Too Heavy in Real Estate?

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dougm36
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Joined: Sun Dec 30, 2018 5:46 pm

Too Heavy in Real Estate?

Post by dougm36 » Sun Dec 30, 2018 6:24 pm

Hello everybody,

I have been lurking here for some time but just registered today.

I am trying to figure out if I am too heavy in physical real estate and should divest and invest more money in the market or something else to diversify.

I am 48 year old married male and live in CA. FederaL tax bracket is 32%

There is $1.2M equity in our principal residence. Have a $560K mortgage. 4.0%, 30 year fixed rate.

There are two rental properties. Market value combined of the two properties is $1.3M. No mortgages on either property. Properties generate $5,600/month in rental income. That income is invested in taxable account each month.

There is $150K in a 403B/457 combined. The 403B and 457 contributions are being maxed out each year.

There is $400K in taxable investment account. Funds are invested in VBIAX.

Any advice would be appreciated.

123
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Joined: Fri Oct 12, 2012 3:55 pm

Re: Too Heavy in Real Estate?

Post by 123 » Sun Dec 30, 2018 8:09 pm

Yes you are heavy in real estate. If it were me I would rather have my personal residence paid for instead of my rental property.

California has seen significant declines in real estate valuations in the past and in many areas prices are at all-time highs. Of course the run up in real estate prices can create a tax burden when you sell. That said I would rather cash out when prices are high then when they are low.

Many bogleheads object to rental properties because they can become a second job. Some people are more suited to such real estate holdings than others. If you wouldn't buy the same rental properties today at current prices it might be time to consider disposal of at least 1 of them. It might be time to take some money off the real estate table while you can.
Last edited by 123 on Sun Dec 30, 2018 8:12 pm, edited 1 time in total.
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DSInvestor
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Joined: Sat Oct 04, 2008 11:42 am

Re: Too Heavy in Real Estate?

Post by DSInvestor » Sun Dec 30, 2018 8:12 pm

VBIAX is Vanguard Balanced Index Admiral and is not tax efficient as the bond portion of the fund throws off significant non-qualified dividend income. You're high income and live in a state with high state income tax. Consider more tax efficient options for the taxable account. Vanguard Total Stock Market Index Admiral and a mix of intermediate term tax exempt/california intermediate term tax exempt bond.

You're maxing out 403b and 457b which is good. Is the 457b a governmental 457 or non-governmental 457. I believe assets in non-governmental 457b plans may be at risk if your employer goes bankrupt.

You didn't mention any IRA contributions. You and your spouse can each contribute to IRA. If your income is too high to be eligible for Roth IRA contributions, consider the backdoor into Roth IRA which combines two steps: 1) Contribution to Traditional IRA and 2) Roth conversion.
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Sandtrap
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Location: Hawaii No Ka Oi , N. Arizona

Re: Too Heavy in Real Estate?

Post by Sandtrap » Sun Dec 30, 2018 8:40 pm

dougm36 wrote:
Sun Dec 30, 2018 6:24 pm
Hello everybody,

I have been lurking here for some time but just registered today.

I am trying to figure out if I am too heavy in physical real estate and should divest and invest more money in the market or something else to diversify.

I am 48 year old married male and live in CA. FederaL tax bracket is 32%

There is $1.2M equity in our principal residence. Have a $560K mortgage. 4.0%, 30 year fixed rate.

There are two rental properties. Market value combined of the two properties is $1.3M. No mortgages on either property. Properties generate $5,600/month in rental income. That income is invested in taxable account each month.

There is $150K in a 403B/457 combined. The 403B and 457 contributions are being maxed out each year.

There is $400K in taxable investment account. Funds are invested in VBIAX.

Any advice would be appreciated.
1. You are too heavy in R/E if you have no intention to be a landlord as a business.
2. You are too heavy in R/E considering your CAP rate is low. (can you raise your rents?)
3. You are fine in R/E if your properties are in an area of high appreciative value.
4. You are fine in R/E is diversification of assets and income stream is important to you.
5. You are fine in R/E considering the tax benefits of owning these properties.
6. You are light in R/E if your goal is to diversify your income stream and assets, and want to grow a R/E income property business.

Actionably:
1. Post a portfolio review for more comprehensive input in this format:
https://www.bogleheads.org/forum/viewt ... =1&t=6212
2. Consider investing new funds in a more tax efficient manner. (other than VBIAX, Balanced Index Fund)
Tax Efficient Fund Placement
https://www.bogleheads.org/wiki/Tax-ef ... _placement
3. You can retain your rental properties, invest new funds per #2, and also work to pay down your mortgage and any high interest debt you might have -- all concurrently.
Wiki Bogleheads Wiki: Everything You Need to Know

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LittleGreenSoldiers
Posts: 104
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Re: Too Heavy in Real Estate?

Post by LittleGreenSoldiers » Sun Dec 30, 2018 8:50 pm

I view real estate as part of my AA and consider rent a taxable dividend. As a whole I'd say you are heavy in real estate but you are continuing to add to your taxable after maxing out 403b and 457b.

