100-Age Rule Impacted by Real Estate

[Craig]

I'm familiar with using age for the percentage of bond investments, and 100 minus age for the percentage in equity investments.  However, I've always taken the point of view that owned real estate rentals (no debt) is tantamount to bonds ... currently yielding north of 2.5% cash on cash, plus appreciation.

Thus, my liquid investments are nearly all in equities, and we continue to dollar cost average in.  (I've tried timing the market for years, and have finally concluded I'm nowhere near as smart as I told my wife I was ... )

Anyone else with this perspective, or is there a hole in my theory ... recognizing the clear liquidity differences (though we have lines of credit on each rental property).

Thanks ... appreciate your insights.

Craig

 

[Bob_Smith]

Craig, I have always viewed real estate as more like equities in most respects and count it as such in my allocation.

 

[Craig]

Equities ... that's interesting. Bob, please expand on that.

Thanks.

 

[Michael]

Neither stock nor bond, it is a separate asset class. Personally owned and managed rentals don't react the same as either stocks or bonds do.

 

[Bob_Smith]

Equities ...  that's interesting.  Bob, please expand on that.

Thanks.

Craig, I suppose an argument could be made both ways, but if I had to choose, I'd view real estate as more like a business than a loan. I am more familiar with farmland, but there are similarities to rental property. With bonds I'm loaning funds at a fixed rate, and I get my principal back in the end. Neither my principal nor my income is subject to change if I hold to maturity. With real estate, both my principal and my income is subject to change based on market forces. There is no "maturity" date. Furthermore, I must manage it, repair it, keep it rented, insure it, deal with problems... all very much like a small business. Bonds are entirely passive investments, the income is fixed, and I get my principal back at the end of a fixed term. Bonds provide a type of security that real estate doesn't. Therefore, as a retiree I wouldn't be comfortable using real estate as a proxy for bonds. So I have chosen to lump it in with the asset class (equities) that I'm willing to expose to the risks of the market. But that's just me. Also, most mutual fund companies classify their real estate funds as concentrated equity funds. On the other hand, real estate has a low correlation to equities, but for me, the other factors supersede that.

 

[John Galt]

Geez, Bob_Smith....that was a good post! I would never
think of real estate as a "proxy for bonds" either.
While I avoid equities, I view the real estate just like you
do (a small business). If I was younger, I would do a lot
more with it (real estate), but I would never claim it wasn't "work". I just enjoy it.

JG

 

[unclemick]

15% on every dollar you put in exclusive of cap gain and after expenses - that's the 'old' number I remember on real estate from the 70's when we had a duplex. Otherwise it's not worth your time - times were different then, heh,heh.

 

[charlie]

I like to think of my home as my "ace in the hole" and
do a reverse mortgage If all else fails. Thus I would
recommend that one set their asset allocation without
factoring in your home value.

Cheers,

Charlie

 

[Bob_Smith]

I would never think of real estate as a "proxy for bonds" either. While I avoid equities, I view the real estate just like you do (a small business).

John, if I had your exposure to real estate, I probably wouldn't be in stocks either. It would be more risk than I'd be willing to tolerate. Unfortunately, I just don't have enough knowledge to trust myself when it comes to real estate investing in my local market, and now that I'm retired, I'm afraid to mess up. So I'll stick with what I know and hope for the best. My family has owned farmland since it was homesteaded, and I have toyed with the idea of buying some land. I also have a brother in the Twin Cities who has made a fortune buying and selling real estate. But I think I can make it now on what I have, so I'll stick with what I know and avoid rocking the boat. Plus, I don't want the "work" aspect of it.

 

[kayelem]

We are struggling with the farm issue as well (my husband inherited a small farm,quarter section a couple years back) and we really aren't sure how to consider it in our portfolio mix.

My husband's cousin farms the farm. We pay all the expenses and split the crop. Looking to past history, the annual profit has been pretty steady in the $15 K - $20 K range. I am not sure what we will do when the cousin no longer wants to farm....this is homestead property and my husband doesn't want to sell. But we are the end of the line as well. I don't like the "work" aspect of finding another arrangement either.

I don't feel comfortable regarding this as an equity, esp. since we inherited and didn't choose to invest. And emotion is in the picture in terms of dispostion of the asset. Since it seemed to be steady income, I like Craig, had tended to throw it over to the bond side in my allocations. I'm still not sure....I think I will take it out completely and regard as a separate asset class as someone else suggested. Funny that this didn't occur to me before!

 

[John Galt]

Hello kayelem. 2 points. When I figure my net worth/
investments, I include everything down to the pots and pans. If it has cash value/produces income it goes in.

Secondly, I was faced with a kind of "selling the homestead"
problem a few years ago, except my property produced
-0- income. So, I sold and reinvested the proceeds.
I still have some emotional twinges though as the
property was in the family a long long time.

JG

 

[kayelem]

Ok, I have to admit we are struggling with allocations lately, partially due to how we consider the farm. We do consider it in net worth.

I did just order the Bernstein book, and am looking forward to reading it. In the meantime, would appreciate thoughts on current allocations.

Sorry I haven't figured out formatting so will keep it simple. Below not including house, cars, pots and pans:

CASH 4%, 5%
BONDS 12% , 16%
STOCKS 39%, 53%
FARM 19%, 26%
ANNUITY 27%

(The annuity is just an income stream, not a financial asset that can be bought or sold, and I have just taken the cash flow and assummed a 4% per year pay out to come to an approximation of what it is worth)(We can't change this annuity - long story).

If I take out the annuity and just look at financial/re assets, you see the percentages in the second set of numbers.

We felt fairly comfortable with about 50% (my husband is 50, I'm 45) in stocks, since we had the annuity as the "sure thing". However now the question of the farm is troubling me. If I regard it as an equity it would say we are too heavily leveraged between it and stocks.

I did run the firecalc and did not include the annuity in the portfolio, but rather took the cash flow of it out of what I thought we needed to have annually. The Firecalc came back with 100% probability of success with a comfortable margin. We ran Financial Engines with similar results. So we don't need to swing for the fences with our portfolio, but since we are youngish for retirement we don't want to get completely out of stocks.

Given the situation of the farm and the annuity...how would you regard these in terms of allocating?

Appreciate any and all thoughts and I will read Bernstein.

 

[mark]

I like the Classic 60% equity/40% bond portfolio, which in a typical pension plan becomes stock 50%, real estate 10%, bonds 40%. This probably mimics the publicly traded assets in the U.S. I then age weight it to 100 - age = stock % + real estate 10% + bond %, with SS and a fixed pension filling most of the bond percentage by the time I retire about age 62.