Is Rental Property/Income Same as Bonds

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gusan
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Is Rental Property/Income Same as Bonds

Post by gusan »

We are 44(H)/39(W) with about 8% of our market investments in bonds and rest in primarily US stocks. I am working to make that 15% in bonds over the next two years. However, the thing that keeps coming up in my mind is around rental property. We have two rental properties and the equity in those rental properties is about 34% of our net worth (not considering primary residence). In that scenario should I be considering my bonds percentage in the asset allocation as 34 + 8 = 42% or do I have it wrong?

TIA!
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Re: Is Rental Property/Income Same as Bonds

Post by alex_686 »

Property has roughly the same level of risk and return as a BBB bond. However it has a low correlation with bonds. Since it is such a big portion of your AA you should probably carve it out into its own asset class.
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Re: Is Rental Property/Income Same as Bonds

Post by WanderingDoc »

I've asked this before on here, and folks usually say no.

However, I have literally been smiling all month as the equity and crypto markets are dropping, while the rent checks keep flowing in. It makes me feel good in some perverse way. I'm honestly not sure why I hold any bonds! 8-)
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Re: Is Rental Property/Income Same as Bonds

Post by gusan »

Thanks guys.
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Re: Is Rental Property/Income Same as Bonds

Post by Watty »

Thinking of things as just stocks and bonds is overly simplistic and people sometimes try to force everything to be a stock or bond but that trying to put a square peg in a round hole.

Investment property is a different asset.

You could even have several asset classes of investment property like residential, commercial, storage units, farmland, timber land, marinas, etc.

Even outside of real estate it would not take much to come of with a list of a dozen different asset classes that are not stocks or bonds.
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Re: Is Rental Property/Income Same as Bonds

Post by dbr »

Exactly. The answer to your question is that rental real estate is not even remotely like either stocks or bonds. But there is nothing wrong with that either. There are lots of posters on this forum who own rental real estate and comment about it. That said, the forum is actually organized around discussion of investing in stock and bond mutual funds as inspired by Mr. Bogle at Vanguard. It is not really a real estate investing forum.
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Re: Is Rental Property/Income Same as Bonds

Post by Peculiar_Investor »

WanderingDoc wrote: Fri Feb 09, 2018 10:46 pm I've asked this before on here, and folks usually say no.

However, I have literally been smiling all month as the equity and crypto markets are dropping, while the rent checks keep flowing in. It makes me feel good in some perverse way. I'm honestly not sure why I hold any bonds! 8-)
Do you always maintain 100% occupancy of the rental properties? To me that's one of the fundamental differences from bonds, the fact that rental properties can have periods were they go unoccupied, but the expenses still need to be paid so the monthly cash flow can turn negative.

Case in point. When we moved from eastern Canada to western Canada we decided to keep our previous house and lease it out in case the move west didn't work out. We didn't really plan to become landlords, it just seemed the best backup strategy at the time. Twelve years later it is generally still working out. That said, we've had two extended periods (3+ months) between tenants where the rental property was significantly cash flow negative.

We generally treat the rental property and for that matter our current house as outside our investment portfolio, although if I had more than one rental property then I might be convinced to consider these as part of the Real estate sector if I were to consider slicing and dicing. Definitely would not consider them fixed income (bonds).
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Re: Is Rental Property/Income Same as Bonds

Post by tibbitts »

The problem with rental property is the difficulty of investing in it through a simple financial instrument. Bonds are difficult to invest in individually (treasuries are not entirely an exception, but are easier to invest in than other bonds) but easy to buy in the form of a fund. Real estate is similarly difficult to invest in directly but there aren't so many simple instruments that invest in it. You can easily buy funds that invest in companies that invest in real estate, but you have fewer options for investing directly in a truly diversified real estate direct-ownership portfolio. With directly owning (parts of) many thousands of properties around the world it seems like you could consider that an income investment similar to maybe a high-yield bond portfolio.
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Re: Is Rental Property/Income Same as Bonds

Post by autopeep »

I don't get called at 3 AM by my bond mutual fund about a leaking pipe, so, no, rental property is not the same.
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Re: Is Rental Property/Income Same as Bonds

