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Real Estate (REITs and similar) as an investment
Old 11-18-2008, 04:23 PM   #1
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Real Estate (REITs and similar) as an investment

I would like to understand how much real estate people own (not including the house you live in or vacation in) as a percent of FIRE portfolio (for income).

Rental properties or REITs.

Do you invest in mutual funds, ETFs or stocks to get this exposure- or own the rental properties directly?

I am reading and researching a retirement portfolio which might have 5 years expenses in cash, then 30% dividend stocks, 30% REITs, 30% bonds and 10% growth (small caps, foreign stocks and large cap growth stocks). Hoping the 30-30-30 could generate around a 4% combined yield.

Not sure if 30% in real estate is too high? How have your REITs held up in current market?
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Old 11-18-2008, 04:38 PM   #2
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My target is 5% of my equity allocation directly in a REIT index, plus whatever is contained in the Large, Mid and Small cap equity funds (I would guess this probably adds another 1%).
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Old 11-18-2008, 04:42 PM   #3
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We've got 5% of our portfolio in Vanguard's REIT vipers (VNQ). It's down 53% since we bought in May/June of 2008. It's our loss-leader so far.

We'll see how it performs in a decade or so, but given how hard it's been smacked down recently I'd hesitate to make it 30% of my portfolio in retirement. Many of the books I've read (including Bogle's little book of commonsense investing and the Bogleheads guide to investing) recommend that REITs and real estate comprise 5-10% of a total portfolio due to their volatility.

However, I do know that there are several folks on this board who use real estate (mainly rentals that they manage) to generate income, and I think that if you're up for it this could be very solid.

Good luck!
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Old 11-18-2008, 06:23 PM   #4
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I got 5% of my portfolio in VGSIX. I would consider increasing it to about 10%, but that's it. VGSIX has been down about 50% in the past year. So far the dividend has been pretty stable, but according to Morningstar big dividend cuts for REITs are coming up.
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Old 11-18-2008, 06:41 PM   #5
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I don't have any.

Eventually I would like to get a little VGSIX, but since we are in the middle of a bursting real estate bubble I thought I'd sit it out for a while. No rush.
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Old 11-18-2008, 06:46 PM   #6
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I had about 10% but I sold most of it once the real estate bubble started to deflate .
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Old 11-18-2008, 07:30 PM   #7
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5% VNQ, 5% FIREX (international RE fund). Neither has held up particularly well, but they do behave differently than many of the other assets.
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Old 11-18-2008, 07:32 PM   #8
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Not counting our home we've better than 80% of our assets in rental properties, properties we've sold and recieve payments on, and property loans we've financed.
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Old 11-18-2008, 07:43 PM   #9
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5% in VGSIX the bulk of it also purchased in May 2008 (tough year so far) I'll buy some more in Dec. or January.

I used to own rental property and could see myself doing that as an ER type program. The only way RE would exceed 10% is if I was managing it myself.
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Old 11-18-2008, 07:45 PM   #10
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I am 50, retired 2 years, and have been 100% in individual stocks since 1993. I have had very heavy REIT exposure at times (100% from late 1998 to late 2005), 0% at others (when I think they are overvalued).

All of the REITs I follow have been pummelled, with the most aggressive ones being hardest hit. I just moved about 9% back into 2 of the most conservative and best-run REITs, WRE and KIM.
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Old 11-18-2008, 11:26 PM   #11
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Quote:
Originally Posted by jIMOh View Post
I would like to understand how much real estate people own (not including the house you live in or vacation in) as a percent of FIRE portfolio (for income).

Rental properties or REITs.

Do you invest in mutual funds, ETFs or stocks to get this exposure- or own the rental properties directly?

I am reading and researching a retirement portfolio which might have 5 years expenses in cash, then 30% dividend stocks, 30% REITs, 30% bonds and 10% growth (small caps, foreign stocks and large cap growth stocks). Hoping the 30-30-30 could generate around a 4% combined yield.

Not sure if 30% in real estate is too high? How have your REITs held up in current market?
Look around. Real estate is in the toilet; REITs too.

This might suggest bargains to be had, but be careful as all real estate uses leverage, and leverage can be bad news in a credit crunch.

Ha
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Old 11-19-2008, 08:59 AM   #12
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6.5% of my portfolio is in REITs -- VNQ and DRW.

So far this year: VNQ = down 43.4% DRW = down 55.4%

Thank you so much for bringing that to my attention.
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Old 11-19-2008, 09:46 AM   #13
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This might suggest bargains to be had, but be careful as all real estate uses leverage,

Ha
Not true. There are a couple high quality (non traded) REITS and LPs that use no leverage. They were laughed at for a while and now they're once again buying high quality properties (and getting the last laugh)
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Old 11-19-2008, 10:37 AM   #14
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Not true. There are a couple high quality (non traded) REITS and LPs that use no leverage. They were laughed at for a while and now they're once again buying high quality properties (and getting the last laugh)
I am sure you are right that an entity with cash now can make strong deals. However, over a full cycle unleveraged real estate is a low return commodity business which wouldn't attract much money.

Ha
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Old 11-19-2008, 11:35 AM   #15
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I am sure you are right that an entity with cash now can make strong deals. However, over a full cycle unleveraged real estate is a low return commodity business which wouldn't attract much money.

