Author Topic: How much real estate is too much?  (Read 816 times)

MikeW

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How much real estate is too much?
« on: February 05, 2019, 09:54:46 AM »
After taking a look at my NW (see attached) I noticed a large portion was real estate.
This is 5.5 income generating properties and 1 personal residence.
They have varying degrees of lien. Some 30 year traditional mortgages, some land contract, some owned outright.

While stock to bond ratios and aggressiveness are frequently discussed it occurred to me that this may not apply to landlord portfolios.
Does anyone have wisdom on how much real estate is too much?
How do others stack up?

Fishindude

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Re: How much real estate is too much?
« Reply #1 on: February 05, 2019, 10:25:06 AM »
I've got a little under half of my net worth tied up in real estate.   It's all paid for and some of it generates some pretty decent annual returns.
Will probably acquire a little more (farm ground) over the next few years, but I'm about done.

neo von retorch

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Re: How much real estate is too much?
« Reply #2 on: February 05, 2019, 10:30:11 AM »
To answer your question, you'll need assumptions and/or data.

- What's the return on investment / tied up capital from your equities, bonds and real estate?
- What's the correlation of values on each, and does that tie into your desired asset allocation? (Maybe the real estate values do heavily correlate to equities, but the rental income doesn't, so it's a great hedge against a bear market?)

etc...

SeattleCPA

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Re: How much real estate is too much?
« Reply #3 on: February 05, 2019, 04:13:18 PM »
After reading the "rate of return of everything" research paper, which explains why housing is a better investment historically than equities, I did the calculations for a simple MPT-based allocation... and the suggested optimal allocation to real estate is VERY high:

https://evergreensmallbusiness.com/rate-of-return-on-everything-paper/

Not saying you should go 90% or whatever... but if broadly geographically diversified, it looks to me as if you can actually justify a pretty high percentage.

P.S. That rate of return of everything paper is a really thought-provoking read. Well worth the time.

MikeW

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Re: How much real estate is too much?
« Reply #4 on: February 06, 2019, 05:18:09 AM »
After reading the "rate of return of everything" research paper, which explains why housing is a better investment historically than equities, I did the calculations for a simple MPT-based allocation... and the suggested optimal allocation to real estate is VERY high:

https://evergreensmallbusiness.com/rate-of-return-on-everything-paper/

Not saying you should go 90% or whatever... but if broadly geographically diversified, it looks to me as if you can actually justify a pretty high percentage.

P.S. That rate of return of everything paper is a really thought-provoking read. Well worth the time.

Thanks for this.
I'm still working my way through the details.
This reinforces my desire to diversify my real estate national. I don't know that international is in my scope.

Link to referenced paper:
https://www.frbsf.org/economic-research/files/wp2017-25.pdf

SeattleCPA

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Re: How much real estate is too much?
« Reply #5 on: February 06, 2019, 12:03:49 PM »
I have fallen down the rabbit on this geographical diversification thing. And this quick report:

1. It seems really hard to get data by locality...
2. The data that does exist (government data from places like census bureau I think) suggest you obviously need to be buying in different areas. I.e., not North Seattle and South Seattle.. and probably not Seattle WA and Portal OR but Seattle and then, hmmm, Austin.
3. It didn't look to me as if you needed *that* much geographic diversification. I.e., if you had a couple of different localities, it sort of looked as if that might work.

P.S. Be very interested to hear comments and thoughts from anyone else that falls down this rabbit hole.

RyaninLA

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Re: How much real estate is too much?
« Reply #6 on: February 18, 2019, 11:41:48 AM »
I'm at 25% now and plan to grow RE to 50% of NW by 2025. I don't think it's just a matter of asset allocation if the RE holdings are privately held and there is a practical upper limit that probably increases with a persons NW.

Privately held RE, like a SFR, is more like a business so it doesn't fit perfectly in an allocation like a REIT would. In fact the activity is a business so you could argue that it's an equity position and value it using DCF or similar method. But the point is that it's just not an apples-to-apples comparison for allocation -- it shouldn't be treated like other passive alternatives.

In terms of a reasonable upper limit, it's probably in the range of 75% - 95% for most investors. Like if you took a noob with $50k NW in cash, they could potentially put max 75% into a low cost property and then keep the rest for reserves. If you're sitting on $10M NW, it would be fine to have $9.5M in diversified private RE and $0.5M in other assets, plus lines of credit.

Where I would get nervous is if I had 95% of my NW wrapped up into a single building. But as long as you avoid that, my opinion is that you shouldn't stop growing a RE business for asset allocation reasons.

daverobev

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Re: How much real estate is too much?
« Reply #7 on: February 18, 2019, 12:04:39 PM »
There are two things, aren't there? Return, and hassle factor. Real estate is local, and there is a lot of risk to holding a lot in one area vs thousands of companies the world over.

But also houses can cost you money - actually take money out of your pocket, which stocks can't. IE, sink holes, storms, arson, bad tenants. Transaction costs are high and liquidity is low.