Post by White Coat Investor »

Not the same, but also a great asset class.
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Re: Is Rental Property/Income Same as Bonds

Post by WanderingDoc »

autopeep wrote: Sat Feb 10, 2018 9:37 am I don't get called at 3 AM by my bond mutual fund about a leaking pipe, so, no, rental property is not the same.
I've never got called at 3 AM about anything, and I have a sizable RE portfolio. Neither have any of the real estate investors I know (I've asked). Just another myth that is being perpetuated.
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Re: Is Rental Property/Income Same as Bonds

Post by WanderingDoc »

Peculiar_Investor wrote: Sat Feb 10, 2018 9:10 am
WanderingDoc wrote: Fri Feb 09, 2018 10:46 pm I've asked this before on here, and folks usually say no.

However, I have literally been smiling all month as the equity and crypto markets are dropping, while the rent checks keep flowing in. It makes me feel good in some perverse way. I'm honestly not sure why I hold any bonds! 8-)
Do you always maintain 100% occupancy of the rental properties? To me that's one of the fundamental differences from bonds, the fact that rental properties can have periods were they go unoccupied, but the expenses still need to be paid so the monthly cash flow can turn negative.

Case in point. When we moved from eastern Canada to western Canada we decided to keep our previous house and lease it out in case the move west didn't work out. We didn't really plan to become landlords, it just seemed the best backup strategy at the time. Twelve years later it is generally still working out. That said, we've had two extended periods (3+ months) between tenants where the rental property was significantly cash flow negative.

We generally treat the rental property and for that matter our current house as outside our investment portfolio, although if I had more than one rental property then I might be convinced to consider these as part of the Real estate sector if I were to consider slicing and dicing. Definitely would not consider them fixed income (bonds).
I maintain a 95-98% occupancy. With that factored in, I am still able to earn a solid $4000-8000 in net annual cash flow per property. That amounts to a 12-20% dividend on your cash down. Not too shabby. Best think to do is to buy in a place where people want to live, and there is rent growth.
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Re: Is Rental Property/Income Same as Bonds

Post by Tyler Aspect »

gusan wrote: Fri Feb 09, 2018 6:18 pm We are 44(H)/39(W) with about 8% of our market investments in bonds and rest in primarily US stocks. I am working to make that 15% in bonds over the next two years. However, the thing that keeps coming up in my mind is around rental property. We have two rental properties and the equity in those rental properties is about 34% of our net worth (not considering primary residence). In that scenario should I be considering my bonds percentage in the asset allocation as 34 + 8 = 42% or do I have it wrong?

TIA!
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Re: Is Rental Property/Income Same as Bonds

Post by TropikThunder »

Peculiar_Investor wrote: Sat Feb 10, 2018 9:10 am Do you always maintain 100% occupancy of the rental properties? To me that's one of the fundamental differences from bonds, the fact that rental properties can have periods were they go unoccupied, but the expenses still need to be paid so the monthly cash flow can turn negative.
For perspective, if tenants move out every two years, and turnover takes two weeks, that’s exactly 98% occupancy. In other words, 14 vacant days every two years. House renters tend to move less often than apartment renters, but I don’t know if that high occupancy rate is sustainable.
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Re: Is Rental Property/Income Same as Bonds

Post by arsenalfan »

I don't consider it.
Our family has own rental real estate for 40 years, and it has cashflowed steadily, independent of the market.
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Re: Is Rental Property/Income Same as Bonds

Post by KyleAAA »

No, it is real estate. It is nothing at all like a bond. Instead of a stock/bond mix you have a stock/bond/real estate mix.
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Re: Is Rental Property/Income Same as Bonds

Post by DrGoogle2017 »

WanderingDoc wrote: Fri Feb 09, 2018 10:46 pm I've asked this before on here, and folks usually say no.

However, I have literally been smiling all month as the equity and crypto markets are dropping, while the rent checks keep flowing in. It makes me feel good in some perverse way. I'm honestly not sure why I hold any bonds! 8-)
Me too. I remember back in 2008-2009 time frame, I was very calm, even a large cash in the bank caused me some commotions but not my rent checks. Bank run wa a problem.
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Re: Is Rental Property/Income Same as Bonds

Post by DrGoogle2017 »

Peculiar_Investor wrote: Sat Feb 10, 2018 9:10 am
WanderingDoc wrote: Fri Feb 09, 2018 10:46 pm I've asked this before on here, and folks usually say no.