Ha
Ayup. For the last three decades we've gone against the mantra OPM - other people's money - buying the little places we could afford, mostly rough and needing plenty of work. Fix 'em up, shine 'em up, get them rented, and pay them off as fast as possible. Pushed all the money we could from our wages and rents at the improvements and principle. Looked with lust in my heart at the Tom Vu/Carlton Sheets/no money down distressed property OPM pusher late night TV commercials. I wanted a mansion and a yacht and a Bentley and a flanking pair of bikini clad arm oranaments! They had those things by virtue of using OPIUM! Hail the awesome power of OPM!
Several times we sold places we had had for a decade or so, dumping time and money into them, only to have the buyer, doing no improvements and making time payments, sell within a few years for as much profit as we had made in 5-6 times as long. As long as real estate went up forever we looked like dummies for not using leverage - OPM - as much as we possibly could. Of course now, in a real estate downturn, it feels really good to have the places all paid off and not to have our rears hanging out in the breeze all exposed. Agree that unleveraged rental real estate is a low performing asset, but view it as kind of a bond kind of investment.
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Old 11-19-2008, 11:50 AM   #16
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I would like to understand how much real estate people own (not including the house you live in or vacation in) as a percent of FIRE portfolio (for income).
We're accidental landlords. When we arrived in Hawaii in 1989 (at the top of the Japanese-fueled RE bubble) we looked at 50+ homes and bought the only one we could afford-- a quaint fixer-upper that'd been rode hard as a rental. We put in our share of sweat equity and the forced savings went a long way toward paying it off in the late 1990s.

In 2000, two years before my ER, spouse found our "dream home". Due to work & family it was actually much easier to get another mortgage and rent out the first home than to sell it. A year later my parents-in-law surprised us by moving into it "to watch their granddaughter grow up". In 2007 they surprised us again (in a good way) by moving back to the Mainland. We had a lot of catch-up work to do on the place so we quickly turned around the inside, rented it out again, and have been working on the outside.

Over the last 20 years a very nice residential neighborhood has grown up around our rental and rents have skyrocketed. The place has a small cash flow equivalent to about a 4.7% CD and eases the SWR on our ER portfolio by 1-2% depending on maintenance/repairs. The landlording part is mostly good with a few hard/bad days but we feel as if we're pushing our luck and we're ready to unload it. The equity would go into an underpriced REIT or, as in Bob's "Work Less, Live More", alternative assets like angel investing.

Quote:
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I am reading and researching a retirement portfolio which might have 5 years expenses in cash, then 30% dividend stocks, 30% REITs, 30% bonds and 10% growth (small caps, foreign stocks and large cap growth stocks). Hoping the 30-30-30 could generate around a 4% combined yield.
Not sure if 30% in real estate is too high? How have your REITs held up in current market?
Theory sounds very good until you have to live off its dividends. It might be worth backtesting your portfolio against 1999-2008 to see how you feel about its overall volatility. Quite a few asset classes have been moving in correlation all out of what seems to be the theory, and many of the posters on this board have been learning that they don't care one bit for downward volatility of 25-40%.
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Old 11-19-2008, 01:05 PM   #17
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Ayup. For the last three decades we've gone against the mantra OPM - other people's money - buying the little places we could afford, mostly rough and needing plenty of work. Fix 'em up, shine 'em up, get them rented, and pay them off as fast as possible. Pushed all the money we could from our wages and rents at the improvements and principle. Looked with lust in my heart at the Tom Vu/Carlton Sheets/no money down distressed property OPM pusher late night TV commercials. I wanted a mansion and a yacht and a Bentley and a flanking pair of bikini clad arm oranaments! They had those things by virtue of using OPIUM! Hail the awesome power of OPM!
Several times we sold places we had had for a decade or so, dumping time and money into them, only to have the buyer, doing no improvements and making time payments, sell within a few years for as much profit as we had made in 5-6 times as long. As long as real estate went up forever we looked like dummies for not using leverage - OPM - as much as we possibly could. Of course now, in a real estate downturn, it feels really good to have the places all paid off and not to have our rears hanging out in the breeze all exposed. Agree that unleveraged rental real estate is a low performing asset, but view it as kind of a bond kind of investment.
I don't doubt this at all. Yours is a full or high level part time business, operated by a skilled operator.

I think we are mostly talking about passive investments.

Ha
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Old 11-19-2008, 01:27 PM   #18
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I am sure you are right that an entity with cash now can make strong deals. However, over a full cycle unleveraged real estate is a low return commodity business which wouldn't attract much money.

Ha
I don't want to advertise for any specific firm but there are firms that do only this and have been for many years. They don't seem to have any trouble attracting capital from conservative investors who like 7-8% cash yields and return of principal plus some capital appreciation.
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Old 11-19-2008, 01:32 PM   #19
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Just joined the REIT crowd today. Added a 5% allocation to Vanguard REIT Index Institutional Class (VGSNX) (taking away from Total International and US large cap value allocation). Basically the same as VGSIX but with half the expense ratio.

Also added 5% to WPS - International REIT/Real Estate ETF.

Overall, I trimmed 5% each from my US allocation and International allocation to make room for each fund.

Most of the "literature" suggests 5-10% allocation to REITs is a good diversifier.
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Old 11-19-2008, 02:20 PM   #20
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