Apartment 50% of assets

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muntz
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Apartment 50% of assets

Post by muntz » Mon Oct 08, 2018 11:29 am

Hi - So, it looks like I've inherited a very nice, expensive apartment in NYC. Tough to value things as the market is very weak these days, but if I move in, which I plan to - but the coop board may disagree, it'll be represent ~50% of my total assets. While I may choose to live there my whole life, I might want (or have) to move.

How would people account for this? I've never viewed real estate as an investment, but when something represents such a substantial portion of my assets I figure I should at least think about it. My initial thought is to take REITs down to 0 and maybe TIPS too.

Current Investments are:
55% Equities (60/40 Domestic Forign
15% Bonds (~1/3rd muni. 2/3rds taxable (held in IRAs/401ks.
15% TIPs
15% REITs

Wife and I both work. Have 2 young kids. Wife has a very nice, stable income. Mine is all over the place.

randomguy
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Re: Apartment 50% of assets

Post by randomguy » Mon Oct 08, 2018 11:37 am

Do nothing. Your house isn't correlated directly with REITs to make changes like this. If this apartment lowers your yearly expenditures, think about saving a bit more of that into your portfolio rather than just uping the spending. I am assuming with 2 young kids you are in the accumulation stage more than a spending one.

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dm200
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Re: Apartment 50% of assets

Post by dm200 » Mon Oct 08, 2018 12:00 pm

randomguy wrote:
Mon Oct 08, 2018 11:37 am
Do nothing. Your house isn't correlated directly with REITs to make changes like this. If this apartment lowers your yearly expenditures, think about saving a bit more of that into your portfolio rather than just uping the spending. I am assuming with 2 young kids you are in the accumulation stage more than a spending one.
As long as living there fits your lifestyle and is financially sound, just keep doing (more or less) what you are doing now.

muntz
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Re: Apartment 50% of assets

Post by muntz » Mon Oct 08, 2018 1:44 pm

All good advice.

Now, what if I plan on moving in 10 years to the suburbs and buying something that costs 33-50% of what this place does? How should I look at it then?

Note: this coop, like many in NYC, frown on people taking out mortgages.

stan1
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Re: Apartment 50% of assets

Post by stan1 » Mon Oct 08, 2018 1:51 pm

Will you be able to afford the building maintenance fees? Hopefully they are less than you are paying now in rent (although you do say it is a very nice apartment)?

renue74
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Re: Apartment 50% of assets

Post by renue74 » Mon Oct 08, 2018 1:52 pm

A large portion of my net worth is tied up in rental homes and an airbnb. All of them have no mortgages.

I don't change my mutual fund investments because of this. When I calculate our portfolio, I simply add the "market rate" of the properties...but I do it with more conservative estimate. At some point, we will sell our rentals and that $ will be part of our regular portfolio...but until then, I definitely wouldnt change the way I invest.

muntz
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Re: Apartment 50% of assets

Post by muntz » Mon Oct 08, 2018 1:52 pm

stan1 wrote:
Mon Oct 08, 2018 1:51 pm
Will you be able to afford the building maintenance fees? Hopefully they are less than you are paying now in rent (although you do say it is a very nice apartment)?
Yes. New York is so stupid these days. But, the maintenance is less than my current rent.

muntz
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Re: Apartment 50% of assets

Post by muntz » Mon Oct 08, 2018 1:58 pm

renue74 wrote:
Mon Oct 08, 2018 1:52 pm
A large portion of my net worth is tied up in rental homes and an airbnb. All of them have no mortgages.

I don't change my mutual fund investments because of this. When I calculate our portfolio, I simply add the "market rate" of the properties...but I do it with more conservative estimate. At some point, we will sell our rentals and that $ will be part of our regular portfolio...but until then, I definitely wouldnt change the way I invest.
Forgive me, but that seems really odd. Though there are some differences such as liquidity, tax implications, cost of upkeep, aren't these assets thats are morelike your financial ones than different from them? They (hopefully) throw off income and have offer a capital return or risk of loss?