However, I have literally been smiling all month as the equity and crypto markets are dropping, while the rent checks keep flowing in. It makes me feel good in some perverse way. I'm honestly not sure why I hold any bonds! 8-)
Do you always maintain 100% occupancy of the rental properties? To me that's one of the fundamental differences from bonds, the fact that rental properties can have periods were they go unoccupied, but the expenses still need to be paid so the monthly cash flow can turn negative.

Case in point. When we moved from eastern Canada to western Canada we decided to keep our previous house and lease it out in case the move west didn't work out. We didn't really plan to become landlords, it just seemed the best backup strategy at the time. Twelve years later it is generally still working out. That said, we've had two extended periods (3+ months) between tenants where the rental property was significantly cash flow negative.

We generally treat the rental property and for that matter our current house as outside our investment portfolio, although if I had more than one rental property then I might be convinced to consider these as part of the Real estate sector if I were to consider slicing and dicing. Definitely would not consider them fixed income (bonds).
It depends on the area. In 14 years, we had one month of vacancy when one tenant moved out and we need to repaint the house and redo our bathroom. I have exactly 3 tenants so far.
And my rental has appreciated more than 50%, I think it's safe to say it has double, but not with selling commission.
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Re: Is Rental Property/Income Same as Bonds

Post by DrGoogle2017 »

autopeep wrote: Sat Feb 10, 2018 9:37 am I don't get called at 3 AM by my bond mutual fund about a leaking pipe, so, no, rental property is not the same.
This argument seems to perpetuate in the internet forever. That's why you get property managers. I get zero call at 3am in my 14 years of owning rental properties. In the past, before I got a new property manager, I got emails from previous property manager when something went wrong, I fired her and got new one. It seems to me that the older property manager thought she would get bonus points for showing how hard she worked, not in my case, that's why I hired somebody, they have to learn to deal with the problem, not me. The new property manager only sends email asking for permission on big expense, not small ones. There is no way I was going to retire and take 3-4 months vacation anywhere in the world with that kind of hassle.
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Re: Is Rental Property/Income Same as Bonds

Post by Peculiar_Investor »

WanderingDoc wrote: Sat Feb 10, 2018 12:04 pm I maintain a 95-98% occupancy. With that factored in, I am still able to earn a solid $4000-8000 in net annual cash flow per property. That amounts to a 12-20% dividend on your cash down. Not too shabby. Best think to do is to buy in a place where people want to live, and there is rent growth.
Thanks and well done. We became 'accidental' landlords as the result of moving for career reasons. Our target market is fairly narrow, essentially executive relocations, which generally have a two or three year term. The 2008-09 period was challenging between tenants. As well, there has been significant growth and changing demographics in the area of our rental property, which has driven overall rent growth downwards (too much supply) although has had less of an impact to our segment of the market. Overall the experience worked out very well and the property has produced a very nice income stream for us.

Coming back to the topic at hand, which is why I provided the example, bonds by definition have a known and recurring income stream. Rental properties share some of this characteristic, but many landlords and potential landlords tend to forget that in real-life there will be periods when the property will sit empty and the income stream gets disrupted. Thus income for a rental property is similar to, but not the same as income from a bond.
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Re: Is Rental Property/Income Same as Bonds

Post by WanderingDoc »

TropikThunder wrote: Sat Feb 10, 2018 1:07 pm
Peculiar_Investor wrote: Sat Feb 10, 2018 9:10 am Do you always maintain 100% occupancy of the rental properties? To me that's one of the fundamental differences from bonds, the fact that rental properties can have periods were they go unoccupied, but the expenses still need to be paid so the monthly cash flow can turn negative.
For perspective, if tenants move out every two years, and turnover takes two weeks, that’s exactly 98% occupancy. In other words, 14 vacant days every two years. House renters tend to move less often than apartment renters, but I don’t know if that high occupancy rate is sustainable.
That turnover rate sounds about right to me :beer 96-99% occupancy is common is nice SFH neighborhoods, as well as well run large apartments in areas with job growth. I think assuming a 90-92% occupancy for large apartments is totally fine due to economies of scale. I personally like to see 95-96%+ occupancy for SFHs or condominiums.

