Portfolio Balancing w/ Investment Real Estate

[Wu Wei]

My question: How do you treat investment real estate in the overall balancing of your portfolio? Does real estate act similarly to bonds as an overall buffer to the volatility of stocks?



Our investment real estate currently makes up 75% of our overall portfolio, and fully funds our retirement. Therefore, should we remain in a more aggressive posture for our invested funds - perhaps 80/20? Allocating more to bonds, when we are not using those funds to fund the retirement, seems like we would be wasting potential growth.


Thanks in advance for your insights!

 

[sengsational]

I think you should include a "hard assets" bucket in your asset allocation, but it's not a universally agreed-upon idea. You can read the thread that contains this post [https://www.early-retirement.org/fo...investment-options-105019-2.html#post2468858] to see my thoughts on it.

Many people on this board tend to think that unless you plan to sell it, it shouldn't be in your asset allocation scheme. I don't plan to sell 95% of my equities, and I don't plan to sell 95% of my bonds, but those are still in my allocation. It's simple, though, to say "I've got a 70/30 allocation", and ignore the investment in real estate, ignore international, etc . I would argue that for someone who's got a lot of money tied up in real estate, the equity/bond ratio should probably be different from someone who has no real estate.

 

[pb4uski]

....Many people on this board tend to think that unless you plan to sell it, it shouldn't be in your asset allocation scheme. ...

I think you are misinterpreting what many of us are saying... the unless you plan to sell it relates to a home or second home... NOT to investment real estate which is what the OP asked about.

That said, I don't have any investment real estate so it is a moot issue for me... however Mom has investment real estate but I don't consider it at all in looking at AA.... if I did I would probably include it in fixed income since it is held for income.

 

[Wu Wei]

I think you should include a "hard assets" bucket in your asset allocation, but it's not a universally agreed-upon idea. You can read the thread that contains this post [https://www.early-retirement.org/fo...investment-options-105019-2.html#post2468858] to see my thoughts on it.

Many people on this board tend to think that unless you plan to sell it, it shouldn't be in your asset allocation scheme. I don't plan to sell 95% of my equities, and I don't plan to sell 95% of my bonds, but those are still in my allocation. It's simple, though, to say "I've got a 70/30 allocation", and ignore the investment in real estate, ignore international, etc . I would argue that for someone who's got a lot of money tied up in real estate, the equity/bond ratio should probably be different from someone who has no real estate.

Thanks for your reply and the link.


The thread seemed to be mostly about a personal home/second property. Accounting for investment real estate in a portfolio always seems to make people shuffle their feet and draw blanks! I'm still not sure why! It creates income, it appreciates, and our net worth goes up every time someone pays rent. How does it differ from a REIT except for the fact that I've cut-out the middle man by not buying a "fund'?


Oh well...I think we will follow our gut and reduce the bonds by a bit.


Cheers!

 

[Koolau]

Interesting discussion: Back in the day (pre move to Paradise) I considered our HI property as an investment since we rented it out. The house we lived in on the mainland I did NOT consider as part of the portfolio. SO when we sold the house and moved to the HI property, my accounting of our assets went DOWN by a couple hundred thousand. The HI property was now valued at "zero" portfolio value while the old house was suddenly "cash." Not sure that made sense, but it seemed "right" at the time (and still does.)

OPs Real Estate is actually a "business." I'm not sure how that is accounted for in the personal portfolio. Probably NOT like owning REITs but it must surely be considered a part of the Port in some fashion. YMMV

 

[calmloki]

We grew the rental fleet from the eighties on and feel your pain at not having a rental block in the various retirement calculators. Been through a number of market crashes and thanks to the rental income just didn't really notice them as the monthly rent checks kept plunking in. Meanwhile some members of this board impressed me by noting that the market woes had them joining the "two comma club". When real estate crashed back in 2008-2010 the rent kept coming - and since we had all the mortgages paid it made no difference. What I do notice is that at the age of 70, and with no plans to saddle any heirs with property nor desire to keep being a landlord, divesting of the rentals is a chore. Quite unlike selling some stocks. In the stocks and bonds area we have about 2% Wellesley, 16% Ca municipal bonds, and 82% stocks. We are sitting on one and a half times that amount in cash, which is wacky. Our rentals are worth about what we have in cash and stocks and bonds. loans and property contracts due are worth about half what we have in stocks.
At this point, we're no longer too concerned about whether we will have enough or how to characterize or optimize our stash; it's more about cleaning things up and simplifying.

