Author Topic: How much real estate is too much?  (Read 4499 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.

SeattleCPA

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Re: How much real estate is too much?
« Reply #2 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 #3 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 #4 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.

FatFI2025

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Re: How much real estate is too much?
« Reply #5 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 #6 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 #7 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 #8 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 #9 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 a "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. 


« Last Edit: February 27, 2019, 05:48:02 AM by SwordGuy »

Kl285528

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Re: How much real estate is too much?
« Reply #10 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.

JoJoP

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Re: How much real estate is too much?
« Reply #11 on: February 22, 2019, 09:03:18 AM »
We have rentals and real estate (whether or not you include our home), is most of our NW.   We have modest IRAs and cash, relative to our NW.   Our next plan is to start dumping the extra cash into stocks, bonds or CDs. Maybe we missed out on major stock market increases, but RE made huge gains too.  RE has worked for us.

With our scenario, close proximity is crucial.  We can dash over in an emergency, and no management company is taking 10% off the top.  If you buy out of town, factor in the 10% cost of outsourcing.  Also, no body cares about your money more than you do.  When you hire a management firm, you are dependant upon their decisions about a major asset and its cash flow.   Are you comfortable with that as a trade off to diversifying into other markets?

People say RE isn't liquid.  It's not quickly liquid, for emergencies, but more like a CD... it takes some time if you want to pull out the full value. 
« Last Edit: February 22, 2019, 11:11:16 AM by JoJoP »

monarda

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Re: How much real estate is too much?
« Reply #12 on: February 22, 2019, 07:26:21 PM »
We are at 75% real estate equity (60% rental property equity (3 buildings) and 15% primary residence equity) and 25% cash/stock/bond in IRAs and other retirement accounts. It's a little high toward real estate, and over the next couple of years we'll aim to get it closer to 2/3 RE and 1/3 not.

The rentals give us a nice cash flow, we try to live off of that and are mostly doing it.

JoJoP

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Re: How much real estate is too much?
« Reply #13 on: February 22, 2019, 08:41:41 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.

@SeattleCPA , I've just spent a couple of hours looking over your blog.   I sent friends links to a few of your articles.  I love the information on real estate portfolios. We've always been real estate heavy, as our stock investments have been lackluster to awful. Now, at semiFIR, I think we can add stocks into the mix, but it's thanks to our rentals (and diligent savings/self employment) that we got here. 

 Thanks for those articles.  Very helpful and thought provoking.

waltworks

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Re: How much real estate is too much?
« Reply #14 on: February 22, 2019, 10:36:04 PM »
We've always been real estate heavy, as our stock investments have been lackluster to awful.

Curious, how did you manage this? Blind peyote-addled monkeys made good money in the last decade.

-W

MrThatsDifferent

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Re: How much real estate is too much?
« Reply #15 on: February 23, 2019, 03:49:53 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.

So whatís the point for you to even have such a large stocks and bond portfolio if you donít plan to/need to access it? Leaving a large inheritance?

Dicey

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Re: How much real estate is too much?
« Reply #16 on: February 23, 2019, 07:21:10 AM »
We've always been real estate heavy, as our stock investments have been lackluster to awful.

Curious, how did you manage this? Blind peyote-addled monkeys made good money in the last decade.

-W
I'm curious too. Individual stocks? Not a lot of diversity? Edward Jones-type investing?

Papa bear

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Re: How much real estate is too much?
« Reply #17 on: February 23, 2019, 08:53:22 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.

So what’s the point for you to even have such a large stocks and bond portfolio if you don’t plan to/need to access it? Leaving a large inheritance?

Real estate is local and rents may or may not keep up with inflation nationally as it is closer tied to local job markets.

Also, long term vacancies or large capital improvements can effect yearly returns and you would need other assets to cover regular expenses and large capital expenses.

I’m at close to 50/50 RE to liquid assets and can cover around 60% annual expenses with rents at the current point.  I would like to get to 100% annual expenses covered by net rents with a large stock/cash position as well.


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JoJoP

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Re: How much real estate is too much?
« Reply #18 on: February 23, 2019, 09:58:12 AM »
We've always been real estate heavy, as our stock investments have been lackluster to awful.

Curious, how did you manage this? Blind peyote-addled monkeys made good money in the last decade.

-W
I'm curious too. Individual stocks? Not a lot of diversity? Edward Jones-type investing?

He hee... The last decade was good to us, but we had a bad history leading up to it.  Here's my story.

Prologue- bought $500 worth of stock as a high school student.  It mostly disappeared through trading.  Sold it and thought Why?

Round 1: Following standard wisdom (invest frequently, go the course) we went a round of Mutual fund investments in the early 90's.   Didn't really know what to do when the market sunk, so we waited it out without cashing in.  We were going the course.   It wasn't much money and became even less.  We watched it slowly dwindle statement by statement.   It was not motivating to put good money after bad. We stopped investing.  We began to buy real estate. Among our first RE investments, we spent our money on a vacation house that we loved and used weekly, and were not sorry.  We're happy with real estate.  This is where our roads diverged toward real estate and away from stocks.