Just like NY, SF, and HNL real estate investors have been told since the 1960s "I don't know if 8-9% year over year appreciation is sustainable". Guess what? We have seen 9% year over year appreciation for the last 50+ years, this includes the downturns. 6%+ rental income growth annually in the same timeframe. Big difference between the "USA real estate market" and individual markets and submarkets.
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Re: Is Rental Property/Income Same as Bonds

Post by WanderingDoc »

DrGoogle2017 wrote: Sat Feb 10, 2018 1:34 pm
autopeep wrote: Sat Feb 10, 2018 9:37 am I don't get called at 3 AM by my bond mutual fund about a leaking pipe, so, no, rental property is not the same.
This argument seems to perpetuate in the internet forever. That's why you get property managers. I get zero call at 3am in my 14 years of owning rental properties. In the past, before I got a new property manager, I got emails from previous property manager when something went wrong, I fired her and got new one. It seems to me that the older property manager thought she would get bonus points for showing how hard she worked, not in my case, that's why I hired somebody, they have to learn to deal with the problem, not me. The new property manager only sends email asking for permission on big expense, not small ones. There is no way I was going to retire and take 3-4 months vacation anywhere in the world with that kind of hassle.
My experience exactly. I like to use a PM for single family homes or apartments. For condos its pretty easy to self manage in my experience, even thousands of miles away. I have also never got this mystical call or text at 3 am to fix a leaky toilet.

I am super interested in that 3-4 vacation bit. I would love to get your take on it. Let me know if I can send you a PM! :D
I'm not looking to get rich quick (stocks), I'm not looking to get rich slow (indexing), I'm looking to get rich, for sure (real estate) | Don't wait to buy real estate. Buy real estate.. and wait.
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Re: Is Rental Property/Income Same as Bonds

Post by DrGoogle2017 »

WanderingDoc wrote: Sat Feb 10, 2018 2:03 pm
DrGoogle2017 wrote: Sat Feb 10, 2018 1:34 pm
autopeep wrote: Sat Feb 10, 2018 9:37 am I don't get called at 3 AM by my bond mutual fund about a leaking pipe, so, no, rental property is not the same.
This argument seems to perpetuate in the internet forever. That's why you get property managers. I get zero call at 3am in my 14 years of owning rental properties. In the past, before I got a new property manager, I got emails from previous property manager when something went wrong, I fired her and got new one. It seems to me that the older property manager thought she would get bonus points for showing how hard she worked, not in my case, that's why I hired somebody, they have to learn to deal with the problem, not me. The new property manager only sends email asking for permission on big expense, not small ones. There is no way I was going to retire and take 3-4 months vacation anywhere in the world with that kind of hassle.
My experience exactly. I like to use a PM for single family homes or apartments. For condos its pretty easy to self manage in my experience, even thousands of miles away. I have also never got this mystical call or text at 3 am to fix a leaky toilet.

I am super interested in that 3-4 vacation bit. I would love to get your take on it. Let me know if I can send you a PM! :D
I think I set up to receive a PM. Let me know if you can’t PM me.
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Re: Is Rental Property/Income Same as Bonds

Post by knpstr »

gusan wrote: Fri Feb 09, 2018 6:18 pm We are 44(H)/39(W) with about 8% of our market investments in bonds and rest in primarily US stocks. I am working to make that 15% in bonds over the next two years. However, the thing that keeps coming up in my mind is around rental property. We have two rental properties and the equity in those rental properties is about 34% of our net worth (not considering primary residence). In that scenario should I be considering my bonds percentage in the asset allocation as 34 + 8 = 42% or do I have it wrong?

