do you count your house as the RE part of your allocation?

[ladelfina]

I own mine free & clear. Represents about 1/3 of net worth. Yet many here hold REITs, etc., as part of their allocation when I assume they also have substantial home equity.

As an 'investment' (I know your home is in some ways not really an investment, but just for the sake of argument..) the pros are: in euros, so balances the other 2/3 in dollar-denominated stocks/bonds/funds from which I draw income as needed; the cons are: not real liquid as houses here can take a long time to sell- -also, it's an unusual property so no clear 'comps' to help establish fair market value.

Any thoughts? It may have been discussed here before but a couple different searches didn't turn up anything for me.

Have a little bit of cash to invest and am wondering whether it is worth putting some in REITs, or concentrating only on the other "missing" allocation pieces.

 

[azanon]

If the equity in your house represents about one third of your net worth, then i wouldnt add an REIT component too.   I think you have to "count" your personal home as an investment because it can be liquidated or converted to cash in various ways.   The author "Bach" who's pretty popular recommends 1/3rd Real Estate (home equity + REIT), 1/3rd Bonds, and 1/3rd Stock.  And if you ask me, that's on the higher end of recommendations you'll see for the real estate portion.

That Kioyauski guy is confused when he calls a house a liability; especially one paid for.   If a house is a liability, then i'd like everyone who thinks that to sign over this "liability" to me.  Mr. Kioyauski seems to not understand that capital gains also "puts money in your pocket", albeit indirectly. A house, even an empty one with no one paying rent, would have been an incredible investment over the past 6 years or so.

 

[laurence]

Excellent post, Azanon.

I have read the threads here debating whether a house is an asset or liability, I come down firmly on the side of asset, for reasons partly stated above. I have thought that perhaps a discount model is appropriate to be applied to it's market value, since you have to live somewhere, but I'm to lazy to make one up.

So I would hold off on REITs, what are your other 2/3rds invested in now?

 

[brewer12345]

delfina, I come down on the side of REITs being a very different animal than your home. I tend to view a paid-off home as a defeasance of one's future need for shelter, with the option of liquidating the asset if your wealth or wishes change. REITs, OTOH, are an equity investment in commercial real estate with very different risks and rewards than owning your own home. I think they deserve a (small) place in any well diversified portfolio.

 

[ladelfina]

% By Goal
32.21 S-US Large Cap
30.40 S-Intl-Large
11.42 S-US Small Cap
8.52 B-Long Term gov't
7.21 Cash
4.88 B-Med. Term gov't
4.74 S-Intl-Emerging
0.53 S-US Mid Cap
0.15 S-Intl-Small

I roughly did this in Quicken, using "Goal" to categorize beyond Q's basic allocation groups, which are v. limited. I haven't gone to the trouble of "x-raying" any of the few funds I have.. I put PFIOX as "large-cap", LAQ as "Intl. large cap", FAX as "intl. large cap"

Long term gov't is TLT; Med term gov't is TIPS (?); emerging is EEM

I can see Brewer's POV that REITs and residential RE are not the same animal.

Still welcome any further comments on easy/accessible diversification possibilities.

 

[brewer12345]

I'd add commodities (PCRIX or PCRDX) and non US bonds (GIM or PFUIX), both at the expense of US LC and Intl LC, assuming that REITs are out of the picture.

 

[azanon]

delfina, I come down on the side of REITs being a very different animal than your home.

Both are part of your net worth (aka financial portfolio), both are real estate, and both are very subject to the same forces that drive up and down their price.   I would be very hesitant to have a lot of equity in a home AND own a significant portion of REITs, if those combined weightings were much larger in comparison to my bond and stock holdings.   Especially after a very strong 6 year runup in real estate.    Again, this is just advise that you'll find reiterated by Bach.

I'm not sure its possible to actually buy low and sell high, but we can certainly look at the real estate market now and realize its definitely not at any historical lows!

>Ive often seen commodities grouped in the same category as futures, options, art, collectibales, and fine gemstones.  The cateory of "run as fast as you can" from them. The one author i'm thinking of specifically is Gordon Williamson, but you see this advise repeated in many books.

 

[cute fuzzy bunny]

You could consider the home a 'real estate' holding. But its not as diversified as a REIT and certainly is nothing like an apartment building or medical office complex.

You could consider your home a sort of "bond" holding if you've paid it off; many homes experience low volatility in valuations, by that I mean its quite lower in volatility than a typical equity holding, isnt necessarily closely correlated to the stock market, and by not holding a mortgage you're essentially paying yourself the mortgage rate...which is often similar to the dividends paid by short term bonds. Of course, this statement is loaded with "not in my part of the country/world" and "yahbut that three word piece wasnt true for 47 minutes in january of 1992. A smart person can read the dang paragraph and understand my intention and fit it to their own situation.

You might consider a home to be an inflation protected security, as many homes in many areas value themselves over the long term to mock the local inflation rate...sometimes better...sometimes not.

I always consider it to be part of my total net worth. As mentioned above, it can be liquidated, rented, etc.

