Moving to SF Bay Area, Considering REITs for investments

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GingerU
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Moving to SF Bay Area, Considering REITs for investments

Postby GingerU » Sun Jun 18, 2017 9:49 pm

Bogleheads,

I am moving to the San Francisco Bay area for a job opportunity. I really like the Bay Area and want to live close to work which is the Palo Alto area. That said, I don't believe that I will be able to afford to purchase property here - I am on one income and moving to a very high cost of living (especially real estate) area.

I keep playing around with the numbers and can't seem to make home ownership work for me there. Having been resigned to the idea of not owning a home, I wanted to see if maybe there is an investment equivalent that I can used to diversify my portfolio like the Vanguard REIT.

I would like to know how many of you may have invested in REITs in place of actually owning real estate. Are REITs a good idea for someone that wants to benefit from the stability of that area.? I am a Vanguard index fund investor, "set it and forget it", 401K-max, yearly re-balancing.

While at this time I am open to alternative investments, I do really like the idea of owning my own home. When you own, nobody can raise the rent on you or put crazy rules on how I user my space. It's a bit unsettling to think about going back to renting an not having a measure of control over my house.

Interested in thoughts, perspectives....

Copernicus
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Re: Moving to SF Bay Area, Considering REITs for investments

Postby Copernicus » Sun Jun 18, 2017 10:50 pm

I went through the exact same thing a long time ago. Sold house on the East Coast, moved with the family to Bay Area, rented for 5 - 6 years, until I felt sure that I will live here for good. No, I did not buy REITs. I would suggest just putting money into S&P Index fund and hope for the best.

I will write the common sense screening items for any relocation, but these are especially critical when choosing areas to live in the Bay Area. If kids in the family access to good schools and extracurricular activities, traffic driving to work, accessible shopping areas, access to weekend activities and traffic patterns going to those areas.

Rent in an area that is acceptable to you FOR THE LONG TERM from a variety of perspectives. I say long term because our experience was that even after renting for some time, it takes time to feel comfortable bidding for a house in competition with many other solid offers.

AlohaJoe
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Re: Moving to SF Bay Area, Considering REITs for investments

Postby AlohaJoe » Mon Jun 19, 2017 2:31 am

GingerU wrote:I wanted to see if maybe there is an investment equivalent that I can used to diversify my portfolio like the Vanguard REIT.

I would like to know how many of you may have invested in REITs in place of actually owning real estate. Are REITs a good idea for someone that wants to benefit from the stability of that area?


Nope. REITs may good part of a portfolio but they aren't a substitute for personal home ownership. Here are just a few of the differences:

- Leverage: when you buy a home you are using 5x leverage (assuming 20% down payment). REITs tends to have massively less leverage; currently debt ratios are around 0.3x
- Diversification: REITs (especially in an index fund) are diversified across the entire country. If SF shoots up by New York stagnates, the index will be somewhere in between. Obviously that's good news if you're in NY and bad news if you're in SF.
- Commercial: REITs tend to be for commercial property, not residential property.

Given all of that our intuition would be that they are only very weakly correlated. We can look at monthly house prices via the Case-Shiller SF House Price Index and compare that to the Wilshire Total Return REIT Index.

Since January 1987, the correlation has been only .177. So while they aren't totally disconnected, they definitely don't have much relationship to one another.

Valuethinker
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Re: Moving to SF Bay Area, Considering REITs for investments

Postby Valuethinker » Mon Jun 19, 2017 3:23 am

AlohaJoe wrote:
GingerU wrote:I wanted to see if maybe there is an investment equivalent that I can used to diversify my portfolio like the Vanguard REIT.

I would like to know how many of you may have invested in REITs in place of actually owning real estate. Are REITs a good idea for someone that wants to benefit from the stability of that area?


Nope. REITs may good part of a portfolio but they aren't a substitute for personal home ownership. Here are just a few of the differences:

- Leverage: when you buy a home you are using 5x leverage (assuming 20% down payment). REITs tends to have massively less leverage; currently debt ratios are around 0.3x
- Diversification: REITs (especially in an index fund) are diversified across the entire country. If SF shoots up by New York stagnates, the index will be somewhere in between. Obviously that's good news if you're in NY and bad news if you're in SF.
- Commercial: REITs tend to be for commercial property, not residential property.