TIA!
It is not the same as bonds, but it isn't the same as stocks either.
Your allocation is 34/8/58.
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Re: Is Rental Property/Income Same as Bonds

Post by WanderingDoc »

DrGoogle2017 wrote: Sat Feb 10, 2018 2:46 pm
WanderingDoc wrote: Sat Feb 10, 2018 2:03 pm
DrGoogle2017 wrote: Sat Feb 10, 2018 1:34 pm
autopeep wrote: Sat Feb 10, 2018 9:37 am I don't get called at 3 AM by my bond mutual fund about a leaking pipe, so, no, rental property is not the same.
This argument seems to perpetuate in the internet forever. That's why you get property managers. I get zero call at 3am in my 14 years of owning rental properties. In the past, before I got a new property manager, I got emails from previous property manager when something went wrong, I fired her and got new one. It seems to me that the older property manager thought she would get bonus points for showing how hard she worked, not in my case, that's why I hired somebody, they have to learn to deal with the problem, not me. The new property manager only sends email asking for permission on big expense, not small ones. There is no way I was going to retire and take 3-4 months vacation anywhere in the world with that kind of hassle.
My experience exactly. I like to use a PM for single family homes or apartments. For condos its pretty easy to self manage in my experience, even thousands of miles away. I have also never got this mystical call or text at 3 am to fix a leaky toilet.

I am super interested in that 3-4 vacation bit. I would love to get your take on it. Let me know if I can send you a PM! :D
I think I set up to receive a PM. Let me know if you can’t PM me.
Hmm.. not giving me the option to send you a PM. It only let me add you as a friend. I haven't seen that before. Weird.
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Re: Is Rental Property/Income Same as Bonds

Post by itstoomuch »

We got rid of all bonds and funds with bonds, in 2008 in favor of all equity GLWB VA 3.5% fees, 5% Growth minim, 5% GLWB income. :confused

Thinking about getting rid of the Annuities for Rental RE @ 4-7% ROI. :confused
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Re: Is Rental Property/Income Same as Bonds

Post by DrGoogle2017 »

WanderingDoc wrote: Sat Feb 10, 2018 2:56 pm
DrGoogle2017 wrote: Sat Feb 10, 2018 2:46 pm
WanderingDoc wrote: Sat Feb 10, 2018 2:03 pm
DrGoogle2017 wrote: Sat Feb 10, 2018 1:34 pm
autopeep wrote: Sat Feb 10, 2018 9:37 am I don't get called at 3 AM by my bond mutual fund about a leaking pipe, so, no, rental property is not the same.
This argument seems to perpetuate in the internet forever. That's why you get property managers. I get zero call at 3am in my 14 years of owning rental properties. In the past, before I got a new property manager, I got emails from previous property manager when something went wrong, I fired her and got new one. It seems to me that the older property manager thought she would get bonus points for showing how hard she worked, not in my case, that's why I hired somebody, they have to learn to deal with the problem, not me. The new property manager only sends email asking for permission on big expense, not small ones. There is no way I was going to retire and take 3-4 months vacation anywhere in the world with that kind of hassle.
My experience exactly. I like to use a PM for single family homes or apartments. For condos its pretty easy to self manage in my experience, even thousands of miles away. I have also never got this mystical call or text at 3 am to fix a leaky toilet.

I am super interested in that 3-4 vacation bit. I would love to get your take on it. Let me know if I can send you a PM! :D
I think I set up to receive a PM. Let me know if you can’t PM me.
Hmm.. not giving me the option to send you a PM. It only let me add you as a friend. I haven't seen that before. Weird.
I clicked allow users to send a private messages now. I think I misunderstood something before. Please try again.
Last edited by DrGoogle2017 on Sat Feb 10, 2018 11:54 pm, edited 2 times in total.
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Re: Is Rental Property/Income Same as Bonds

Post by itstoomuch »

itstoomuch wrote: Sat Feb 10, 2018 3:42 pm We got rid of all bonds and funds with bonds, in 2008 in favor of all equity GLWB VA 3.5% fees, 5% Growth minim, 5% GLWB income. :confused

Thinking about getting rid of the Annuities for Rental RE @ 4-7% ROI. :confused
Ymmv
Clarification: Approx 75% of our NW is now income RE (home not included). RE produces about 70% of retirement income, 30% is SS and pension. We are deferring IRA's as long as possible and may be using techniques to minimize RMDs.
YMMV
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Re: Is Rental Property/Income Same as Bonds

Post by itstoomuch »

gusan wrote: Fri Feb 09, 2018 6:18 pm We are 44(H)/39(W) with about 8% of our market investments in bonds and rest in primarily US stocks. I am working to make that 15% in bonds over the next two years. However, the thing that keeps coming up in my mind is around rental property. We have two rental properties and the equity in those rental properties is about 34% of our net worth (not considering primary residence). In that scenario should I be considering my bonds percentage in the asset allocation as 34 + 8 = 42% or do I have it wrong?