And besides being a multi-phase investment, you can also live in it...regardless of what its value is.

As far as asset allocation, I'd consider my home as part of my net worth. I'd add some reits to my portfolio to give me a broader real estate exposure...but considerably less than if I didnt own a home. I'd add some bonds but consider the belly-ballast my paid off homes value provides and maybe get riskier on the bonds, hold less of them, or only seek out ones that offered real diversity and low correlation. I'd add some inflation protection products if they're paying an adjustment that is equal to or in excess of my personal/local rate of inflation, but perhaps less of them if my home is indexing some of the inflation for me in my situation.

 

[azanon]

You guys, TH and brewer, clearly get more in the weeds of it than I do. I'll admit i'm a generalist with investing, so i tend to just try to read a lot of books and take an average of the advise. So i'm just regurgitating Bach on this point. Maybe the guy doesn't know what he's talking about. I mean that seriously. Ultimately, biologists like me who are just generalists with investing has to take someone's advise and go with it!

Azanon

 

[brewer12345]

>Ive often seen commodities grouped in the same category as futures, options, art, collectibales, and fine gemstones.  The cateory of "run as fast as you can" from them.  The one author i'm thinking of specifically is Gordon Williamson, but you see this advise repeated in many books.

Heaven save us from uninformed opinions. :

Raddr did a better job discussing this than I could: http://raddr-pages.com/research/CommodityFutures.htm

 

[Ed_The_Gypsy]

There is a big difference between your house and REITs. An REIT probably has geographic diversity. I associate them with commercial properties, too, so it is a different market from single-family housing.

My house is part of my net worth, though. I expect to sell it and downsize (among other things), so we will get some of our equity out of it. If one wanted to stay put after retirement, another way to get the equity out would be a reverse mortgage.

 

[Gone4Good]

I'm with brewer.

A house is definitely an asset, but I do not factor it into my asset allocation calculation. Why? Because the value of my home is largely (although not completely) irrelevant.

Consider. If I liquidate the value of my home by borrowing against it, I create a liability that must be repaid . . . I am really no better off. If I liquidate the value of my home by selling it, I have to pay to live somewhere else either by buying another home or renting one, in which case I might be better off, I might not be. Whether I'm better off in this case depends on the value of my home relative to the cost of the other possible equivalent living arrangements. Unless I'm moving from a high cost area to a low cost area, I shouldn't expect to be better off by liquidating my home equity because I have to replace it with something - unlike a true financial asset. Viewed that way, home ownership is more of a hedge against housing costs than an asset class in its own right.

Another way to think about it is to consider what would happen to your financial situation if your fully paid off house were to decline by 50%. Seems bad, doesn't it? But when you consider that all houses have declined by roughly the same amount, you realize that your relative financial position has not changed all that much. In fact, to the extent that you have other assets in addition to your home, you are probably better off because your residential real estate purchasing power has actually increased (e.g. your home equity buys the same amount of house as it did before the price decline but your money market fund buys more).

 

[audreyh1]

Wow 3 Yrs To Go - that was a good post!!

I never considered home equity part of my portfolio for the simple reason that I couldn't "rebalance" it. I couldn't sell a little of the house to invest in stocks to rebalance the portfolio when equities were lower, or buy a little more house when other equity classes outperform.

I mean - I suppose you COULD take a loan out against your house in these circumstances (although buying more house would be awkward). But if you look at the costs of these transactions - well it seems kind of silly.

None of the asset allocation models have studied have recommended using your house as one of the allocations.

Like 3 Yrs said - home ownership is really a hedge against housing costs. You will ALWAYS have to pay for housing one way or another.

Audrey

 

[mb]

Ladefina,

Your house is in France? Right? Would the REITs be in the US?

If that is the case then I would also argue that French and US RE may not be well correlated and that is an additional argument in favor of some REIT exposure.

MB

 

[azanon]

Heaven save us from uninformed opinions.

Of all my financial books, the one by Gordon Williamson was among the most impressive to me. The one in particular that I have is entitled "Low Risk Investing", though I believe he wrote others.

 

[azanon]

Like 3 Yrs said - home ownership is really a hedge against housing costs.  You will ALWAYS have to pay for housing one way or another.

This logic would work if one was always obligated to be the owner of some home.  Renting is still an option, ya know.   I did it for 10 years myself.

As a renter, you bear little to zero risk during real estate fluctuations since none of your net worth is exposed to it.

 

[ladelfina]

I'm getting a vibe that a smallish REIT portion would not be bad. House is in Italy but all investment accounts are in the US for numerous reasons. Matters are complicated as I earn dollars but am spending euros. That introduces a wild card that can effectively vary my 'earnings' by as 40-50%, taking the past several years of exchange rates into consideration (!)    Euro at .85 => 1.32; now 1.20 or thereabouts.

For me buying was preferable to renting since I knew what I was paying at a fixed point in time (versus the spectre of paying euro rent with an ever-plummeting dollar). Also, renting the type of property we have would be more expensive relative to the purchase price than would have been the case for a 'normal' apt.

brewer, thanks for the references to commodities and foreign bonds. I will check those out.

now as far as REITs go, I'm not sure how to go about evaluating.. is there an REIT fund or ETF? Or is it better to pick a couple individual ones?

