Real Estate Investing vs Primary Home

[MrDelane]

I saw a comment recently from someone concerning REIT investment, and in the replies someone brought up the amount of equity in their primary residence.  The idea of my home equity being 'an investment in real estate' had actually never occurred to me.  I had always considered myself as having 0% invested in real estate.

I had been looking into Vanguard's REIT options, with a goal of having roughly 10% of my portfolio in real estate (I don't plan on buying actual property and have no desire to be a landlord).

Looking at the numbers, my home equity accounts for roughly 25% of my total assets.
So, should I actually consider that to mean that I'm 15% overweighted in real estate?

Is that really the same as having 25% of my stache in an REIT?
Should I therefore wait until that balance is below 10% to consider investing in an REIT (assuming 10% is my goal)?

I'm curious - how do most of you deal with your asset allocation when it comes to real estate and your primary residence?  Do you consider your equity to be the same as an investment in real estate?

If it matters - I have no plans to sell my primary residence at any point in the foreseeable future.

[SeattleCPA]

I don't consider my primary home to be part of our real estate percentage...

But I kind of think you're right that it should be. Or maybe should be.

There's a thread right now in the bogleheads forum where all these retirees with grown kids are talking about downsizing their "family-sized" homes to something that's sized right for a couple or a single person... or about moving from a HCOL to a LCOL area. In these cases, that primary home probably has some of same impact (at downsizing or relocating) as your REIT holdings.

FYI, I think David Swensen suggests this sort of thinking too.

[East River Guide]

I'd say it's the full value, not just the equity.  If you have a 100k house with a 90k mortgage and real estate goes up or down 5%, you've made or lost 5k not 500.   

[MrDelane]

I'd say it's the full value, not just the equity.  If you have a 100k house with a 90k mortgage and real estate goes up or down 5%, you've made or lost 5k not 500.

That's an interesting point.

I suppose my initial thought is that while it may be a part of my total net worth, it does not seem to be something I should calculate as a part of my 'stache given that I plan to continue living in this house during retirement.  If my home appreciates or depreciates significantly it shouldn't have any affect on my withdrawal rates, so long as I still live in the home.

On the other hand, if I were to invest in an REIT or buy additional properties with the intention of generating revenue, then it would seem obvious to include them as part of my asset allocation when calculating my assets.

I'm realizing as I write this that I'm making a distinction between net worth (which I would consider to be the total of assets owned less any liabilities) and what we like to refer to as 'stache (which I would consider to be the assets from which I plan to fund my retirement).

While a primary home is part of every homeowner's net worth, it does not seem to necessarily be a part of every homeowner's 'stache.

So, if the home is not actually a part of the 'stache, does it make sense to still consider it part of your real estate holdings when calculating allocation?  Either answer seems to have some complications with it

(never mind that having one house in one market seems akin to choosing ONE individual stock for your entire domestic equity allocation - in which case not only would I be overweighted in real estate, I would be terribly undiversified within that asset class as well.)

I may be overthinking all of this - I was just curious how everyone else here handled it.

[MrDelane]

FYI, I think David Swensen suggests this sort of thinking too.

I'm not familiar with David Swensen - I'll look into what he has to say on it.
Thanks for the suggestion.

[AM43]

I like real state as an investment, so on top of our primary home, we own several rental properties and about 10% of our portfolio is in Vanguard REITs.

[jjandjab]

Its an interesting concept and I can see both sides of the argument. As my wife and I currently live in a pre-mustachian too-big home, I factor current home equity into our stache/investments, since we plan to sell within two years (when we have two of three in college) and we figure out where to live next. So in some ways our current home is an investment, in that our cash for the next home depends on the market value of our current home when we sell it.

But if you are totally happy where you are, and consider yourself in your forever home, then it is likely reasonable to only count it in your net worth and not as an investment in your stache.

[AdrianC]

FYI, I think David Swensen suggests this sort of thinking too.

I'm not familiar with David Swensen - I'll look into what he has to say on it.
Thanks for the suggestion.

Swenson's model portfolio in Unconventional Success is:

US Stocks 30%
Int. Developed 15%
Emerging 5%
Real Estate 20%
TIPS 15%
Bonds 15%

He mentions that your real estate holdings, including primary residence, could be included on the Real Estate line.

REITs seem so overvalued to me - folks seeking yield - that I don't have any, other than what's in the total market funds.

[SeattleCPA]

FYI, I think David Swensen suggests this sort of thinking too.

I'm not familiar with David Swensen - I'll look into what he has to say on it.
Thanks for the suggestion.

Swenson's model portfolio in Unconventional Success is:

US Stocks 30%
Int. Developed 15%
Emerging 5%
Real Estate 20%
TIPS 15%
Bonds 15%

He mentions that your real estate holdings, including primary residence, could be included on the Real Estate line.

REITs seem so overvalued to me - folks seeking yield - that I don't have any, other than what's in the total market funds.

Swensen changed the emerging market percentage from 5% to 10% and dropped the REITs percentage from 20% to 15% in a later edition.

This change BTW reflected reality that emerging markets had become a bigger market.

[AdrianC]

Swensen changed the emerging market percentage from 5% to 10% and dropped the REITs percentage from 20% to 15% in a later edition.

This change BTW reflected reality that emerging markets had become a bigger market.

Thanks. My library's copy is pretty old and battered.

I enjoyed the book, though he has an odd writing style. I like the way he goes over the different asset classes, and explains why we don't need anything complicated.

I look at REITs the way I would look at individual properties. Would I be interested in an ordinary building yielding the same as a REIT index fund? Not at current yields, I wouldn't.