If I knew I'd have a "windfall" equal to 75% of my portfolio in 10 years I would certainly invest differently.

Thought experiment. If you knew, without a doubt, that you'd receive $10mm in 10yrs wouldn't you do something different with your disposable income today? Buy safer investments because you dont have to take risk, or buy highly risky investments because you can afford to take risk or buy a huge house and very expensive cars because you have no need to save?

I would definitely include your assets in your portfolio.

renue74
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Re: Apartment 50% of assets

Post by renue74 » Mon Oct 08, 2018 2:13 pm

I don't wish to rely on the value of my rental property to sway the way I invest. I already converted to index investing in 2015 after I found this forum and have a conservative 65/35 allocation at age 44.

I look at the real estate portion of my portfolio as the "over the top" part. If one day, I decide I want to retire....will selling the rental property put me "over the top," and am I mentally ready to sell it and make a life change. Until then, they are income producing assets.

The one thing it does do...I have no need to invest in REITs, because I have real estate exposure already....albeit it not diversified.

I much rather be really conservative with my RE values and be pleasantly surprised when it's time to sell them than to think my properties are worth more than what they are.

At some point our house may be worth 50% of our worth...but do we actively say, "my house equity is 50% of my investable assets, so I should change my thinking on investing?"

BarbBrooklyn
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Re: Apartment 50% of assets

Post by BarbBrooklyn » Mon Oct 08, 2018 3:13 pm

Will the coop board allow subletting after you've lived there for a certain number of years?
BarbBrooklyn | "The enemy of a good plan is the dream of a perfect plan."

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celia
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Re: Apartment 50% of assets

Post by celia » Mon Oct 08, 2018 4:07 pm

OP, Please clarify if you are inheriting one unit or an entire apartment building. I think some people are assuming one way while others are thinking the opposite.

In addition, do you already own a house? If so, would you be selling it to move to the apartment?

BarbBrooklyn
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Re: Apartment 50% of assets

Post by BarbBrooklyn » Mon Oct 08, 2018 4:36 pm

muntz wrote:
Mon Oct 08, 2018 1:52 pm
stan1 wrote:
Mon Oct 08, 2018 1:51 pm
Will you be able to afford the building maintenance fees? Hopefully they are less than you are paying now in rent (although you do say it is a very nice apartment)?
Yes. New York is so stupid these days. But, the maintenance is less than my current rent.
I think we can assume he is renting. Inheriting NYC real estate is kinda a dream come true in my book; I had to buy mine!
BarbBrooklyn | "The enemy of a good plan is the dream of a perfect plan."

muntz
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Re: Apartment 50% of assets

Post by muntz » Mon Oct 08, 2018 5:33 pm

BarbBrooklyn wrote:
Mon Oct 08, 2018 3:13 pm
Will the coop board allow subletting after you've lived there for a certain number of years?
No. They won't. NYC Coop boards are the last vestige of stalinism in this world.

muntz
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Re: Apartment 50% of assets

Post by muntz » Mon Oct 08, 2018 5:35 pm

celia wrote:
Mon Oct 08, 2018 4:07 pm
OP, Please clarify if you are inheriting one unit or an entire apartment building. I think some people are assuming one way while others are thinking the opposite.

In addition, do you already own a house? If so, would you be selling it to move to the apartment?
I currently rent an apartment in NYC. I am inheriting a unit in a a building with a couple hundred units. The building is about 30 stories tall. If I was inheriting that building I think my questions would be a bit different!

muntz
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Re: Apartment 50% of assets

Post by muntz » Mon Oct 08, 2018 5:44 pm

renue74 wrote:
Mon Oct 08, 2018 2:13 pm
I don't wish to rely on the value of my rental property to sway the way I invest.
But aren't your rental properties investments? Shouldn't they be included in your plan and viewed as a part of your portfolio? I mean, if you sold them, you could buy securities.
renue74 wrote:
Mon Oct 08, 2018 2:13 pm
I already converted to index investing in 2015 after I found this forum and have a conservative 65/35 allocation at age 44.