I am kicking myself right now!!! I have a kind of ne'er do well uncle.. not known for his financial genius (when they were in trouble many years ago he high-tailed it to Vegas to change his fortunes and my dad had to go chase after him and bring him back to reality...). Anyway a couple of years ago we visited this now-elderly uncle and found his house chock-a-block with annual reports. As a parting 'gift', he wrote down 5 or 6 "good investments" for us! He'd gotten the investing bug.  Well, I recently found that scrap of paper and came to find that all his "tips" were REITs that all were yielding in double digits, and that one had a return of over 75%. OUCH!  :

 

[Gone4Good]

This logic would work if one was always obligated to be the owner of some home.  Renting is still an option, ya know.   I did it for 10 years myself.

As a renter, you bear little to zero risk during real estate fluctuations since none of your net worth is exposed to it.

What is rent? It is an annuity payment that covers the cost of housing - much like a mortgage payment. If you look at the cash flow streams of a home owner and a renter they should be roughly equivalent . . . if the housing market is acting rationally. That is to say your rental payment, plus savings should roughly equal the after tax cost of your mortgage payment and taxes (with the home equity accumulation counted as "savings"). Now most housing markets are not perfectly efficient, but rents and real estate prices should be closely related over time.

The point is, you have to pay for housing either way. You could sell your house and have a big bank account but be forced to draw on it to make monthly annuity rental payments, or you can trade a large bank account for a large home equity balance and avoid the annuity rental payments. The positions are roughly equivalent.

As a renter you are still exposed to real estate fluctuations. Required rents will adjust over time to the supply and demand for housing (a.k.a real estate prices). Keep in mind that your on-going rental expense has a present value of rent / discount rate. If you pay $1,000 / month and have an expected portfolio return of 8%, your on-going rental liability has a present value of $150,000. If your rent costs increases to $1,100 per month, your liability increases to $165,000.

Also if you ever hope to own real estate one day, your fortunes are directly tied to the real estate market. I know many people who wanted to buy but waited for real estate prices to come down. Over the years they've seen their home purchasing power decline as real estate prices have soared. It's kind of hard for them to say they haven't been affected by real estate prices because they don't own any.

 

[audreyh1]

This logic would work if one was always obligated to be the owner of some home.  Renting is still an option, ya know.   I did it for 10 years myself.

As a renter, you bear little to zero risk during real estate fluctuations since none of your net worth is exposed to it.

And renting isn't paying for housing? That was my point - you either own housing or you rent it.

Audrey

 

[Maximillion]

We ALL Rent, the Rent some pay is the opportunity costs by investing the monies tied up, elsewhere.

We all die, someone else comes along, the process is repeated.

Most major cities the cost of R.E . and the property Taxes make Renting a much more cost effective , viable alternative.

The only time your House should be considered an asset is if it is producing an Income Stream.

Men buy Houses, Women buy Homes.

 

[unclemick]

Random first cup of coffee:

I'm with Audrey - renting gives one the most flexibility.

My sister's H a mining engineer is the family poster child for bad RE - always bought/sold houses in their moves in yucky markets - in the hole after thirty years. Currently renting in the PacNW. The one exception - the house they owned in CA.

I'm periodically hit with pangs of jealousy toward people I know who did well in RE and were successful in converting some of the gains toward ER.

A slice and dicer probably wants some RE as well as commodities and foreign fixed in his portfolio.

There is enough variation among ER plans - that there is no one answer. For me - RE was so so and the historical period for my savings 1966 - 1992 stocks did the heavy lifting. In a different location easily could have been RE.

 

[roadkill]

In my RE planning, I count the house as a component of my net worth, but not as a cash flow generating asset. I do not want to depend on the house to provide sufficient cash flow to enjoy retirement. I tend to be more conservative in my approach and this may not work for some.

 

[Maximillion]

Real Estate is worth as much as someone is willing to pay and I am often surprised by people who shirk at borrowing monies to Buy Bonds etc, but are quite willing to leverage themslves to the hilt to buy a pile of Bricks and Sticks??

In order to break EVEN on R.E it must go up at least 10% in order to cover the Transaction Costs of divestiture.

$500,000 worth of R.E costs you about $40,000+ to sell, that's a lot more than ETrade.

 

[rs0460a]

Real Estate is worth as much as someone is willing to pay

Same as investing (e.g. stocks/bonds/hard assets)...

 

[lazygood4nothinbum]

i consider my house an asset which i plan one day to use to purchase a boat which is "a hole in the water into which one throws money," not an asset.

but sometimes even a mobile home can be an asset. certainly the 488 lucky residents of briny breezes, a tiny trailer park town on the beach in palm beach county, fl, think so. their $80-200k investments are about to pay off as someone just offered $500 million to purchase the entire town. they are considering the offer but some holding out for that billion dollar offer. now i'm not yet very financially astute, but one million bucks for a trailer park site? yeah, i'd call that an asset.