Do renters need more real estate exposure?

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gatsby11
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Do renters need more real estate exposure?

Post by gatsby11 » Tue Jul 09, 2019 10:58 am

I've seen the many threads on here debating whether or not to invest in REITS. I understand they are already included in index funds, but take a look at this information from the Fed:

https://fred.stlouisfed.org/release/tab ... eid=810420

Summary:

Total US Assets: $117.5 trillion

Real estate: $26.1T
Pension entitlements: $26.4T
Corporate equities and mutual fund shares: $24.4T
Equity in non-corporate business: $13T
Checking, Time Deposits, and Money Market Accounts: $12.6T
Debt securities: $5.5T
All other assets: $9.5T

As you can see, real estate ownership makes up nearly a quarter of all assets in the United States. Given that, I'd argue index funds severely underweight real estate (US Total Market is usually 4-5% real estate). Doesn't that particularly leave renters exposed to great risk?

For context, I'm a fairly young renter in one of the expensive coastal cities with a few hundred thousand in index-fund investments. I could buy a small apartment in my city, but I've not yet chosen to do so for a few personal reasons. The one economic risk where my interests could diverge from the market is a continued run up in real estate prices in my area while I am very unexposed to that sector (according to the Fed data). This would mean my expenses go up a lot and buying a home becomes very difficult, while my wealth has not gone up to pay for the additional costs. This could happen in several ways without me seeing gains in my portfolio/career: more population growth, more foreign buyers, reduced building, etc. Does mitigating this risk necessitate additional real estate exposure?

I am familiar with a common counterargument that REITs are largely non-residential. That's fine, and I'm not necessarily saying REITs are the answer. I also realize I could relocate if there were a large run-up in prices in my area, though that would involve very large personal costs potentially. It just seems to me that there is a large risk here for renters generally, as we are very underexposed to an asset class (because it is mostly privately owned and so doesn't show up in stock indices) that also happens to be for most of us the largest spending category. In my case I spend more on rent than the rest of my expenses combined. The supply of housing is also slow to respond to demand and for many the location they are in is non-negotiable, so large price increases come at huge personal cost.

What do you think?

Dottie57
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Re: Do renters need more real estate exposure?

Post by Dottie57 » Tue Jul 09, 2019 11:04 am

If you own shares in a total U.S. market fund you own REITS. I own my own condo but think of it as a place to live not as an investment. If you want more than market cap, buy into one or more reits.

Church Lady
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Re: Do renters need more real estate exposure?

Post by Church Lady » Tue Jul 09, 2019 11:45 am

In my completely unqualified opinion, I think you need at least an inflation hedge.

The easiest thing is to buy REITS and TIPS (treasury securities).
He that loveth silver shall not be satisfied with silver; nor he that loveth abundance with increase: this is also vanity.

ohai
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Re: Do renters need more real estate exposure?

Post by ohai » Tue Jul 09, 2019 11:47 am

Stocks are an inflation hedge too though.

CrossOverGuy
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Re: Do renters need more real estate exposure?

Post by CrossOverGuy » Tue Jul 09, 2019 11:47 am

You could have index funds for example, such as Total Stock, Total International and a bond index, plus if you wanted to, put money in a REIT Index, in which case you would be over-weighting in the real estate market. But having read some books by Burton Malkiel, Bogle and others, I forget who mentioned it, but real estate can sometimes be thought of as its own kind of investment and doesn't always zig and zag the way other kinds of investments go from day to day. As someone who is a renter and wants to get into real estate investing, it's not imprudent at all to put some money there. If you wanted to, depending on your total portfolio, you might even think of investing up to what would be a downpayment on a property. You might possibly end up over time with a bigger amount than those who think they'll make a killing when they sell their house, and if you invest it at say, Vanguard or Fidelity, you won't have any closing or realtor costs at both buying and selling, just low expense ratios. Nor will you have to wait for a buyer for your house, which stymies many people's plans; you can easily sell your shares when you want. Of course, depending on how long you hold and/or when you sell, you could also lose money. But I think recognized personal financial writers have touted real estate as another viable place to invest if you want to look for some more diversity in your portfolio. Of course, when I look at my Vanguard holdings as a whole and the website's Portfolio Watch feature, it always says that I am overweighted in real estate. It's ok, as long as I (and you if you do it) know it.
Last edited by CrossOverGuy on Tue Jul 09, 2019 12:08 pm, edited 1 time in total.

