Can commercial real estate replace fixed income in assest allocation?

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poley23
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Joined: Sun May 26, 2019 6:41 am

Can commercial real estate replace fixed income in assest allocation?

Post by poley23 » Sun May 26, 2019 6:48 am

Can commercial real estate replace fixed income in assest allocation?

How or do I need to rebalance portfolio with consideration of commercial real estate? I'm 57, wife is 55 and she retired 21 years ago. I plan on working at least another 5 years, maybe part time after that. One child just finished college and the other has a 529 plan that should be close to financing his last 3 years. Once retired an income stream of $150,000 is desired. I have 50% ownership in a commercial building that has 6 tenants, triple net long term leases, of which I occupy 18% for my professional business. My K1 rental income was $88,000 in 2018. If I sell this interest, I would pay CG on $1,500,000.

Other assets include: My SEP: VTSAX $1,042,000
ETF VTI $820,000
BRK B $454,000
My Roth IRA: VTSAX $7000
Wife IRA: VTSAX $72,000
Wife Roth IRA: VTSAX $7,000
Joint cash account: $155,000
HSA: $87,000
Primary residence: $1,600,000 with a $130,000 mortage, monthly payment $1450,
2.83%, payoff 8 years. Do not plan on moving or downsizing.

I've been through 1987, 2000 and 2008 without selling equities. I'm reading Bogleheads' Guide to Retirement Planning. Any suggestions? Thanks

dbr
Posts: 29493
Joined: Sun Mar 04, 2007 9:50 am

Re: Can commercial real estate replace fixed income in assest allocation?

Post by dbr » Sun May 26, 2019 9:18 am

Generally asset allocation is about holdings in stocks and bonds, so, from that point of view, no.

If your method of arriving at your stock and bond asset allocation is an assessment of need, ability, and willingness to take risk, you can think through how your ownership of other assets affects the risk you should take in stock and bond investing.

There are also papers published discussing how commercial or residential real estate directly owned can be treated as a portfolio asset class alongside stocks and bonds or as a diversifier of stocks and bonds. I was looking for a paper I found on that but can't find it any more. A Google search would turn up some reading. This kind of stuff is generally pretty technical work done by academics.

As a practical matter I would just take the n/a/w approach. I would absolutely not treat commercial real estate as fixed income even if the fact that it generates income makes that tempting. Note that fixed income investments are neither fixed nor income.

btenny
Posts: 5081
Joined: Sun Oct 07, 2007 6:47 pm

Re: Can commercial real estate replace fixed income in assest allocation?

Post by btenny » Sun May 26, 2019 10:20 am

I am sorry but as described above commercial real estate is not a bond or a stock. It is real estate. It has expenses and needs some looking after and management. It has many risks and some advantages. From what you have described it will make up 50% or so of your retirement income plan. That is huge percentage and huge risk. I think that is very risky in any long term retirement plan.

When you are still working and going to that building every day you are doing some management. How do you plan to utilize your space when you retire? I think you need to create a diversification plan for that building when or soon after you retire. That building is really a investment in a single city and state location. What happens if three tenets decide to move at once? What happens if the city or some other outside group changes the local area? They could build a garbage sorting plant down the street. They could change the highway next door to a commuter train route. Things in life change and this is why most of us here recommend a lot of diversification in retirement to make sleeping at night easy.

Good Luck.

Stormbringer
Posts: 807
Joined: Sun Jun 14, 2015 7:07 am

Re: Can commercial real estate replace fixed income in assest allocation?

Post by Stormbringer » Sun May 26, 2019 3:47 pm

No. There is nothing about real estate income that is "fixed". It is much more like owning a business, in that you get what may or may not left over after income and expenses.
"Compound interest is the most powerful force in the universe." - Albert Einstein

WhyNotUs
Posts: 1523
Joined: Sun Apr 14, 2013 11:38 am

Re: Can commercial real estate replace fixed income in assest allocation?

Post by WhyNotUs » Sun May 26, 2019 4:34 pm

A commercial building with NNN is a different animal than what many people are familiar with. While it is not the same as bonds, it has some bond like qualities and any "surprise" expenses, in general, are paid by lessees.

I think you are saying, I am all in on TSM/CRE and wondering if at this stage of life I should adjust my mix. SO it looks like, rough numbers $2M in TSM, $450 in Buffett
Let's call that $2.5M
$250k in cash (HSA and Checking)
About $3M in RE (home and CRE)

Congrats, and you are still cranking out cash.
$150k per year at 4% is $3.75M. Looks like you are there, plus some. Not counting SS which would reduce the need for investment income.
You could definitely take some risk off the table and still be on track.
If you don't want to do anything else, you could put all of your new investment $$ into Total Bond Market from now on.
I own the next hot stock- VTSAX

smby
Posts: 29
Joined: Wed May 30, 2018 12:14 pm

Re: Can commercial real estate replace fixed income in assest allocation?

Post by smby » Sun May 26, 2019 6:17 pm

NNN lease is better than bonds in my opinion with more upside. I would do the same allocation that you have.

aristotelian
Posts: 5804
Joined: Wed Jan 11, 2017 8:05 pm

Re: Can commercial real estate replace fixed income in assest allocation?

Post by aristotelian » Sun May 26, 2019 6:18 pm

No, it is an idiosyncratic investment. Nobody here can tell you what it is worth or assess the risk. For the purposes of asset allocation, it is separate from your stock/bond portfolio by and up to you to judge it.

Personally I would consider it high risk, perhaps higher risk than stocks. You are talking about concentrating a lot of your net worth in a single illiquid asset.

I would be converting much of the SEP to bonds. It is already big enough that you are going to get killed by taxes on distributions.

Consider paying off the mortgage. You have no need to leverage debt now. Reduce your expense and simplify.

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Sandtrap
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Re: Can commercial real estate replace fixed income in assest allocation?

Post by Sandtrap » Sun May 26, 2019 6:28 pm

poley23 wrote:
Sun May 26, 2019 6:48 am
Can commercial real estate replace fixed income in assest allocation?

How or do I need to rebalance portfolio with consideration of commercial real estate? I'm 57, wife is 55 and she retired 21 years ago. I plan on working at least another 5 years, maybe part time after that. One child just finished college and the other has a 529 plan that should be close to financing his last 3 years. Once retired an income stream of $150,000 is desired. I have 50% ownership in a commercial building that has 6 tenants, triple net long term leases, of which I occupy 18% for my professional business. My K1 rental income was $88,000 in 2018. If I sell this interest, I would pay CG on $1,500,000.

Other assets include: My SEP: VTSAX $1,042,000
ETF VTI $820,000
BRK B $454,000
My Roth IRA: VTSAX $7000
Wife IRA: VTSAX $72,000
Wife Roth IRA: VTSAX $7,000
Joint cash account: $155,000
HSA: $87,000
Primary residence: $1,600,000 with a $130,000 mortage, monthly payment $1450,
2.83%, payoff 8 years. Do not plan on moving or downsizing.

I've been through 1987, 2000 and 2008 without selling equities. I'm reading Bogleheads' Guide to Retirement Planning. Any suggestions? Thanks
Questions:
1. How much would you "net" if you sold of your interests in the commercial building today?

2. If you no longer occupied the building and it was fully rented, what would you monthly "net" proceeds be from it?

3. If you retired in 5 years and worked part time, would you still need the space in the building for yourself?

4. What is your existing allocation (not including the building or other R/E.??

As to your question:
Can commercial real estate replace fixed income in assest allocation?
No. Not at all.

Aloha
j :happy
Wiki Bogleheads Wiki: Everything You Need to Know

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