Am I holding too much Real Estate?

[zcung]

Whether you're FIRE already or getting there, what is your assets allocation look like? I may got too much in Real Estate! only 4% is in an self directed IRA. Of 96% of my total assets, 39% is in commercial office building, and 61% is in new home construction and land.

Z

 

[Sam]

"too much" is an understatement in you case 

Don't know if it's bad, good, or neutral.  But it's definitely not diversified.

Sam

 

[cute fuzzy bunny]

That depends.

If real estate goes up a lot, and more than other asset classes, then the answer is no.

Otherwise, the answer is yes.

 

[zcung]

I've gain as well lost quite a few bucks on the Stock Market but have consitently getting 10% or more on Real Estate investment. Any one care to suggest an allocation table with typical rate of return?

Z

 

[Zathras]

Don't think my heart could take the risk being that focused in one area

What type of rate of return are you looking for? And what is your tolerance for risk (pretty high I am guessing).
Residential real estate may be headed for a tumble, not sure about commercial though, it may hold up better. Anyone have any insights about a commercial real estate bubble??

 

[saluki9]

Wow, I thought my 20-25% was a lot

 

[Cut-Throat]

I've gain as well lost quite a few bucks on the Stock Market but have consitently getting 10% or more on Real Estate investment. Any one care to suggest an allocation table with typical rate of return?

Z

Real estate guys always tell us that they make piles of money. You are getting 10% consistently, and have confindence going forward. Nothing wrong with 10%

 

[zcung]

Real estate guys always tell us that they make piles of money. You are getting 10% consistently, and have confindence going forward. Nothing wrong with 10%

I am not exactly a Real Estate guy and don't make a piles of money. I've made a few bucks between 2000-2003 with some software inventions, at such time I couldn't convince myself to put the money in the stock market, instead I put it into tax free munis but then interest rate went up, I took some big hits on the long term bonds (never listen to a financial advisor again), the only thing that I thought safe investment was Real Estate. Five years later, I thought it is time to reallocate so any suggestion is helpful.

 

[tryan]

I am 75% real estate ... over 1/2 in residential rental, rest is in the roof. But I basically could lived off the rents. That's key IMHO.

How's the cash flow of your 90+% RE ?? If the cash flow is break even - or heaven forbid NEGATIVE - never a better time to bail.

 

[Arif]

We have 90% of our assets in rentals and rehabs. As long as the rents remain the same (although most think they will rise) I can live off the income. So technically I could care less if the value of them goes down 20% (although doubtful in my neck of the woods). I am not uncomfortable holding a high % of any one asset if I know what I am doing and know the market I'm in. If you don't want to deal with your properties or like Tyran said they are neg. cashflow then I would rebalance.
That being said, I haven't had the wild swings in my portfolio due to the recent decline in stocks. My net worth is still positive for the year due to newly acquired projects with equity in them.

 

[doushioukanaa]

I am not exactly a Real Estate guy and don't make a piles of money.  I've made a few bucks between 2000-2003 with some software inventions, at such time I couldn't convince myself to put the money in the stock market, instead I put it into tax free munis but then interest rate went up, I took some big hits on the long term bonds (never listen to a financial advisor again), the only thing that I thought safe investment was Real Estate.   Five years later, I thought it is time to reallocate so any suggestion is helpful.

If you had no real estate but then were handed cash equivalent to what that real estate is worth, would you buy it again? You should view a decision to hold as equivalent to a decision to buy. If you wouldn't buy it again this time because the value has gone up which not only increases risk of loss but also brings down the yield from rental income, then there is your answer. Sell and reallocate. Don't forget the opportunity cost of tying the money up in real estate, particularly if the yields have gone down due to appreciation.

Generally speaking, you are not diversified enough, but sometimes the only way to make serious money is to take a calculated risk with a concentrated portfolio. Just make sure you recognize that risk.

 

[zcung]

Good to hear from other Real Estate Investors.

Tryan, cash flow is positive, I can live on rents too as long as there is a lease on them.

Arif, am glad that its working for you well.

Doushioukjanaa, No I probably won't buy any more and may consider sell some so I can be more diversify.

 

[tryan]

a decision to hold as equivalent to a decision to buy.

Then I should have sold YEARS ago .... and my NW would be cut in half and I would not be retired. The sell decision is more about risk mitigation and has little to do with a buy decision IMHO.

zcung, I agee with Arif ... if you're not tired of the management, stay the course.

 

[doushioukanaa]

Then I should have sold YEARS ago .... and my NW would be cut in half and I would not be retired.  The sell decision is more about risk mitigation and has little to do with a buy decision IMHO.

zcung, I agee with Arif ... if you're not tired of the management, stay the course.