CrossOverGuy
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Re: Do renters need more real estate exposure?

Post by CrossOverGuy » Tue Jul 09, 2019 12:06 pm

delete - double post - sorry

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Sandtrap
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Re: Do renters need more real estate exposure?

Post by Sandtrap » Tue Jul 09, 2019 12:08 pm

Thanks for posting the interesting link.

There's a lengthy REIT thread not too recently where some of the posts addressed this.
You might find it interesting:
viewtopic.php?f=1&t=283581

A good portion of REITs are in R/E residential income property of various types.
https://www.reit.com/

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Topic Author
gatsby11
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Re: Do renters need more real estate exposure?

Post by gatsby11 » Tue Jul 09, 2019 2:11 pm

Thanks for the replies.
If you own shares in a total U.S. market fund you own REITS. I own my own condo but think of it as a place to live not as an investment. If you want more than market cap, buy into one or more reits.
I already mentioned all of that REIT info in the OP. Please read it before you reply. As for your condo, I'm not sure why you wouldn't consider it in your portfolio. If we were in the same metro area, as things currently stand a big run up in real estate prices would harm me while enriching you. Home ownership can drastically change the impact of market movements.
In my completely unqualified opinion, I think you need at least an inflation hedge.

The easiest thing is to buy REITS and TIPS (treasury securities).
As Ohai mentioned, stocks are an inflation hedge. I don't really see that as a problem. It's price appreciation in local real estate that would be a big problem for my life, as right now I am very underweight US real estate. From what I can tell the market weight of publicly traded real estate is pretty irrelevant, as most real estate is privately owned.
You could have index funds for example, such as Total Stock, Total International and a bond index, plus if you wanted to, put money in a REIT Index, in which case you would be over-weighting in the real estate market. But having read some books by Burton Malkiel, Bogle and others, I forget who mentioned it, but real estate can sometimes be thought of as its own kind of investment and doesn't always zig and zag the way other kinds of investments go from day to day. As someone who is a renter and wants to get into real estate investing, it's not imprudent at all to put some money there. If you wanted to, depending on your total portfolio, you might even think of investing up to what would be a downpayment on a property. You might possibly end up over time with a bigger amount than those who think they'll make a killing when they sell their house, and if you invest it at say, Vanguard or Fidelity, you won't have any closing or realtor costs at both buying and selling, just low expense ratios. Nor will you have to wait for a buyer for your house, which stymies many people's plans; you can easily sell your shares when you want. Of course, depending on how long you hold and/or when you sell, you could also lose money. But I think recognized personal financial writers have touted real estate as another viable place to invest if you want to look for some more diversity in your portfolio. Of course, when I look at my Vanguard holdings as a whole and the website's Portfolio Watch feature, it always says that I am overweighted in real estate. It's ok, as long as I (and you if you do it) know it.
But I don't think I would be overweighting real estate. As I said, it looks to me like index funds just dramatically underweight it relative to its total portion of the economy. Most real estate is privately owned, so public indexes won't account for it. That doesn't necessarily mean individual investors shouldn't, particularly when it's the most impactful area in a typical renter's budget and they stand to gain nothing from market appreciation currently.
Thanks for posting the interesting link.

There's a lengthy REIT thread not too recently where some of the posts addressed this.
You might find it interesting:
viewtopic.php?f=1&t=283581

A good portion of REITs are in R/E residential income property of various types.
https://www.reit.com/
No problem. I read through the thread; a few posters did make my point (renters should have more real estate exposure than currently reflected in public indexes). Most other posters ignored their comments though, and I really would like to start a healthy debate on this topic.

MotoTrojan
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Re: Do renters need more real estate exposure?

Post by MotoTrojan » Tue Jul 09, 2019 2:14 pm

I don't think it makes sense to try to achieve the global allocation. Do you hold bonds/cash in the same weight as the world?

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gatsby11
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Re: Do renters need more real estate exposure?

