Author Topic: REIT Allocation  (Read 1478 times)

nihilism122

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REIT Allocation
« on: July 29, 2018, 10:10:01 AM »
All the asset allocation tools I find online only differentiate between stocks and bonds.  Should REITS be considered as one of these two categories, or are they a separate one?  How do you decide what percentage to hold in REITS and does this lower your bond allocation or your stocks or both?

Steeze

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Re: REIT Allocation
« Reply #1 on: July 29, 2018, 11:00:32 AM »
Most people consider REITS as part of thier stock allocation.
Some advocate holding REITs in total market index funds only, while others advocate a larger percemtage by holding an individual REIT or REIT index.

Proponents of increasing REIT exposure usually cite the proportion of real estate held in private equity or using it as an asset with less correlation to US stocks to better diversify. Others might argue the additional diversification is not warranted, adds complexity, and increases risk by overweighting a single sector.

As for what is right for you, only you can answer that. You can check various calculators like cfireism or portfoliocharts to run the allocation through historical data, however, the data does not go back very far as REITS are relatively new, and the past is not predictive of the future.

Personally I overweight REITs, but that is just a preference of mine and may end up helping or hurting me in the long run. Most famous proponent is Swensen who manages the Yale endowment. He recommends 20% of total allocation in REITs.

https://portfoliocharts.com/portfolio/swensen-portfolio/

Raymond Reddington

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Re: REIT Allocation
« Reply #2 on: July 29, 2018, 02:18:23 PM »
IMO they are separate. I don't want the hassle of landlording, so REITs allow me to "collect rent" (ie dividends) without managing a property, but with the benefits of being a minority owner (20% pass through deduction beginning in 2018). Plus buying individual REITs allows me to avoid segments of the market I want no part in (such as high end residential, or shopping mall retail) while managing my allocation in markets that do (stand alone triple net lease, mid end residential, wireless infrastructure, and data centers)

nihilism122

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Re: REIT Allocation
« Reply #3 on: July 29, 2018, 02:37:33 PM »
Most people consider REITS as part of thier stock allocation.
Some advocate holding REITs in total market index funds only, while others advocate a larger percemtage by holding an individual REIT or REIT index.

Proponents of increasing REIT exposure usually cite the proportion of real estate held in private equity or using it as an asset with less correlation to US stocks to better diversify. Others might argue the additional diversification is not warranted, adds complexity, and increases risk by overweighting a single sector.

As for what is right for you, only you can answer that. You can check various calculators like cfireism or portfoliocharts to run the allocation through historical data, however, the data does not go back very far as REITS are relatively new, and the past is not predictive of the future.

Personally I overweight REITs, but that is just a preference of mine and may end up helping or hurting me in the long run. Most famous proponent is Swensen who manages the Yale endowment. He recommends 20% of total allocation in REITs.

https://portfoliocharts.com/portfolio/swensen-portfolio/

Thank you.  This is helpful.  I completely forgot about the Yale endowment, but I read about it years ago when I first got into REITs.  I have 10% in REITS and 10% in Bonds, but I am considering bumping it up.  What is your allocation of REITs and Bonds? 

Steeze

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Re: REIT Allocation
« Reply #4 on: July 29, 2018, 04:58:23 PM »
I am working toward a 20% REIT allocation, but am at around 10% now. Also at 5% bonds working toward 10% bonds.

The bulk of my stash is in my 401k, and due to terrible fees it is in only one US Total Market fund. I am not currently buying REITs or bonds in my taxable account, so I am limited to what I can fit in my IRA for now. As I get more international exposure built up in the taxable account, I will sell those positions in the IRA and convert them to bonds and REITs until the IRA holds only bonds and REITs.

DavidAnnArbor

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Re: REIT Allocation
« Reply #5 on: July 30, 2018, 08:02:06 PM »
REITS represent a small slice of the total US economy so I personally wouldn't go beyond the 10% allocation - think that's enough.

You're better off in plain vanilla US and International Total Stock market indices.