Something to consider. If you have kids going off to college in the next few years now would be a good time to move the equity in the rentals to your primary residence. If/when you file for FAFSA any equity/liability on your primary residence is not figured in. I have 2 rental properties as well. Had I known 2 years before my first went to college and we filled out the FAFSA application I would have owned my residence outright.

delamer
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Re: Too Heavy in Real Estate?

Post by delamer » Sun Dec 30, 2018 9:01 pm

Excluding your primary home, real estate makes up 70% of your assets.

Bogleheads would not recommend having that much in any one sector (be it real estate, tech, healthcare, etc.), especially spread over just two properties (or stocks).

The other issue is whether your rental properties are both in the same area. For instance, one in Chicago and one in Miami is different than both in Los Angeles. The former spreads the risk a bit more.

andrew99999
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Joined: Fri Jul 13, 2018 8:14 pm

Re: Too Heavy in Real Estate?

Post by andrew99999 » Sun Dec 30, 2018 9:10 pm

dougm36 wrote:
Sun Dec 30, 2018 6:24 pm
Too Heavy in Real Estate?
What is "too heavy".
People tend to be biased to either say stocks are great and property sux or stocks suck and property is great. Guess which side this forum is on? Be aware that whoever you ask will almost always have a bias, and be critical of comments given, even when they are agreed on by a group. Lots of "groups" will tell you how great dividend investing is, and just because a group agrees with something doesn't make it correct.
123 wrote:
Sun Dec 30, 2018 8:09 pm
Many bogleheads object to rental properties because they can become a second job.
Exactly right, that is the most commonly quoted argument on here, but for some reason I spend under 5 hours a year on my "second job", so I consider the purpose of this argument to be entirely for confirmation bias.
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ny_rn
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Joined: Sun May 11, 2014 7:09 am

Re: Too Heavy in Real Estate?

Post by ny_rn » Sun Dec 30, 2018 9:44 pm

Do you have any interest in buying more rental properties? Can you get some of that $1.2MM in equity working for you?

Nissanzx1
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Re: Too Heavy in Real Estate?

Post by Nissanzx1 » Sun Dec 30, 2018 9:46 pm

Of the really rich people I know, several I can think of are real estate heavy. Nothing wrong with it if you understand real estate and are comfortable with / enjoy being a land lord.

We have a much smaller net worth than you but we are about 45% real estate (as percentage of net worth). I'd be comfortable with 50-60% myself.

senex
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Joined: Wed Dec 13, 2017 4:38 pm

Re: Too Heavy in Real Estate?

Post by senex » Mon Dec 31, 2018 9:00 am

andrew99999 wrote:
Sun Dec 30, 2018 9:10 pm
What is "too heavy"?
+1.

You've accumulated ~$3M net worth, so whatever you're doing is working great. It's fine to stick with it if you like it and are good at it. Real estate has significant tax advantages over stock investing, too.

If you are wanting to diversify to stocks, that would be fine. Lots of bogleheads would want more stock and less real estate than you have, but many of us are not the landlord type.

riverguy
Posts: 496
Joined: Sun May 23, 2010 10:33 pm

Re: Too Heavy in Real Estate?

Post by riverguy » Mon Dec 31, 2018 10:00 am

Cap rates on the rentals are awful. Hopefully you have some good appreciation in them. It's hard to even leverage them because you are going to pay an interest rate higher than the cap rate, unless you could use the proceeds to buy a significantly higher cap rate property.

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greg24
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Re: Too Heavy in Real Estate?

Post by greg24 » Mon Dec 31, 2018 10:02 am

You have been very successful in RE. I wouldn't rock the boat.

WhyNotUs
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Re: Too Heavy in Real Estate?

Post by WhyNotUs » Mon Dec 31, 2018 10:09 am

Well you seem to be doing something right as your net worth is high for your age. You are very heavy in RE and while your 5% cap rate is not terribly unusual in an area with appreciation, it is not a rate that would motivate most RE investors. Selling RE also triggers tax issues that would need to be considered in repositioning.

• Someone else mentioned Roth IRAs for some of the rental income. If that works, it is a great idea. The fact that you do not need the income for monthly expenses allows you to transfer RE income into equity markets. Over time your non-RE assets will increase as a % of Net Worth. I would explore all options for tax-free investments, medical spending accounts, 529, etc.

• Assuming the two rentals have enjoyed good appreciation rather than a step-up basis from inheritance, at some point, if it was me, I would look to leverage my two SFHs into a 1031 transaction for an apartment complex or storage that offers passive investment with a little better cash flow. The timing would need to be carefully put together but one can sometimes find someone leaving a position in an existing complex who can work with your schedule. Selling two sfhs at the same time for a 1031 is not without complications but can shift you into a more passive situation.

• If your retirement accounts are at $150k at 48, then I am sure you realize that this should be your area of focus.
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