Post by gatsby11 » Tue Jul 09, 2019 2:54 pm

MotoTrojan wrote:
Tue Jul 09, 2019 2:14 pm
I don't think it makes sense to try to achieve the global allocation. Do you hold bonds/cash in the same weight as the world?
Just looking at the Fed data I posted above, I certainly underweight bonds and cash. Part of that is my greater risk tolerance, but the other thing is I don't see any large risk in underweighting those asset classes. If USD (or other currencies) appreciate in value, stocks almost by definition must as well. Bonds would largely increase in value if stocks did poorly, in which case I will lose out some. However, I don't plan to sell most of my stocks any time soon (I don't expect a cash crunch) and so the long term outlook of my portfolio is fine with me.

An issue I hope I've made clear though is that I don't really understand only looking at publicly owned assets when weighting your portfolio. Bogleheads posters often claim REIT owners are overweighting real estate, but that's only in relation to an arbitrary benchmark (say the S&P 500). According to the Fed data real estate is 22% of US assets (and I don't believe that counts the real estate that most corporations own, as that would be included in their market cap). Why should one prefer to be so underexposed to this sector given it's critical importance to our lives?

A hypothetical: let's say most banks went private for whatever reason. Now the Financials sector only represents 3% of the market cap of the S&P 500 (or whatever index you prefer) instead of the previous ~17%. Assuming there was an easy way to do so, wouldn't it make sense to continue holding a market weight of financials, rather than shrinking your exposure to the publicly traded weight?

This seems even more important for real estate, because it's such a crucial part of our personal finances. A 100% gain in local real estate prices would be fairly excruciating for me, and mostly not reflected in my portfolio. I understand why a homeowner would be less worried, but this seems like something renters may want to account for right? Not sure if there's baskets of REITs for one area or region, but that seems to me like a potential risk strategy. One counterpoint to that may be that you don't want to further concentrate your fortune's on the outcomes of your locality, which is a fair point, but the downside to renters of continued real estate appreciation is quite big.

CrossOverGuy
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Re: Do renters need more real estate exposure?

Post by CrossOverGuy » Tue Jul 09, 2019 3:06 pm

But I don't think I would be overweighting real estate. As I said, it looks to me like index funds just dramatically underweight it relative to its total portion of the economy. Most real estate is privately owned, so public indexes won't account for it. That doesn't necessarily mean individual investors shouldn't, particularly when it's the most impactful area in a typical renter's budget and they stand to gain nothing from market appreciation currently.
Since, I currently rent quite inexpensively for my area, I don't think I'm overweighting real estate either when I look at my portfolio. Vanguard's Portfolio Watch is what says I'm overweighted, and I take that with a bit of a grain of salt, just since it is out of line percentage-wise with what they consider real estate to be as part of the Total Stock Index. I look upon investing in REITS as wanting to have "some skin in the game" that I see others profiting from as either homeowners and/or landlords. So REITs are the cheapest, most diverse and least cumbersome way I've found to invest in real estate.
Last edited by CrossOverGuy on Tue Jul 09, 2019 3:10 pm, edited 3 times in total.

SpaceMonkey
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Re: Do renters need more real estate exposure?

Post by SpaceMonkey » Tue Jul 09, 2019 3:08 pm

Fundamentally, the risk you identified that you are trying to mitigate (being priced out of the residential real estate market in your current city) is not an investment problem. It's an income problem. I don't see how portfolio allocation addresses the problem -- housing prices could skyrocket in your area at a rate faster than REIT returns. You say you could purchase an apartment now but you don't want to for other reasons, so I don't know that there is much else you can do about it. But being a long-term renter is not so bad either.

venkman
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Re: Do renters need more real estate exposure?

Post by venkman » Tue Jul 09, 2019 10:35 pm

gatsby11 wrote:
Tue Jul 09, 2019 10:58 am
The one economic risk where my interests could diverge from the market is a continued run up in real estate prices in my area while I am very unexposed to that sector (according to the Fed data). This would mean my expenses go up a lot and buying a home becomes very difficult, while my wealth has not gone up to pay for the additional costs. This could happen in several ways without me seeing gains in my portfolio/career: more population growth, more foreign buyers, reduced building, etc. Does mitigating this risk necessitate additional real estate exposure?
It doesn't seem like the specific risk that housing costs will go up in your area would be particularly mitigated by owning a geographically diversified portfolio of REITs. The best hedge against that risk is owning property in the area.