PizzaSteve

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Re: REIT Allocation
« Reply #6 on: July 30, 2018, 08:15:50 PM »
I tend to think of REITs as bondlike stocks or mature largecaps consumer staples type companies, income oriented with a bit of upside, but not going to go 100x like a tech stock might.  A REIT fund will tend to behave more like a dividend stock focused ETF. A bit less correllated than a stock fund to the major indexes.
« Last Edit: July 30, 2018, 08:17:45 PM by PizzaSteve »

FINate

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Re: REIT Allocation
« Reply #7 on: July 30, 2018, 08:53:42 PM »
In recent years RE values ran up extremely rapidly in our area, to the point of our being extremely overweight RE - a good problem to have for sure - but not something I want to drag my feet on for too long. Plus some other considerations as well that I don't want to go into here. Long story short, sold primary residence (to take advantage of the home sale exclusion on cap gains) and moved to a rental we purchased during the Great Recession.

Plan on using half the proceeds in 1-2 years to purchase a home out of state as part of relocation, so half of the proceeds are now in VFSUX.

Still wanted some RE exposure so the other half is in VGSLX. This puts our REIT allocation at about 20% which is probably more than most folks, but I'm much more comfortable with a diversified fund of REITs than the previous situation of having 2x more tied up in a single property.

Steeze

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Re: REIT Allocation
« Reply #8 on: July 31, 2018, 05:36:42 AM »
@FINate , that seems pretty reasonable to me. I am a renter so to me a higher REIT allocation is logical. I do plan on getting a multifamily closer to FI, at which point I will dial back or eliminate the REIT portion of the portfolio.

Car Jack

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Re: REIT Allocation
« Reply #9 on: July 31, 2018, 07:08:53 AM »
REITs are pretty loosely defined.  You might think you're buying a fund that rents stores in a shopping mall or offices in a sky scraper.  Look under the hood.  You might find that the REIT invests in sub prime mortgages or credit default swaps or futures on the Albanian stock market or non-liquid project investments. 

Personally, I see REITs as redundant with my total stock market investments.  How many companies exist that don't own some real estate?  Cheaper, more efficient and safer, in my humble opinion to skip them entirely and stick with total stock market to cover REITs.

FINate

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Re: REIT Allocation
« Reply #10 on: July 31, 2018, 09:40:17 AM »
@Steeze sounds like a good approach. Have often wondered about friends/family in my extreme HCOL area who complain about the difficulty of getting into RE, with prices often outpacing savings. There are a number of REITs that would give people access without the huge up-front cost. Alas, these folks seem more interested in bitching than solutions... and I suppose there's a psychological factor as well of buying something on paper vs. a physical structure you can see and feel. At the point you make the move from REIT to multifamily, what is your strategy w.r.t. taxes?

Agree that you can't just buy REITs w/o understanding what's under the hood. But this is true of any fund/investment class. REITs are less correlated with the total stock market than most asset classes, which I desire because I already have lots of exposure to the total stock market. They also produce relatively high yields (VGSLX currently 3.38%) which can be a disadvantage if you're in a high tax bracket, but I'm FIRE with low income and low expenses. Definitely not a silver bullet, but can be useful in a diversified portfolio if used correctly.

boarder42

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Re: REIT Allocation
« Reply #11 on: July 31, 2018, 09:48:00 AM »
I'm currently planning to use REITs instead of bonds in my FIRE AA

CorpRaider

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Re: REIT Allocation
« Reply #12 on: July 31, 2018, 01:08:32 PM »
Probably everyone knows this, but head's up, VNQ changed indexes within the past year (to a more broad "Real Estate" index, if memory serves). 

boarder42

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Re: REIT Allocation
« Reply #13 on: July 31, 2018, 02:06:07 PM »
REITs are pretty loosely defined.  You might think you're buying a fund that rents stores in a shopping mall or offices in a sky scraper.  Look under the hood.  You might find that the REIT invests in sub prime mortgages or credit default swaps or futures on the Albanian stock market or non-liquid project investments. 

Personally, I see REITs as redundant with my total stock market investments.  How many companies exist that don't own some real estate?  Cheaper, more efficient and safer, in my humble opinion to skip them entirely and stick with total stock market to cover REITs.

they are anything but redundant b/c they do not track with the stock market and anytime you can get assets that arent correlated but produce very similar returns you decresase your SORR.  You can buy a REIT index fund from vanguard just like VTSAX and get the diversification.

