic "big picture" for us.
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Old 11-22-2010, 08:56 AM   #23
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Yes, we could sell the place someday, but that's not part of the economic "big picture" for us.
And I think that is the "answer" for most people. We've effectively locked a certain amount of our portfolio into real estate and, because we have no intention of changing that allocation, we ignore it and back into the rest of the allocation as if it doesn't exist. I don't see any problem with that. But it doesn't preclude an approach that recognizes a home as just another asset in the portfolio that deserves its own consideration.
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Old 11-28-2010, 09:29 AM   #24
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I think there are a few challenges in the approach. Real estate is actually a riskier asset class than bonds. It's also very illiquid. So it doesnt seem like a good substitute. Even if it were liquid, as REITS are, 40% would be a lot of eggs in that basket.

I prefer to view primary residence as cost avoidance (ie no rent etc) and potential source of a chunk of future money upon downsizing.
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Old 11-28-2010, 07:34 PM   #25
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I prefer to view primary residence as cost avoidance (ie no rent etc) and potential source of a chunk of future money upon downsizing.
Totally with you. Also, I don't mind splashing a bit on my primary residence as it is part of my lifestyle too. I can downsize later when I grow older or when I need the money. I used to have 2 properties - one for residence and one for rental but found it a bit too much work to rent and maintain the second property. I know a lot of people do that and great for them if it works for them. But for me, I prefer some other form of investment.
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