The question then becomes what are the expected returns of owning real estate in your area (including the imputed rent), vs. the expected returns of the other things you could be doing with that money.

deanmoriarty
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Re: Do renters need more real estate exposure?

Post by deanmoriarty » Tue Jul 09, 2019 11:46 pm

I have been having this dilemma myself for years, and haven’t found a solution yet.

Like you, I am a youngish (32yo) renter in a VHCOL (SF Bay Area). I have a low 7 figure net worth all invested in a 3 fund portfolio with a 10% overweight in REITs.

I followed the Boglehead model since my early 20s and most folks on this forum would applaud my investment style. Yet, I can’t stop thinking that if I did what all my coworkers did and bought a house here over the past 10 years, I would be sitting on an incredible amount of gains that the stock market has not been able to match at all, due to the effects of leverage and subsidized mortgages, combined with the local appreciation the area has seen.

I basically could have made $1M+ (conservative estimation, I know folks who made close to 2M) in appreciation in about 5 years by just investing 200k in down payment. Crazy returns. It bothers me deeply and I am quite envious when my coworkers discuss the astronomical prices of their houses when I just look at my modest unleveraged SP500 IRR of 8% (I understand it’s not really modest, but compare it to the IRR of a house bought at 1M with 200k down that appreciated to 2M in 5 years...), but I haven’t changed my position yet since prices are insanely high now, and I enjoy the lifestyle freedom that comes with being a renter.

mchampse
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Re: Do renters need more real estate exposure?

Post by mchampse » Wed Jul 10, 2019 12:46 am

Equity in your home is somewhat funny money. You may be sell at some point after prices have risen, but you then have to purchase another home at the same inflated level that you sold at. A home gives you a relatively stable housing cost and when you pay off the mortgage, a much lower one than if you rented (at least that is the case in most of the country). I can’t afford rent where I live, but I can stay here because we bought a long time ago and our payments are based on a seemingly tiny mortgage compared to the ones people are taking out now.

There is the opportunity to break the piggy bank if you really need to. You can refinance or sell and move to a lower cost area and take the proceeds for whatever you might need, but the likely event is that it becomes part of your estate.

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JoMoney
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Re: Do renters need more real estate exposure?

Post by JoMoney » Wed Jul 10, 2019 12:50 am

While I see lots of figures bandied about, I still don't understand why any of that should influence some ones portfolio. Is someone arguing that more real estate exposure would increase returns or reducing risk? Maybe people need more utility exposure or energy or consumer staples...???

Also, I feel compelled to point out that if one is only looking at REITs or stocks that might fall into a "real estate" sector as their primary business when counting real estate in the stock market, they're mis-accounting for the tons of real estate owned by public companies that are not classified as such.
Walmart (and many other public companies) have a ton of real estate on their books
https://www.walmartrealty.com/
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dbr
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Re: Do renters need more real estate exposure?

Post by dbr » Wed Jul 10, 2019 8:59 am

What I think whatever anyone else think is:

No, nobody, renters or not, "needs" any investment in REITs or in real estate. There is no reason whatsoever that it is a big mistake not to be invested in proportion to the world holding of wealth. It is a discussion whether it is even helpful to be so invested. As a practical issue it probably is not possible to invest in the world proportion of assets.

Keep in mind also, for example, that REITs are market traded stocks in companies that own or manage real estate and are not ownership of real estate. Owning a house or an apartment is not ownership of most of the categories of real property that exist either. In addition the single private investor can't diversify investment in real estate, making such attempts risky. Owning one's home is done for many reasons not related to holding a diversified portfolio of assets and probably is not on the whole a very good investment from that point of view. Making a business of owning parcels of rental real estate is a legitimate enterprise but it is a business as well as an investment.

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gatsby11
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Re: Do renters need more real estate exposure?