Given all of that our intuition would be that they are only very weakly correlated. We can look at monthly house prices via the Case-Shiller SF House Price Index and compare that to the Wilshire Total Return REIT Index.

Since January 1987, the correlation has been only .177. So while they aren't totally disconnected, they definitely don't have much relationship to one another.


Absolutely true.

Also residential RE is so location specific. Generally, houses just about keep up with inflation, including repair, maintenance and upgrades, they probably don't in the long run.

However in the coastal cities of the US where the economy has been strong and zoning is tough, houses have far far far beaten inflation over the last 50 years. Edward Gleaser at Harvard University is the doyen of urban economists (credited with reviving the field single handedly) and has published quite a bit (non technical) about this.

https://scholar.harvard.edu/glaeser/publications

old publication list-- not updated since 2012 it looks like. He's also written a book (again non technical).

https://www.hks.harvard.edu/about/facul ... rd-glaeser

more up to date list.

AlohaJoe
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Re: Moving to SF Bay Area, Considering REITs for investments

Postby AlohaJoe » Mon Jun 19, 2017 5:15 am

Valuethinker wrote:old publication list-- not updated since 2012 it looks like. He's also written a book (again non technical).


Looks like Google Scholar is up to date: https://scholar.google.com/citations?hl ... by=pubdate

I second the book, it is very interesting.

shashi
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Re: Moving to SF Bay Area, Considering REITs for investments

Postby shashi » Mon Jun 19, 2017 9:03 am

Why not buy a condo in less expensive area like Dublin, CA and commute or rent it out and use that for your rent?

taguscove
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Re: Moving to SF Bay Area, Considering REITs for investments

Postby taguscove » Mon Jun 19, 2017 9:14 am

I agree with what everyone else said. Don't overweight REITs. Just own a diversified stock and bond portfolio.

The reality is that REITS are very loosely correlated to SF housing prices and won't act as a substitute. The REITs are mostly commercial with a heavy emphasis on generating income.

garlandwhizzer
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Re: Moving to SF Bay Area, Considering REITs for investments

Postby garlandwhizzer » Mon Jun 19, 2017 1:42 pm

Congratulations on moving to the Palo Alto/SF Bay area. It used to be a great place to live. I know I used to live there. The good news is that the area is the intellectual/creative engine that drives much of worldwide technology innovation and the resultant tech income stream for the US and much of the world winds up there. The bad news is twofold. Real estate prices due to all this money flowing in are astronomical and the cost of living including taxes are high. Buying a home or condo in a good area is impossible unless you are already quite wealthy and, in addition, have a secure and robust income stream.

Home prices there have apprecIated so much so quickly that it has reached a critical point. It has become very hard for tech companies to continue to attract qualified young workers because they cannot afford to buy a home, pay taxes, and raise a family even on their very high levels of salary. In short too much success can lead to eventual failure. Future home price appreciation there may not be as robust as in the past as tech companies move operations elsewhere to more affordable places where recruiting top flight young employees is easier.

If I were you, I would defer the home purchase decision until you know this is the right place for you to live long term. Not predictable beforehand if you haven't lived there. It's not for everyone. Whatever you can save above rent should be invested in a vehicle to allow growth over time although in the past that investment growth has lagged behind the growth of real estate appreciation in the area. I suggest dollar cost averaging some money every month from your salary into your chosen mutual fund. I personally would not choose to invest all that money in Vanguard's REIT fund but rather in Vanguard's TSM fund which I expect to appreciate more than REITS over long periods of tine, If you do in fact decide that it is worth the massive financial outlay to live there long term and your job is secure, you could use those savings/investments to make a down payment, not in the Palo Alto area, but on a less expensive property in the East Bay which would involve a longer commute but would at least get you into the Bay Area real estate market.