I'm not sure I follow this, or perhaps I didn't make my point clear. In saying "a decision to hold an investment is equivalent to a decision to buy it again" I don't mean to imply anybody should just sell. You should apply the same rules to investment real estate as you would any other investment. What is the yield on it's current value expressed as a percentage? What is the risk of the value going down? What is the likelihood of continued appreciation? You should stay the course if you think the risk / reward relationship makes sense relative to other potential investments and if it fits with your plan. If the yield is very low (sometimes it is negative when you factor in all costs) and if the potential capital appreciation is also low as it may be in many inflated markets, and if furthermore you have too concentrated a position in the asset class, then you should sell.

 

[Enuff2Eat]

diversify means you invest NOT to make too much money and NOT to lose too much money.... another words 8-10% return is like dream comes true

95% in real estate is NOT diversify, it's FOCUSED investing. i say if you know what you are doing. you can win big but it could go the other way too.

my point is that i would rather do FOCUSED investing than diversify because sometime diversify only yield positive returns when the whole USA economy do well and/or the whole world do well too.

and another point is that diversification investor tends to DEPEND on others to invest for them. that's why every single financial adviser tells you DIVERSIFY....


enuff

 

[califdreamer]

Whether you're FIRE already or getting there, what is your assets allocation look like? I may got too much in Real Estate!

Z, I'm in similar situation.  Roughly 60% of my NW is equity in investment RE and another 20% is in home equity.  I've been rotating investment RE equity out of CA with 1031 exchanges.  I have one more property in So Cal I'd like to sell and exchange for investment in another area. 

I'm approaching the diversification issue by moving into real estate in other geographical areas.  Even though CA and other areas of the US, typically high priced coastal areas, have seen rising rents and values in apartment bldgs, many other areas had a tough time.  IMO, some of those areas are ripe for an increase in rents and propty values.  It's happening now in Austin, for instance, one of the places I moved equity a while back. 

I have mostly stuck to multi-unit residential with a few exceptions.  Another way to diversify is to look at different sectors (apartment, industrial, retail, office, etc.) within different geo markets.  You could find a city that has great prospects for the retail market (eg strip centers) but a poor outlook for apartments.  I think there are advantages to diversifying by staying in real estate (deferring cap gains tax comes to mind).  I think you can still find geo areas and sectors that will provide appreciation which makes for very nice returns with a little leverage.

 

[tryan]

my point is that i would rather do FOCUSED investing than diversify because sometime diversify only yield positive returns when the whole USA economy do well and/or the whole world do well too. 

... also helps that with any small business one can mitigate risk via experience, knowledge and sweat.

 

[Arif]

... also helps that with any small business one can mitigate risk via experience, knowledge and sweat.

I guess this is why I am so comfortable with our high allocation of RE. I know my properties inside out (what the rents are, how much they're worth, what the PM should be doing, etc.) and this is also why I own so in little stocks. Truth be told I don't understand or trust public companies (I probably shouldn't have read The Smartest Guys in the Room about ENRON). With the exorbant pay packages of CEOs, back dating stock options and ten other unethical things that investors don't even know about.....yet. In that light my RE looks very "low risk" to me.

 

[tryan]

Don't mind me I am just looking for 75 cent dollar bills.

When I was attending RTC/HUD auctions (~'93-94) I would look up what the foreclosed note cost them then bid up to a dime on the dollar.

Picked up 1/2 dozen gems this way .... watched hundreds of others go for a quarter on the dollar or less.

Any downward cycle could be just as exciting. Just need to get our ducks in line.

 

[Arif]

When I was attending RTC/HUD auctions (~'93-94) I would look up what the foreclosed note cost them then bid up to a dime on the dollar.

Picked up 1/2 dozen gems this way .... watched hundreds of others go for a quarter on the dollar or less.

Any downward cycle could be just as exciting. Just need to get our ducks in line.

Yep, always an opportunity in RE that can be exploited. In my area the number of foreclosed properties is increasing while the inventory of homes for sale have been almost cut in half going from 4500 units available down to 2700 units. So I've layed off the rentals and started full speed ahead with rehabbing. Not making a killing but don't need to since I spend the profits in Panama. Good deal.

 

[spideyrdpd]

So the answer is it depends on how good a real estate guy you are ?

The issue with having all your money in real estate would be liquidity. Atleast in my limited experience. That doesnt mean I would sell it just means I would try to build up some other assets that would be liquid.
Of course I love my roth ira. Which holds stocks.
My 401k holds mutual funds . Which I loathe but its the only choice there is. Plus I get the employee match and the tax break