Rentals have been great and I think thinking of them like bonds is okay fine. You are kinda on your own as far as calculators go though, and do give a thought to your exit strategy..

 

[Wu Wei]

Koolau and Calmloki,


Thank you for your replies, insights, and suggestions.


Real estate has been good to us and I strongly agree: there should be a few more boxes added to investment calculators to account for investment real estate.


I will be looking to an exit strategy in the not too distant future - at which time the funds will enter the standard asset class and hopefully feel normal!


Cheers!

 

[pjigar]

I treat rentals in bonds category in order to make calculators happy and in practical application as well. We are 100% equity for for all non-rental assets and some gold hedge.

 

[Stormy Kromer]

I own farmland which funds about 33% of our FIRE income. It accounts for about 20% of our investment NW.


I use a separate category entirely. This steady income allows me to be a bit more aggressive with the remainder of our assets. It acts like a bond that never gets called in.

 

[Toocold]

Our rentals are part of the overall AA. Stocks/Bonds(including cash)/Real estate. Real estate has very low correlation with stocks and bonds. I look at both % across these categories and makeup of each.

In our networth calculations they are included as a separate category. I also include a separate "other category" that includes our primary home & cars, but I don't consider them as part of our "investments"

In terms of retirement cash flow, I use rentals as a semi-passive business that functions like a pseudo-inflation protected pension. I use rentals to pay our core expenses. I use after-tax brokerage dividends/interest for big travel expenses. I also separate retirement, long term wealth, and deferred compensation accounts.

The rentals don't have an impact on my % of stocks/bonds I have. But, there are three ways to think about this. This is similar someone who has a pension. 1) You won the game so you can go 100% bonds - why risk it?, 2) You won the game so you can go 100% stocks - booyah!, 3) You won the game, but you will maintain a good stock/bond portfolio mix.

I personally choose #3.

 

[Wu Wei]

Thanks again for all the great ideas and input!

 

[RunningBum]

The main consideration I see is that if hard times hit, you want to have enough non-equities to get through it without selling really low. If you're still collecting enough rents to live on through this pandemic, you should be ok being more aggressive with the rest.

 

[DawgMan]

It depends... how's that for an answer?

Are these active rentals you manage/collect rents on or are you a passive investor (LP) in an investment you collect some kind of preferred/actual return?

My 2 cents as someone who has worked in the commercial RE business for over 32 years with investing experience, here is how I would look at it...

If you are "running" rental properties as an "active" investor I would call that "social capital/income", not really much different than how you would view say part time job income in retirement. You are "working a business" that generates income. It's still an asset on your balance sheet, but until you sell it, it's not a very liquid asset (i.e. stocks, bonds) so very difficult to "re-balance".

If its is a passive investment, I would throw it in your REIT category. Again, it's still an asset on your balance sheet, but you don't generally control the ability to sell your interest, at least not make the overall asset sell decision.

I have done/do all the above and that is how I look at real estate relative to my AA.

 

[Sunset]

I treat rental property as bonds that don't expire until I sell them.

For my other investments, I put more into equities and less into bonds since the rental property is like a bond to me.

 

[lem1955]

I think you are misinterpreting what many of us are saying... the unless you plan to sell it relates to a home or second home... NOT to investment real estate which is what the OP asked about.

That said, I don't have any investment real estate so it is a moot issue for me... however Mom has investment real estate but I don't consider it at all in looking at AA.... if I did I would probably include it in fixed income since it is held for income.

I do have investment real estate as a passive investor. I could sell the whole position but not pieces of it and I don't intend to sell it. It definitely provides income and steady even during this pandemic but I do not include it in my asset allocation calculations since I can't rebalance by buying more or selling a bit.