Real estate "bucket"?

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Tatupu
Posts: 38
Joined: Fri Aug 10, 2007 1:17 pm

Real estate "bucket"?

Post by Tatupu »

Please let me just make the obligatory introductory statement on how fortunate I was to discover this forum. I have been lurking for awhile and sincerely appreciate the knowledge, time and effort that so many of you throw into this forum. I sincerely thank you.

I am seeking advice on whether it is wise to leave my real estate "bucket" separate from my overall retirement portfolio when determining proper asset allocation.

I have recently decided to abandon my plan to buy a house sometime in the next few years and instead think it is much more likely that I'll wait to buy until closer to retirement (hopefully in about 20 years.) I currently have an account dedicated solely to real estate which I had been planning to use as a down payment. When establishing my AA, I kept the real estate account entirely separate from my retirement portfolio. Given my change in thinking I wonder if I shouldn't just roll that money into the retirement portfolio and rebalance my portfolio.

While it is possible I'll decide to buy, it is much more likely I will defer buying until close to retirement. For what it is worth, the reason I changed my thinking is that my job will keep me overseas for most of the next 20 years and the more I learn the more I think it makes better financial sense to simply rent a house/apartment for those few years I'll be in the States. (When I am overseas I will fortunately receive free housing.) The alternative is to buy a house in the States and spend most of the next 20 years renting it out -- with all the headaches of being a landlord and the costs that go with it. While I certainly can't predict the future, at this point I prefer to invest the real estate chunk for the next 20 years and then buy something near retirement.

If I added the real estate "bucket" to my overall portfolio, it would equal about 25% of my overall portfolio. Any thoughts on whether I should continue to keep it separate or roll it into my overall portfolio plan?

Thanks.
grberry
Posts: 234
Joined: Fri Jul 20, 2007 1:16 pm
Location: Boston, MA

seperate - if

Post by grberry »

I'd keep it separate:
1) you might change jobs (voluntarily or not) and massively change your current timeline for buying
2) you might change your mind about waiting until you return to the states full time (possibly to acquire a vacation/retirement home earlier)
3) even if you don't change plans, your time horizon for this money is significantly shorter than for the retirement money (as you will spend it on purchase, rather than over the 5-20 years after purchase), so a more conservative allocation is appropriate.

All in all, I'd probably invest it as if it was a separate "retirement" account, with a "retirement" date estimated at the midpoint between today and when you actually plan to buy.
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CABob
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Consideration

Post by CABob »

I think the answer deals with how and where this bucket is currently invested. Typically, the recommendation for money potentially needed in the near future (5 years or less) be liquid, available, and safe. This usually means a money market fund, CDs, or perhaps a short term bond or fund. If this it your current situation, since your current thinking is that the need is now longer term I think the investing plans can change. Whether this means put it in the same bucket as other retirement funds or still keep the real estate bucket separate is a personal decision, but, I think it could be invested more agressively.
Bottom line is how the money is invested not what bucket it is in.

Bob
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White Coat Investor
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Post by White Coat Investor »

I'd keep it separate too. It has a different purpose than your other funds:

Emergency fund: Needs to be stable and liquid
Real Estate (I call mine my house fund, and it is currently stored in my home/equity minus my mortgage): will be needed all at once at some point before retirement
Retirement: Will BEGIN to be used in 20-30 years, but over many years, not all at once.

Because it has a different time horizon than the rest of your money, you should keep a separate asset allocation for it. If at any point you decide to buy in 5 more years, or 1 more year, you would want to change your asset allocation for those funds.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
Topic Author
Tatupu
Posts: 38
Joined: Fri Aug 10, 2007 1:17 pm

Real estate "bucket"?

Post by Tatupu »

Thanks for the very useful responses. This helps.
YDNAL
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Location: Biscayne Bay

Post by YDNAL »

Real Estate (I call mine my house fund, and it is currently stored in my home/equity minus my mortgage): will be needed all at once at some point before retirement.
EmergDoc,

Please expand. Are you planning to live on a van down by the river?..... for the youngsters, http://www.youtube.com/watch?v=t-dkCyRTzj8

Regards,
Landy
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Re: Real estate "bucket"?

Post by White Coat Investor »

Tatupu wrote:I am seeking advice on whether it is wise to leave my real estate "bucket" separate from my overall retirement portfolio when determining proper asset allocation.... Any thoughts on whether I should continue to keep it separate or roll it into my overall portfolio plan?
Keep it separate. It's timeline is separate than your retirement. You will need a lump sum in ~20 years. Whereas your retirement portfolio you will take out little by little beginning in 20 years, but over a period of ~30 (hopefully.) Right now the asset allocations may be pretty similar, but in 15-18 years they should be dramatically different. Plus, if you change your mind in 5 years and decide to buy a house a year later you just have to adjust that bucket's asset allocation accordingly.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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