Obviously you can mitigate a lot of that by living close by and being handy - but then you are using your time. Do you want to? If you do, cool.

Having ten houses in ten different places - much better! Except then you have ten different agents.

Vs... ah, an ETF. Every three months it gives you money.

Not that I'm suggesting there is anything wrong with having real estate (and I see others are talking about things which are not houses); leverage is powerful (works both ways, though).

Being a land baron has its appeal. But it depends how hands on you want to be. So I'd say it's more of a philosophical difference.

Dicey

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Re: How much real estate is too much?
« Reply #8 on: February 19, 2019, 06:00:53 AM »
There are two things, aren't there? Return, and hassle factor. Real estate is local, and there is a lot of risk to holding a lot in one area vs thousands of companies the world over.

But also houses can cost you money - actually take money out of your pocket, which stocks can't. IE, sink holes, storms, arson, bad tenants. Transaction costs are high and liquidity is low.

Obviously you can mitigate a lot of that by living close by and being handy - but then you are using your time. Do you want to? If you do, cool.

Having ten houses in ten different places - much better! Except then you have ten different agents.

Vs... ah, an ETF. Every three months it gives you money.

Not that I'm suggesting there is anything wrong with having real estate (and I see others are talking about things which are not houses); leverage is powerful (works both ways, though).

Being a land baron has its appeal. But it depends how hands on you want to be. So I'd say it's more of a philosophical difference.
^^Those are all great points!^^

We are pro-RE. Early on, we were very top heavy, because we live in a HCOLA and RE is crazy expensive.  We got in, got long, fixed rate mortgages and paid them as scheduled, not early. While we weren't paying mortgages off, we were shoveling cash into equities. Then we started buying SFH rentals. They're in a different, lower cost part of the state, and they're all in the same development. This makes things significantly easier. We use the same agent, gardener, handyman, etc. for all three properties. We know the area intimately, and know how to spot a deal. We're up for buying one or two more, if the price and property are right.

Our primary home is worth more than the three rentals combined. My rough guess is that our NW is 2/3 RE and 1/3 equities. Except that DH will also have a defined benefit pension. No idea how to calculate that, but it's nice to know it's there, plus whatever SS ends up being.

Another Reader

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Re: How much real estate is too much?
« Reply #9 on: February 19, 2019, 06:16:05 AM »
There are two things, aren't there? Return, and hassle factor. Real estate is local, and there is a lot of risk to holding a lot in one area vs thousands of companies the world over.

But also houses can cost you money - actually take money out of your pocket, which stocks can't. IE, sink holes, storms, arson, bad tenants. Transaction costs are high and liquidity is low.

Obviously you can mitigate a lot of that by living close by and being handy - but then you are using your time. Do you want to? If you do, cool.

Having ten houses in ten different places - much better! Except then you have ten different agents.

Vs... ah, an ETF. Every three months it gives you money.

Not that I'm suggesting there is anything wrong with having real estate (and I see others are talking about things which are not houses); leverage is powerful (works both ways, though).

Being a land baron has its appeal. But it depends how hands on you want to be. So I'd say it's more of a philosophical difference.
^^Those are all great points!^^

We are pro-RE. Early on, we were very top heavy, because we live in a HCOLA and RE is crazy expensive.  We got in, got long, fixed rate mortgages and paid them as scheduled, not early. While we weren't paying mortgages off, we were shoveling cash into equities. Then we started buying SFH rentals. They're in a different, lower cost part of the state, and they're all in the same development. This makes things significantly easier. We use the same agent, gardener, handyman, etc. for all three properties. We know the area intimately, and know how to spot a deal. We're up for buying one or two more, if the price and property are right.

Our primary home is worth more than the three rentals combined. My rough guess is that our NW is 2/3 RE and 1/3 equities. Except that DH will also have a defined benefit pension. No idea how to calculate that, but it's nice to know it's there, plus whatever SS ends up being.

Great minds think alike, and so do ours! (old saying) I'm over 75 percent real estate but I shovel money into equities every month.  I have two small pensions and Social Security plus IRA's that will have to be liquidated eventually.  Taxable paper assets as well.  Real estate is a business, not a passive investment.  If you are good at it and patient, it will serve you well.  If you are not willing to do the work of running a business and you don't understand real estate, stick to paper investments. 

SwordGuy

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Re: How much real estate is too much?
« Reply #10 on: February 19, 2019, 07:18:27 AM »
We've got roughly $1.0M in real estate investments and $1.5M in stocks and bonds.
I'm not counting our house because it's not an investment.

My goal is to move about $120,000 into two more rental properties over the next couple years.   That will add about $180,000 to our net worth (after fixing up the properties).

More importantly, it will mean that in an "normal" year, we do not have to draw from our stock and bond portfolio to fund our living expenses.  That pretty much eliminates any sequence of returns risk from the stock and bond market. 



Kl285528

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Re: How much real estate is too much?
« Reply #11 on: February 19, 2019, 07:24:47 AM »
I was up to 12 units at one time, and then started selling them off. When I factored in my time, my return on investment dropped way down. Just something to consider.