TIA!
I'd consider rentals as a pseudo bond. More like an deferred Income Annuity (GLWB) where there are two values.
We consider Income RE into a separate category than either stock or bonds.
In our case the Income RE has a Real Market Value for borrowing and inheritance purposes; Then an Income Value for retirement purposes. Since we are retirement I want the Income Value. Our heirs will see the Real Market Value.
The rents kinda like bond like and dividend like. Its a tax issue that I let the CPA decide.
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Re: Is Rental Property/Income Same as Bonds

Post by alex_686 »

Tyler Aspect wrote: Sat Feb 10, 2018 12:34 pm Commercial Real-Estates are Sector Stocks

Commercial Real-Estates are generally considered similar to stocks. Vanguard classifies them as sector stocks. I have included their web page image below.
I don't think so.

REITS, such as what you posted, offer equity like risk and return. Directly held real estate offers something closer to BBB bonds.

The real estate in REITS are strutted differently, usually with a higher leverage. REITS transform illiquid assets into liquid assets, which increases its value which increases its volility. The transformative alchemy of Wall Street.
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Re: Is Rental Property/Income Same as Bonds

Post by Bwlonge »

itstoomuch wrote: Sat Feb 10, 2018 6:52 pm
Clarification: Approx 75% of our NW is now income RE (home not included). RE produces about 70% of retirement income, 30% is SS and pension. We are deferring IRA's as long as possible and may be using techniques to minimize RMDs.
YMMV
If you don't mind sharing, how many doors are you renting? I have a duplex now, I'm wondering if I want to expand in the future or stick to the beaten path.
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Re: Is Rental Property/Income Same as Bonds

Post by itstoomuch »

Bwlonge wrote: Sun Feb 11, 2018 8:04 am
itstoomuch wrote: Sat Feb 10, 2018 6:52 pm
Clarification: Approx 75% of our NW is now income RE (home not included). RE produces about 70% of retirement income, 30% is SS and pension. We are deferring IRA's as long as possible and may be using techniques to minimize RMDs.
YMMV
If you don't mind sharing, how many doors are you renting? I have a duplex now, I'm wondering if I want to expand in the future or stick to the beaten path.
By April 1, just 3. Currently 2, #3 is in the process of sale closing. We diverted/converted low return assets into assets that returned something. Low leverage. High value units. Then sometime in 2018, we will sell existing home and move into one rental and use the home sale to extinguish the mortgage on the unit. Seattle area.
YMMV
Rev012718; 4 Incm stream buckets: SS+pension; dfr'd GLWB VA & FI anntys, by time & $$ laddered; Discretionary; Rentals. LTCi. Own, not asset. Tax TBT%. Early SS. FundRatio (FR) >1.1 67/70yo
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Tyler Aspect
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Re: Is Rental Property/Income Same as Bonds

Post by Tyler Aspect »

alex_686 wrote: Sun Feb 11, 2018 7:22 am
Tyler Aspect wrote: Sat Feb 10, 2018 12:34 pm Commercial Real-Estates are Sector Stocks

Commercial Real-Estates are generally considered similar to stocks. Vanguard classifies them as sector stocks. I have included their web page image below.
I don't think so.

REITS, such as what you posted, offer equity like risk and return. Directly held real estate offers something closer to BBB bonds.

The real estate in REITS are strutted differently, usually with a higher leverage. REITS transform illiquid assets into liquid assets, which increases its value which increases its volility. The transformative alchemy of Wall Street.
The essential difference between stock and bond are payment stream and valuation. Stock's payment stream are variable, while bonds' are constant. Stock's valuation is forward projection based, while bond's valuation is based on loan quality and current yield.