Post by gatsby11 » Wed Jul 10, 2019 10:47 am

SpaceMonkey wrote:
Tue Jul 09, 2019 3:08 pm
Fundamentally, the risk you identified that you are trying to mitigate (being priced out of the residential real estate market in your current city) is not an investment problem. It's an income problem. I don't see how portfolio allocation addresses the problem -- housing prices could skyrocket in your area at a rate faster than REIT returns. You say you could purchase an apartment now but you don't want to for other reasons, so I don't know that there is much else you can do about it. But being a long-term renter is not so bad either.
I don't follow you on it being an income problem, not an investment problem. All my money is for some future consumption/use. I see no reason to differentiate between the two. I am trying to maximize my well being and eventually help others. To the extent I can tweak my portfolio to make my life better off, I will. I am facing a large risk now in potential real estate price increases, so looking into ways to mitigate that.
It doesn't seem like the specific risk that housing costs will go up in your area would be particularly mitigated by owning a geographically diversified portfolio of REITs. The best hedge against that risk is owning property in the area.

The question then becomes what are the expected returns of owning real estate in your area (including the imputed rent), vs. the expected returns of the other things you could be doing with that money.
Agreed that a broad basket of REITs is not super helpful. Some other options: a regional basket of REITS, a small hand-picked number of REITs specific to my area, one of those real estate crowdfunding platforms invested in my area, or investment property as you mentioned. Obviously the further down that list you go the more concentrated the risk is, which is the big tradeoff. I'd done some DCF analysis on investment properties in my area, and I think a 10-13% return is fairly reasonable. I haven't bought an investment property because it concentrates my risk a lot, I lose liquidity/flexibility, and it takes some sweat equity, but it's something I would consider. Those returns are not so much higher than the stock market that I'd be dying to jump into it though. All the other options are on the table too, but I'd love to hear arguments for/against them.
I have been having this dilemma myself for years, and haven’t found a solution yet.

Like you, I am a youngish (32yo) renter in a VHCOL (SF Bay Area). I have a low 7 figure net worth all invested in a 3 fund portfolio with a 10% overweight in REITs.

I followed the Boglehead model since my early 20s and most folks on this forum would applaud my investment style. Yet, I can’t stop thinking that if I did what all my coworkers did and bought a house here over the past 10 years, I would be sitting on an incredible amount of gains that the stock market has not been able to match at all, due to the effects of leverage and subsidized mortgages, combined with the local appreciation the area has seen.

I basically could have made $1M+ (conservative estimation, I know folks who made close to 2M) in appreciation in about 5 years by just investing 200k in down payment. Crazy returns. It bothers me deeply and I am quite envious when my coworkers discuss the astronomical prices of their houses when I just look at my modest unleveraged SP500 IRR of 8% (I understand it’s not really modest, but compare it to the IRR of a house bought at 1M with 200k down that appreciated to 2M in 5 years...), but I haven’t changed my position yet since prices are insanely high now, and I enjoy the lifestyle freedom that comes with being a renter.
Heh, we've got a lot of similarities. If you've made that money through work you've done very, very well for yourself; quite a bit better than me. It would ease my mind some to know my portfolio is at a level where I don't really have to work, but I'm not there yet (probably ~5 years away). There have been political machinations to try to increase the housing supply in California; so I don't think real estate there is completely bulletproof. But yes, the past 40 years or so have been incredibly kind to RE there.
While I see lots of figures bandied about, I still don't understand why any of that should influence some ones portfolio. Is someone arguing that more real estate exposure would increase returns or reducing risk? Maybe people need more utility exposure or energy or consumer staples...???
I hope that's not all you've taken from my posts, or I've done a poor job explaining. This is not about increasing returns nor reducing portfolio risk, it's about increasing the correlation of portfolio performance to local real estate. Why? As I've explained, housing costs are far and away my biggest expenditure (and the same is true for many renters). How much money I need in the future is strongly correlated to future housing prices in my area. So the one outcome I really want to avoid is large increases in housing prices without large increases in my portfolio. That would be very bad for me. Energy and food costs are near irrelevant; even if both of those tripled I'd still spend far less on them than I do on housing. Housing costs dominate in the expensive coastal cities, and I currently have no protection against future price increases.
Also, I feel compelled to point out that if one is only looking at REITs or stocks that might fall into a "real estate" sector as their primary business when counting real estate in the stock market, they're mis-accounting for the tons of real estate owned by public companies that are not classified as such.
Walmart (and many other public companies) have a ton of real estate on their books
This is pretty irrelevant. If housing costs doubled in my city how much would my portfolio go up? Probably not much; nowhere near double I'd bet. Much of the housing stock is privately owned, and I am extremely underweight in housing. Given my sensitivity to local housing prices, my argument is I should increase my exposure to that area so that my wealth increases if local housing prices do.

petulant
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Re: Do renters need more real estate exposure?