The other piece of good news is that the California real estate market including the Bay Area goes through boom/bust cycles. Fire sale prices appeared in some desirable areas during the tech collapse of 2000-3 and again in 2007-9 when excessive leverage unwound itself. So don't chase after skyrocketing prices, sit on the sidelines and increasing your assets, waiting for an opportunity which will in time present itself for you to sell your East Bay property and move into the Peninsula area where you want to live.

Good luck.

Garland Whizzer

ryman554
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Re: Moving to SF Bay Area, Considering REITs for investments

Postby ryman554 » Mon Jun 19, 2017 1:49 pm

shashi wrote:Why not buy a condo in less expensive area like Dublin, CA and commute or rent it out and use that for your rent?


That is the last thing I would recommend anybody do unless the idea of a 1.5+ hour commute, each way, is acceptable.

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Pajamas
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Re: Moving to SF Bay Area, Considering REITs for investments

Postby Pajamas » Mon Jun 19, 2017 2:17 pm

You could certainly include a REIT index fund allocation in your investment portfolio. Many people do so.

AlohaJoe wrote:- Commercial: REITs tend to be for commercial property, not residential property.


There are many different types of REITs, including many that specifically invest in single-family homes, apartments, or trailer parks. However, I don't know of an exclusively residential REIT index fund.

https://www.reit.com/investing/reit-bas ... tial-reits

shashi wrote:Why not buy a condo in less expensive area like Dublin, CA and commute or rent it out and use that for your rent?


Being a landlord is a business. GingerU is asking about investing, not starting a business.

nura
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Re: Moving to SF Bay Area, Considering REITs for investments

Postby nura » Mon Jun 19, 2017 3:03 pm

Bay Area real-estate prices are largely driven by hi-tech industry. If you need a proxy investment, buy a high-tech fund or index like VITAX NDXT over a commercial REIT. If apple, Google etc tanks so will Bay Area housing prices

shashi
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Re: Moving to SF Bay Area, Considering REITs for investments

Postby shashi » Tue Jun 20, 2017 1:02 am

There is no correlation with folks suggesting here such as tech index or reit. It is better in my opinion to have a small condo rather than paying huge rents. Consider slight commute from areas like San Carlos to Palo Alto.

Any way all the best. Just remember like bogleheads there is a way to live with less expensive housing even in Bay area as long as you are willing to make slight compromises in commute.

ryman554
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Re: Moving to SF Bay Area, Considering REITs for investments

Postby ryman554 » Tue Jun 20, 2017 8:27 am

shashi wrote:There is no correlation with folks suggesting here such as tech index or reit. It is better in my opinion to have a small condo rather than paying huge rents. Consider slight commute from areas like San Carlos to Palo Alto.

Any way all the best. Just remember like bogleheads there is a way to live with less expensive housing even in Bay area as long as you are willing to make slight compromises in commute.


That's a much better suggestion.

Just like NASA, you get a choice of:
low(er) price, commute time, nice neighborhood.

Pick two of three.

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GingerU
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Re: Moving to SF Bay Area, Considering REITs for investments

Postby GingerU » Thu Jun 22, 2017 7:00 pm

Thanks Bogleheads. Really sound ideas on both sides of my debate.

United2008
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Re: Moving to SF Bay Area, Considering REITs for investments

Postby United2008 » Fri Jun 23, 2017 1:07 pm

ryman554 wrote:
shashi wrote:There is no correlation with folks suggesting here such as tech index or reit. It is better in my opinion to have a small condo rather than paying huge rents. Consider slight commute from areas like San Carlos to Palo Alto.

Any way all the best. Just remember like bogleheads there is a way to live with less expensive housing even in Bay area as long as you are willing to make slight compromises in commute.


That's a much better suggestion.

Just like NASA, you get a choice of:
low(er) price, commute time, nice neighborhood.

Pick two of three.


Both of these! The range from Redwood City to Sunnyvale offers a reasonable (30 minute-ish) commute to Palo Alto even during rush hour, and you would have multiple freeway/surface street options in the event of a major traffic malfunction. IMHO, the key to a decent quality of life in the Bay Area is minimizing the commute. Enjoy ~ this is an amazing place to live with tremendous opportunity (if you can stomach the high costs).


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