If you look at a piece of commercial property then you will probably agree its payment stream can go negative if there is vacancy; rents are adjustable; costs can fluctuate. It is more like a stock. On the valuation angle commercial properties are also more like stock. Certain properties in high cost living areas can double in price. Property owner can hope for property appreciation even when income stream is just break-even.

The impression that commercial properties are similar to BBB bond probably comes from its high yield income stream. But this is no different than holders of utility stocks who might think their stocks as substitution for bonds. Just because we might hope for something does not make it automatically true.
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gusan
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Re: Is Rental Property/Income Same as Bonds

Post by gusan »

Thank you all for a very interesting discussion. For now I will keep RE and Bonds separate and stay on the aggressive side with investable funds i.e. 85:15.
renue74
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Re: Is Rental Property/Income Same as Bonds

Post by renue74 »

WanderingDoc wrote: Sat Feb 10, 2018 12:04 pm
Peculiar_Investor wrote: Sat Feb 10, 2018 9:10 am
WanderingDoc wrote: Fri Feb 09, 2018 10:46 pm I've asked this before on here, and folks usually say no.

However, I have literally been smiling all month as the equity and crypto markets are dropping, while the rent checks keep flowing in. It makes me feel good in some perverse way. I'm honestly not sure why I hold any bonds! 8-)
Do you always maintain 100% occupancy of the rental properties? To me that's one of the fundamental differences from bonds, the fact that rental properties can have periods were they go unoccupied, but the expenses still need to be paid so the monthly cash flow can turn negative.

Case in point. When we moved from eastern Canada to western Canada we decided to keep our previous house and lease it out in case the move west didn't work out. We didn't really plan to become landlords, it just seemed the best backup strategy at the time. Twelve years later it is generally still working out. That said, we've had two extended periods (3+ months) between tenants where the rental property was significantly cash flow negative.

We generally treat the rental property and for that matter our current house as outside our investment portfolio, although if I had more than one rental property then I might be convinced to consider these as part of the Real estate sector if I were to consider slicing and dicing. Definitely would not consider them fixed income (bonds).
I maintain a 95-98% occupancy. With that factored in, I am still able to earn a solid $4000-8000 in net annual cash flow per property. That amounts to a 12-20% dividend on your cash down. Not too shabby. Best think to do is to buy in a place where people want to live, and there is rent growth.
+1

Rentals are not bonds or stocks. It's a business. I'm new to landlording (done it for 4 years now) and I do occasionally get calls about HVAC or plumbing. I text my vendors and they go fix it and send me a bill.

I average 13% to 17% return on the rentals I currently own. In the past, I bought rentals 3 years ago and sold them for 2x and 2.5x what I paid for them to other landlords who are buying this year.

I've moved from buying $35K houses to $100K rental houses. It's amazing how the tenant quality changes from $600/month to $1000/month rentals.

I like landlording. I'm handy and it gives me something fun to learn....plus I make money at it.

Will I do it forever, no. But, it helps us save for retirement.

We have multiple friends who have 10-20 properties each and they want out. Been doing it for 15+ years and they are finished. I imagine it's just like anything else. There's a % of burn out.
renue74
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Re: Is Rental Property/Income Same as Bonds

Post by renue74 »

WanderingDoc wrote: Sat Feb 10, 2018 12:04 pm
Peculiar_Investor wrote: Sat Feb 10, 2018 9:10 am
WanderingDoc wrote: Fri Feb 09, 2018 10:46 pm I've asked this before on here, and folks usually say no.

However, I have literally been smiling all month as the equity and crypto markets are dropping, while the rent checks keep flowing in. It makes me feel good in some perverse way. I'm honestly not sure why I hold any bonds! 8-)
Do you always maintain 100% occupancy of the rental properties? To me that's one of the fundamental differences from bonds, the fact that rental properties can have periods were they go unoccupied, but the expenses still need to be paid so the monthly cash flow can turn negative.