Post by petulant » Wed Jul 10, 2019 10:59 am

I'm going to bring up the obvious answer: buy a condo or house you can live with. You get government-subsidized financing (through the FNMA/GNMA process) and you end up with the one, single, only asset that is perfectly geared to hedge rent increases. If there's some reason you don't want to do that, I have some questions:

Is it because you're not sure you want to stay in the city/metro? If so, why the need to hedge?

Is it because you think you might want to move around apartments? Is that rational or wise?

Is it because of some kind of relationship issue? Can you do something else to mitigate that, or explore whether that's really a problem?

Really the simplest answer is the easiest, and it bears your reconsideration.

Next best thing, if you're primarily motivated by hedging, is to buy a rental condo/house that matches the level you expect to rent. It doesn't have to have stellar returns, but it's a clear hedge.

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unclescrooge
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Re: Do renters need more real estate exposure?

Post by unclescrooge » Wed Jul 10, 2019 12:08 pm

gatsby11 wrote:
Wed Jul 10, 2019 10:47 am
As I've explained, housing costs are far and away my biggest expenditure (and the same is true for many renters). How much money I need in the future is strongly correlated to future housing prices in my area. So the one outcome I really want to avoid is large increases in housing prices without large increases in my portfolio. That would be very bad for me. Energy and food costs are near irrelevant; even if both of those tripled I'd still spend far less on them than I do on housing. Housing costs dominate in the expensive coastal cities, and I currently have no protection against future price increases.
If you live on the coasts, housing will likely be your largest expense over your life time (except maybe taxes).
Those who chose not to hedge this cost are foolish.
You are right to consider this.

There are many ways to hedge this cost.
1. Buy a home in your city.
2. Buy a rental in your city
3. Buy a rental in your state
4. Buy multiple rentals out of state

I have done 1 or more at various times over the past 16 years with varying degrees of success.

It's hard to predict which will offer the highest return it the least headache. But doing something is a better hedge against doing nothing.

pretzelfisch
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Re: Do renters need more real estate exposure?

Post by pretzelfisch » Wed Jul 10, 2019 1:54 pm

deanmoriarty wrote:
Tue Jul 09, 2019 11:46 pm
I have been having this dilemma myself for years, and haven’t found a solution yet.

Like you, I am a youngish (32yo) renter in a VHCOL (SF Bay Area). I have a low 7 figure net worth all invested in a 3 fund portfolio with a 10% overweight in REITs.

I followed the Boglehead model since my early 20s and most folks on this forum would applaud my investment style. Yet, I can’t stop thinking that if I did what all my coworkers did and bought a house here over the past 10 years, I would be sitting on an incredible amount of gains that the stock market has not been able to match at all, due to the effects of leverage and subsidized mortgages, combined with the local appreciation the area has seen.

I basically could have made $1M+ (conservative estimation, I know folks who made close to 2M) in appreciation in about 5 years by just investing 200k in down payment. Crazy returns. It bothers me deeply and I am quite envious when my coworkers discuss the astronomical prices of their houses when I just look at my modest unleveraged SP500 IRR of 8% (I understand it’s not really modest, but compare it to the IRR of a house bought at 1M with 200k down that appreciated to 2M in 5 years...), but I haven’t changed my position yet since prices are insanely high now, and I enjoy the lifestyle freedom that comes with being a renter.
Don't feel to bad once you factor in interest, property tax, maintenance costs and the 6% fee to sale. they are really not that far ahead .
They did get stable rent which in this area has turned out to be important.

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gatsby11
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Re: Do renters need more real estate exposure?