Steeze

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Re: REIT Allocation
« Reply #14 on: July 31, 2018, 05:58:32 PM »
@FINate haven't thought too much about the taxes honestly. I will keep the REIT portion invested, but will convert it to stocks & bonds inside my IRA. I will sell stock from the taxable account to pay the down payment. I am sure there will be capital gains tax to pay, but I am not that concerned about it.

Owning rentals is a personal goal and interest and I will do it regardless of taxes when the time is right. I am more concerned with not following through on that goal than having optimized my stash / taxes in the long run. My eighteen year old self would facepunch me for having a 7 figure stash and not owning a single rental. Also planning on working for myself after FI, and won't really FIRE until a few years later. I've always been interested in buying, fixing, owning rentals, selling real estate, and working for myself. FI will be a turning point for me to stop chasing someone else's dreams and start chasing my own. Still have a long way to go though. For now the money is good and I am quickly moving in the right direction.

CorpRaider

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Re: REIT Allocation
« Reply #15 on: July 31, 2018, 07:10:07 PM »
REITs are pretty loosely defined.  You might think you're buying a fund that rents stores in a shopping mall or offices in a sky scraper.  Look under the hood.  You might find that the REIT invests in sub prime mortgages or credit default swaps or futures on the Albanian stock market or non-liquid project investments. 

Personally, I see REITs as redundant with my total stock market investments.  How many companies exist that don't own some real estate?  Cheaper, more efficient and safer, in my humble opinion to skip them entirely and stick with total stock market to cover REITs.

they are anything but redundant b/c they do not track with the stock market and anytime you can get assets that arent correlated but produce very similar returns you decresase your SORR.  You can buy a REIT index fund from vanguard just like VTSAX and get the diversification.

What kind of long term correlation you looking at?  I see about a .75 correlation but that is only since the advent of VTI and VNQ (~8 years).

PizzaSteve

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Re: REIT Allocation
« Reply #16 on: September 26, 2018, 11:26:45 AM »
REITs are pretty loosely defined.  You might think you're buying a fund that rents stores in a shopping mall or offices in a sky scraper.  Look under the hood.  You might find that the REIT invests in sub prime mortgages or credit default swaps or futures on the Albanian stock market or non-liquid project investments. 

Personally, I see REITs as redundant with my total stock market investments.  How many companies exist that don't own some real estate?  Cheaper, more efficient and safer, in my humble opinion to skip them entirely and stick with total stock market to cover REITs.

they are anything but redundant b/c they do not track with the stock market and anytime you can get assets that arent correlated but produce very similar returns you decresase your SORR.  You can buy a REIT index fund from vanguard just like VTSAX and get the diversification.

What kind of long term correlation you looking at?  I see about a .75 correlation but that is only since the advent of VTI and VNQ (~8 years).
Just as a small point, one might remember that VTSAX contains the larger public REITs, as they are part of the total market, so if you own them in addition, then technically you are overweight REITS in your portfolio, for good or bad.

talltexan

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Re: REIT Allocation
« Reply #17 on: September 26, 2018, 12:04:33 PM »
@FINate haven't thought too much about the taxes honestly. I will keep the REIT portion invested, but will convert it to stocks & bonds inside my IRA. I will sell stock from the taxable account to pay the down payment. I am sure there will be capital gains tax to pay, but I am not that concerned about it.

Owning rentals is a personal goal and interest and I will do it regardless of taxes when the time is right. I am more concerned with not following through on that goal than having optimized my stash / taxes in the long run. My eighteen year old self would facepunch me for having a 7 figure stash and not owning a single rental. Also planning on working for myself after FI, and won't really FIRE until a few years later. I've always been interested in buying, fixing, owning rentals, selling real estate, and working for myself. FI will be a turning point for me to stop chasing someone else's dreams and start chasing my own. Still have a long way to go though. For now the money is good and I am quickly moving in the right direction.

Your 18-year-old self ought to be grateful that you were able to bring about that net worth in 13 years that included the worst financial crisis in decades. Of course, if you tell that kid to chill, you might alter the past, and then...**checks notes**Jake Sisko won't be born!