Case in point. When we moved from eastern Canada to western Canada we decided to keep our previous house and lease it out in case the move west didn't work out. We didn't really plan to become landlords, it just seemed the best backup strategy at the time. Twelve years later it is generally still working out. That said, we've had two extended periods (3+ months) between tenants where the rental property was significantly cash flow negative.

We generally treat the rental property and for that matter our current house as outside our investment portfolio, although if I had more than one rental property then I might be convinced to consider these as part of the Real estate sector if I were to consider slicing and dicing. Definitely would not consider them fixed income (bonds).
I maintain a 95-98% occupancy. With that factored in, I am still able to earn a solid $4000-8000 in net annual cash flow per property. That amounts to a 12-20% dividend on your cash down. Not too shabby. Best think to do is to buy in a place where people want to live, and there is rent growth.
+1

Rentals are not bonds or stocks. It's a business. I'm new to landlording (done it for 4 years now) and I do occasionally get calls about HVAC or plumbing. I text my vendors and they go fix it and send me a bill.

I average 13% to 17% return on the rentals I currently own. In the past, I bought rentals 3 years ago and sold them for 2x and 2.5x what I paid for them to other landlords who are buying this year.

I've moved from buying $35K houses to $100K rental houses. It's amazing how the tenant quality changes from $600/month to $1000/month rentals.

I like landlording. I'm handy and it gives me something fun to learn....plus I make money at it.

Will I do it forever, no. But, it helps us save for retirement.

We have multiple friends who have 10-20 properties each and they want out. Been doing it for 15+ years and they are finished. I imagine it's just like anything else. There's a % of burn out.
GibsonL6s
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Re: Is Rental Property/Income Same as Bonds

Post by GibsonL6s »

If you are leveraging your RE it is riskier than a diversified portfolio of equities. You are making a leveraged bet on one type of property in a micro location. If you pay $100k for a house and put 25k down and the market drops 25%, you have just lost all of your equity. If you now need to pay the mortgage, taxes insurance etc while it is vacant you have now invested more than the down payment on a property. How long do you want to feed the negative cash flow?

Please don't forget RE also goes through cycles and has other risks, ie environmental, tenant discrimination lawsuits etc. After doing it for 30 plus years, it is no different than any other type of investing, I have seen lots of money made and lots of money lost by really smart people.

Much like the shoe shine boy story, I was once on a flight and the gentleman next to me told me he had a house painting business but was going to quit and do real estate full time as he now had 8 houses in Las Vegas. I remember telling my colleagues the crash can't be far off. It wasn't.
alex_686
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Re: Is Rental Property/Income Same as Bonds

Post by alex_686 »

Tyler Aspect wrote: Sun Feb 11, 2018 12:41 pm The essential difference between stock and bond are payment stream and valuation. Stock's payment stream are variable, while bonds' are constant. Stock's valuation is forward projection based, while bond's valuation is based on loan quality and current yield.

If you look at a piece of commercial property then you will probably agree its payment stream can go negative if there is vacancy; rents are adjustable; costs can fluctuate. It is more like a stock. On the valuation angle commercial properties are also more like stock. Certain properties in high cost living areas can double in price. Property owner can hope for property appreciation even when income stream is just break-even.

The impression that commercial properties are similar to BBB bond probably comes from its high yield income stream. But this is no different than holders of utility stocks who might think their stocks as substitution for bonds. Just because we might hope for something does not make it automatically true.
I am not disputing the major thrust of your argument, which starts from the inside with fundamental analysis. However, my argument comes from from studies done on NAREIT and private equity returns. Basically, from external sources. Public REITs act more like stocks in terms of risk and return. Directly held real estate act more like BBB bonds. You can track real estate that has been private, then public. Or the other way around.

The difference is not so much the cash flows but how investors evaluate those cash flows. REITs are liquid, making those cash flows more valuable - ballpark around 20 to 40%. Of course now the discount rates to that cash flow also increase. Yeah volatility! On the flip side you have control with private real estate, that too is valuable but in a different way.

Structure matters.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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gusan
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Re: Is Rental Property/Income Same as Bonds

Post by gusan »

Thank you all for a very interesting discussion. For now I will keep RE and Bonds separate and stay on the aggressive side with investable funds i.e. 85:15.
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