Post by gatsby11 » Thu Jul 11, 2019 2:19 pm

petulant wrote:
Wed Jul 10, 2019 10:59 am
I'm going to bring up the obvious answer: buy a condo or house you can live with. You get government-subsidized financing (through the FNMA/GNMA process) and you end up with the one, single, only asset that is perfectly geared to hedge rent increases. If there's some reason you don't want to do that, I have some questions:

Is it because you're not sure you want to stay in the city/metro? If so, why the need to hedge?

Is it because you think you might want to move around apartments? Is that rational or wise?

Is it because of some kind of relationship issue? Can you do something else to mitigate that, or explore whether that's really a problem?

Really the simplest answer is the easiest, and it bears your reconsideration.

Next best thing, if you're primarily motivated by hedging, is to buy a rental condo/house that matches the level you expect to rent. It doesn't have to have stellar returns, but it's a clear hedge.
It's mostly the first reason. I may need to move away from here for a year or two before coming back. I'm also not 100% set on staying here just yet, though if I were to leave it'd likely be to one of the other expensive coastal cities. Thus the issue wouldn't dissipate, and there's a fair degree of correlation between housing prices in coastal US metros as it is. That said, yes I've considered buying a condo. I haven't because I still have some uncertainty on moving around and because of the high prices here already. I am considering it though, but I'd like to get more advice from people here.

petulant
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Re: Do renters need more real estate exposure?

Post by petulant » Thu Jul 11, 2019 7:20 pm

gatsby11 wrote:
Thu Jul 11, 2019 2:19 pm
petulant wrote:
Wed Jul 10, 2019 10:59 am
I'm going to bring up the obvious answer: buy a condo or house you can live with. You get government-subsidized financing (through the FNMA/GNMA process) and you end up with the one, single, only asset that is perfectly geared to hedge rent increases. If there's some reason you don't want to do that, I have some questions:

Is it because you're not sure you want to stay in the city/metro? If so, why the need to hedge?

Is it because you think you might want to move around apartments? Is that rational or wise?

Is it because of some kind of relationship issue? Can you do something else to mitigate that, or explore whether that's really a problem?

Really the simplest answer is the easiest, and it bears your reconsideration.

Next best thing, if you're primarily motivated by hedging, is to buy a rental condo/house that matches the level you expect to rent. It doesn't have to have stellar returns, but it's a clear hedge.
It's mostly the first reason. I may need to move away from here for a year or two before coming back. I'm also not 100% set on staying here just yet, though if I were to leave it'd likely be to one of the other expensive coastal cities. Thus the issue wouldn't dissipate, and there's a fair degree of correlation between housing prices in coastal US metros as it is. That said, yes I've considered buying a condo. I haven't because I still have some uncertainty on moving around and because of the high prices here already. I am considering it though, but I'd like to get more advice from people here.
Well, so, for using REITs, I'm really skeptical that's a good hedge. For one thing, if you do a REIT index fund, you're getting into a lot of commercial property that might not correlate as well to your particular markets' rental prices (not to mention geographies with different characteristics). Even if you could get a specific REIT that focused on residential property in expensive metro areas, you might not have a great correlation. You'd be hedging your rental prices with the security returns of a REIT. These might not be as correlated as you think depending on how quickly the REITs are moving into and out of properties, how they're financed, how much costs like insurance and taxes are driving rental price changes, how interest rates affect REIT security prices, and whether the P/E on REITs moves in a good or bad direction in general. (It would be a bit like hedging interest rate risk by shorting or buying a bank. Yes, banks make more money in some interest rate environments, but...)

A conservatively financed (30-year fixed) SFH or condo would be the best hedge other than owning your own condo. In this case, if your personal rent goes up due to the rental market in your area, over time you will be able to raise the rent on the SFH/condo. You will also be exposed to the tax/insurance costs, but consider that the price of your hedge. In essence, you're taking on all the costs of home ownership but swapping your home with another apartment.

Of course, you take on the risk that the particular SFH/condo doesn't match your target apartments due to changing preferences, neighborhood differences, etc. Further, if your specific metro and other nearby metros turned out to be not correlated and you're moving around, then a couple somewhat diversified REITs might have turned out better for you. So the real obstacle here is hedging something that you don't know what you're hedging. Loosely, it would be like buying euro bonds for your retirement spending when you don't know whether you'll end up in UK, Poland, or France. Euro bonds might be better than Brazilian or Ethiopian bonds if you know you want to end up in UK, Poland, or France, but still.