I look at the real estate portion of my portfolio as the "over the top" part. If one day, I decide I want to retire....will selling the rental property put me "over the top," and am I mentally ready to sell it and make a life change. Until then, they are income producing assets.
Ah, I see you are spending the income from the assets. That changes things some, but assuming they arent mortgaged over 100% LTV they might be considered some sort of investment.
renue74 wrote:
Mon Oct 08, 2018 2:13 pm
The one thing it does do...I have no need to invest in REITs, because I have real estate exposure already....albeit it not diversified.
So you ARE viewing the rentals as part of your overall portfolio.
renue74 wrote:
Mon Oct 08, 2018 2:13 pm
I much rather be really conservative with my RE values and be pleasantly surprised when it's time to sell them than to think my properties are worth more than what they are.

At some point our house may be worth 50% of our worth...but do we actively say, "my house equity is 50% of my investable assets, so I should change my thinking on investing?"
Well, for me, the apartment could easily be sold and I could easily downsize to something 1/3rd - 1/2 the cost (in the same city or nearby).

jks1985
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Re: Apartment 50% of assets

Post by jks1985 » Mon Oct 08, 2018 6:37 pm

The only way I wouldn't move into the new apartment is if your current one is rent controlled and you are getting a super good deal.

megabad
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Re: Apartment 50% of assets

Post by megabad » Mon Oct 08, 2018 6:57 pm

muntz wrote:
Mon Oct 08, 2018 11:29 am
How would people account for this? I've never viewed real estate as an investment, but when something represents such a substantial portion of my assets I figure I should at least think about it. My initial thought is to take REITs down to 0 and maybe TIPS too.
You seem to have had the same opinion as me. I do not consider a primary residence when thinking about asset allocation. The reason is that I don't consider housing negotiable--it is an expense for me that I cannot avoid. I don't have to own 12 shares of Apple Stock (I can sell them anytime), but I do "have" to have a place to live. This is emotional for me and not financial since I find that people that consider primary residence an investment instead of an expense often spend many times more on a home than those that do not.

I rented for a while--my rent was an expense. Then I got a house--my mortgage and taxes were an expense. If I sell the house and move to another place, I will have changed my expenses. I have on occasion bought vehicles and sold them for a higher price after a few years--similarly I do not consider that an investment or as part of my allocation, but rather just a change in expense. A primary home is a lifestyle choice for me, not really an investment. Side note: rental real estate is different to me.

muntz
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Re: Apartment 50% of assets

Post by muntz » Mon Oct 08, 2018 7:08 pm

megabad wrote:
Mon Oct 08, 2018 6:57 pm
muntz wrote:
Mon Oct 08, 2018 11:29 am
How would people account for this? I've never viewed real estate as an investment, but when something represents such a substantial portion of my assets I figure I should at least think about it. My initial thought is to take REITs down to 0 and maybe TIPS too.
You seem to have had the same opinion as me. I do not consider a primary residence when thinking about asset allocation. The reason is that I don't consider housing negotiable--it is an expense for me that I cannot avoid. I don't have to own 12 shares of Apple Stock (I can sell them anytime), but I do "have" to have a place to live. This is emotional for me and not financial since I find that people that consider primary residence an investment instead of an expense often spend many times more on a home than those that do not.

I rented for a while--my rent was an expense. Then I got a house--my mortgage and taxes were an expense. If I sell the house and move to another place, I will have changed my expenses. I have on occasion bought vehicles and sold them for a higher price after a few years--similarly I do not consider that an investment or as part of my allocation, but rather just a change in expense. A primary home is a lifestyle choice for me, not really an investment. Side note: rental real estate is different to me.
So. I agree completely. However, this place is pretty pricy and we could easily sell it and move to something much less expensive.

megabad
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Re: Apartment 50% of assets

Post by megabad » Mon Oct 08, 2018 8:22 pm

muntz wrote:
Mon Oct 08, 2018 7:08 pm
So. I agree completely. However, this place is pretty pricy and we could easily sell it and move to something much less expensive.
Well the price of the home relative to my assets doesn't affect my personal opinion as to how to classify it, but you will need to decide how you view it. If you could easily sell it and move to something less expensive, than why have you not? Perhaps because it is a lifestyle decision and not an investment for the future (which is fine).

