Real Estate and the Allocation

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Real Estate and the Allocation

Postby mbs » Sat Jun 29, 2013 1:19 pm

Any feelings about putting real estate holdings into the portfolio/allocation calculations? In addition to my home, I own a couple of properties from which I derive income. Should any or all of it be included in the same allocation category as REITs?
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Re: Real Estate and the Allocation

Postby livesoft » Sat Jun 29, 2013 1:23 pm

Sure, do what you want. It's just a "feel-good" calculation anyways, isn't it?

I have a category labeled "commercial real estate", but it is not like I ever do anything with it. I don't rebalance with it. It just sits there: no buys, no sells.

My REIT allocation is different. If it drops below a band or has a RBD, then I buy. If it goes above or pops after a RBD buy, then I sell.
It's all about short-term opportunistic rebalancing due to a short-term change in one's asset allocation, uh, I mean opportunistic rebalancing, uh I mean rebalancing, uh I mean market timing.
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Re: Real Estate and the Allocation

Postby WhyNotUs » Sat Jun 29, 2013 1:50 pm

I do, it helps me to see how tied to real estate value my net worth is and also helps me think about retirement income. Since I am comfortable with real estate, I use it to try not to get too lopsided with that asset class. A reminder that REIT funds would not be a wise investment for me.

As people start to talk about lower and lower withdrawal rates for retirements funds, then investment property looks even better when thinking about the future. I look at net income and compare it to other assets in thinking about distributions. If I have $1,000 a month in net coming from real estate properties and compare to a 4% distribution rate (which used to be the common standard), then my investment is equal to $300,000 in other retirement assets. People are now talking about 3 or even 2% withdrawal rates. At 3%, the equivalent value of my real estate is then $400,000.

Helps me, YMMV
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Re: Real Estate and the Allocation

Postby YDNAL » Sat Jun 29, 2013 2:13 pm

mbs wrote:Any feelings about putting real estate holdings into the portfolio/allocation calculations? In addition to my home, I own a couple of properties from which I derive income. Should any or all of it be included in the same allocation category as REITs?

The only benefit would be to measure this particular "couple of properties" in relation to other investments. Basically, a Net Worth thing mostly. You certainly can't rebalance (add/subtract) from this "category." This is NO different than the countless Social Security and Pension threads you find all over this Forum.

I view investable [liquid] Assets on their own.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
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Re: Real Estate and the Allocation

Postby garlandwhizzer » Sat Jun 29, 2013 4:01 pm

I think that if you own investment property and REITS, you should sum them together in determining how great is your exposure to real estate in your overall asset allocation. I believe many if not most investors are more comfortable with investing in real estate than they are with investing in stocks. Given current REIT valuations relative to TSM, I take the opposite view and hold REITS only in proportion to their weighting in broad indexes. I think that your personal home should not count in asset allocation models since you need it is a place to live, not a economic trading vehicle.

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Re: Real Estate and the Allocation

Postby Dandy » Sat Jun 29, 2013 4:17 pm

You can't ignore large real estate holdings when thinking about your assets and investing. That being said I think it is unwise to have it make a great impact on your investment portfolio allocation. Yes, you probably don't want to invest in REITS since you have a lot of exposure to real estate.

I would probably look at it this way. How risky is your Real Estate? I assume it is not very diversified by location but are the locations stable as far as employment, rents etc. Did your rentals hold up during the "crash" of 2007/08? How much equity do you have in them, is the mortgage/taxes covered by rental income? etc. If you can assess your overall risk tolerance for both Real Estate and Investments then if Real Estate is a bit risky you make your investment portfolio a bit less risky.

Other than that kind of gross risk assessment and possibly avoiding REITS - I would proceed with a "normal" investment portflio of equity and fixed income funds. I would not do things like consider your Real Estate as fixed income and then have a very high allocation to equities.
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Re: Real Estate and the Allocation

Postby mbs » Sun Jun 30, 2013 12:25 pm

Great input. Thanks, everyone!
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Re: Real Estate and the Allocation

Postby dbr » Sun Jun 30, 2013 1:34 pm

I would add that the crux of the issue in designing a portfolio is the question of risk and return. Liquid investments in stocks and bonds have commensurability regarding the return and the volatility of return so it makes sense to talk about how they are combined to form a portfolio. Rebalancing, mentioned here, is part of that picture. There does not seem to be a coherent way to assign risk and return to one's home or to an investment property or two in the same way as to stock and bond mutual funds. From that point of view the answer is that real estate is not part of one's portfolio allocation. Of course, the answers that these assets are part of one's net worth are correct, and it is true that how stocks and bonds are allocated would take into account the existence of other assets somehow. Someone may want to offer a method of accounting for such diverse assets in a coherent system.
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