I take it that if you have to move, it's not in the immediate future, or you wouldn't be so worried about hedging costs right now. In that case, it might make sense to buy a SFH/condo with a 30-year mortgage while rates are back at historic lows so you can get owner-occupied interest rates. Then, if in a year or so you need to move for work, you can rent the SFH/condo at that time.

Topic Author
gatsby11
Posts: 66
Joined: Sun May 26, 2013 1:58 pm

Re: Do renters need more real estate exposure?

Post by gatsby11 » Fri Jul 12, 2019 11:37 am

petulant wrote:
Thu Jul 11, 2019 7:20 pm
gatsby11 wrote:
Thu Jul 11, 2019 2:19 pm
petulant wrote:
Wed Jul 10, 2019 10:59 am
I'm going to bring up the obvious answer: buy a condo or house you can live with. You get government-subsidized financing (through the FNMA/GNMA process) and you end up with the one, single, only asset that is perfectly geared to hedge rent increases. If there's some reason you don't want to do that, I have some questions:

Is it because you're not sure you want to stay in the city/metro? If so, why the need to hedge?

Is it because you think you might want to move around apartments? Is that rational or wise?

Is it because of some kind of relationship issue? Can you do something else to mitigate that, or explore whether that's really a problem?

Really the simplest answer is the easiest, and it bears your reconsideration.

Next best thing, if you're primarily motivated by hedging, is to buy a rental condo/house that matches the level you expect to rent. It doesn't have to have stellar returns, but it's a clear hedge.
It's mostly the first reason. I may need to move away from here for a year or two before coming back. I'm also not 100% set on staying here just yet, though if I were to leave it'd likely be to one of the other expensive coastal cities. Thus the issue wouldn't dissipate, and there's a fair degree of correlation between housing prices in coastal US metros as it is. That said, yes I've considered buying a condo. I haven't because I still have some uncertainty on moving around and because of the high prices here already. I am considering it though, but I'd like to get more advice from people here.
Well, so, for using REITs, I'm really skeptical that's a good hedge. For one thing, if you do a REIT index fund, you're getting into a lot of commercial property that might not correlate as well to your particular markets' rental prices (not to mention geographies with different characteristics). Even if you could get a specific REIT that focused on residential property in expensive metro areas, you might not have a great correlation. You'd be hedging your rental prices with the security returns of a REIT. These might not be as correlated as you think depending on how quickly the REITs are moving into and out of properties, how they're financed, how much costs like insurance and taxes are driving rental price changes, how interest rates affect REIT security prices, and whether the P/E on REITs moves in a good or bad direction in general. (It would be a bit like hedging interest rate risk by shorting or buying a bank. Yes, banks make more money in some interest rate environments, but...)

A conservatively financed (30-year fixed) SFH or condo would be the best hedge other than owning your own condo. In this case, if your personal rent goes up due to the rental market in your area, over time you will be able to raise the rent on the SFH/condo. You will also be exposed to the tax/insurance costs, but consider that the price of your hedge. In essence, you're taking on all the costs of home ownership but swapping your home with another apartment.

Of course, you take on the risk that the particular SFH/condo doesn't match your target apartments due to changing preferences, neighborhood differences, etc. Further, if your specific metro and other nearby metros turned out to be not correlated and you're moving around, then a couple somewhat diversified REITs might have turned out better for you. So the real obstacle here is hedging something that you don't know what you're hedging. Loosely, it would be like buying euro bonds for your retirement spending when you don't know whether you'll end up in UK, Poland, or France. Euro bonds might be better than Brazilian or Ethiopian bonds if you know you want to end up in UK, Poland, or France, but still.

I take it that if you have to move, it's not in the immediate future, or you wouldn't be so worried about hedging costs right now. In that case, it might make sense to buy a SFH/condo with a 30-year mortgage while rates are back at historic lows so you can get owner-occupied interest rates. Then, if in a year or so you need to move for work, you can rent the SFH/condo at that time.
Thanks for the detailed response. I really appreciate that sort of feedback.

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