The problem for me is that I can't really choose where I live in a general sense (I need to live within driving distance to my job). And emotionally I have other "needs" as well---number of bedrooms, bathrooms, square footage, school district, etc. The reason I own the specific equities and bonds that I do in my investment portfolio is because I believe this collection will offer the best risk adjusted return. The reason I own my specific home has nothing to do with return and everything to do with where and how I want to live.

Consider it as part of your overall portfolio if you wish, but I would encourage you to view it with reason and logic. You own non-diversified asset in a very inefficient market that will almost certainly have unpredictable valuation at best. Try this analogy-- if someone was approaching retirement with 50% of their portfolio in one stock like say China Petroleum. I would be inclined to advise them to have a much bigger buffer in total assets than I would someone who had a diversified collection of index funds.

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leeks
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Re: Apartment 50% of assets

Post by leeks » Tue Oct 09, 2018 1:10 pm

Say the inherited apartment would sell for about 1.5 million. If you had simply inherited 1.5 million in cash, would you have used it to buy an apartment like this? Or would you have spread some of the windfall across other financial goals? If you wouldn't have made this purchase if you had the equivalent in cash, I would sell it and purchase something less expensive that suits your needs (or keep renting for now if you are happy with your current place).

That being said, I can understand how there might be some sentimental attachment that outweighs other considerations (ie one of you grew up in that apartment or has fond memories of family gatherings there, or other friends/relatives live in the same building, etc).

wolf359
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Re: Apartment 50% of assets

Post by wolf359 » Tue Oct 09, 2018 2:10 pm

I consider housing as an expense. In terms of net worth, I track it both investable net worth, and total net worth.

The value of your apartment now represents 50% of your total net worth, but is not part of your investable net worth (which is investments but not your housing.) If it were a rental property, then it would be considered an investment.

Overall, it simply means that you are technically house poor. If you move from a VHCOL area like New York, you can remedy this by selling the property and buying some place cheaper. Since you're planning on continuing to live in the city, you need do nothing. If the price of the apartment goes up or down, it is irrelevant because you are living there.

As time goes on, hopefully your asset base builds, and the percentage housing represents of your total assets will drop. This is one of the consequences of owning property in a VHCOL area.

ryman554
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Re: Apartment 50% of assets

Post by ryman554 » Tue Oct 09, 2018 2:25 pm

muntz wrote:
Mon Oct 08, 2018 7:08 pm

So. I agree completely. However, this place is pretty pricy and we could easily sell it and move to something much less expensive.
It's a lot less complicated than you are making it.

1. Assume the goal of your investing is to become financially independent. Also assume you want to get there as soon as you can, so you are equity heavy.
2. You only are able to invest what you can afford to out of you free cash flow. So you add up expenses and income and figure out how much of the net surplus (hopefully!) you want to invest vs. spend today for some fun.
3. What you are really asking about is, how does this property help you in your goals? Answer assuming you are not financially independent, it doesn't do much. It reduces expenses, so you can invest more and reach FI faster. OR you can choose to sell it and get to FI faster still. In both cases, you need to be just as aggressive with your money -- agruably you may want to be more aggressive if you keep the place, not because the place is worth a lot, but because you are further from your liquid goal.
4. If you really want to do a "what if", then take your investments today and figure out how long it's gonna take to get to where you want. Do the same if you sell your place -- bump up your investments by the net value, but reduce by cost of housing elsewhere. Then increase/decrease your free cash flow the the change in expenses incurred by moving elsewhere which changes your investment amount (not allocation). Compute the new time to FI. See which one wins and by how much.

As you can see,it's not changing your investments at all. Its a place to live which can unlock money if you choose to do so. Your choice is not only about FI, it's about lifestyle and how you want to live. Run the numbers both ways and see what turns up.

My suggestion to you is to keep the place and do business as usual. When the value of your nest egg + the money gained by moving elsewhere gets you to your number, reconsider then.

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