Round 2: Inherited a small chunk, and a money manager  with a golden touch that was managing it for grandma for decades.  We were so impressed with what he'd done historically for grandma.  We didn't know much-- next to nothing, really about stocks, but we wanted to try it again.   Then, the money manager got promoted to Regional Director and our account got shifted to the young up-and-coming guy.   Mr. Up and Coming put our money in funds with front AND back loads. Over time (financial crisis) and then when we cashed out, we learned the reality of load and management fees.  This was about 10-12 years ago and included the financial crisis.  We moved the money out of the management company and to Fidelity about 7 years ago.   In the mean time, we were still buying real estate, learning about real estate, etc and that's going very well.  It was clearly more profitable for us than stocks.  This was our growth phase and we had to choose where the money was going to go.  We chose more real estate because that's what we know and it's working for us.   I got a real estate licence, mainly to buy and sell our own places,  and we leveled up.

Round 3:  Current-- holding some stocks/IRA's/index funds.  It's going well in spite of a couple of big dips with individual stocks.   But we're cautious after rounds 1 & 2.   I joined an investment club hoping to learn more, but the club ended up disbanding.   We are self employed and put in our IRA contributions yearly.   There's a bit that isn't in IRA's that was from Round 2.   In total, relative to our real estate, it's not much, maybe 10% NW tops.  Even though there's growth, the number is small because the investment is small.  Now holding mostly index funds with minimal fees.  It's going well enough to move more money into Fidelity, though. Our mortgages are mostly paid off and we are FIR.   We will not be buying any more real estate. 

Summary: Over time, we moved toward the real estate path.   We understand real estate, we like it, it's been good to us. You can see it, walk around on it, improve it with your own sweat.  Plant a tree and watch it grow. Paint the house and admire it. We like that.  We're hands on people and it's a good fit.  We don't know stocks.  Stocks feel less comfortable, more of a leap of faith. 

FINate

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Re: How much real estate is too much?
« Reply #19 on: February 23, 2019, 10:19:38 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

All very interesting. Thanks for the links.

Something I'm wondering about now: In the aggregate residential real estate isn't very correlated with equities (0.2-0.3), which is great in theory but difficult in practice without something like a REIT fund, and yet Vanguard Real Estate Investment Trust is more highly correlated with equities, 0.75 according to the referenced blog. Is this because the liquidity of a REIT fund makes it more susceptible to market psychology? I.e. are the inherent drawbacks of owning RE directly what leads to it being less volatile?

waltworks

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Re: How much real estate is too much?
« Reply #20 on: February 23, 2019, 10:38:54 AM »
Well, that explains it. You would have made a fortune if you'd just dumped money in and left it alone, but you did the classic panic-and-sell-low thing, combined with hiring active managers. C'est la vie.

Bummer. But it's good that RE worked out for you.

-W

JoJoP

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Re: How much real estate is too much?
« Reply #21 on: February 23, 2019, 04:03:45 PM »
No, @waltworks, I guess I wasn't clear.  We didn't sell anything.  We just bought something else with our investment money. We definitely didn't do the "classic panic and sell" but I'm sad for anyone who did that and possibly never recovered.  We have an older friend who has suffered for many years by an unfortunate series of events that undermined his life savings.  It's a personal reminder that behind all these statistics there are real people, maybe people that you love.  For us,  there was no panic and no selling (except for what was left of the little high school experiment-- that just got whittled away bit by bit.  We just kept "going the course" and finding that, due to our lack of knowledge/poor choices, it wasn't working out as we'd hoped.
Round 1 lost money but eventually went to the money manger, which was round 2
Round 2 was the money manager and got moved to Fidelity and is still there today
Round 3 is current, at Fidelity,  and being funded regularly, now that we're "rebalancing" our RE heavy portfolio.

Tongue in cheek, because it all worked out, I can say we were the ones who got low returns on the chart!  But the bright side is that we found what did work for us.  We put our money where it worked out. 
We just focused our investment funds into real estate, where it ALSO grew tremendously over time, just like the Rate of Return of Just About Everything calculated.  I read through a portion of the report last night, and it appears to be one of the first blocks of research that compiled the long term historical data across these categories. If I read it right, that paper says we might have even done better then if we had stocks.  We feel we did. No complaints here.

 There's some regional variance in RE returns, so we got a boost there by being in a high COL area, even though we're minimally diversified both regionally and as a complete portfolio (being real estate heavy at 90%).   I see that regional variance as the same type of pitfall as making a poor stock choice or not diversifying, but sometimes it works in your favor.  We chose what was easy in a familiar and local RE market where knowledge helped us make good purchases.  Surely there was more money to be made elsewhere, but we did what worked for us. We stuck with what we knew.   I'm grateful we made some good (or lucky) choices and took a path that did work for us, even when the going was tough. Like you, we did have to go the distance during the RE crisis, and we held RE during the same type of crisis/downturn that stocks experienced.  We didn't panic and sell our holdings then, much like you didn't.    It wasn't easy, because of the costs involved with holding, but we managed.  That is a big and negative difference than with stocks.   Now, like stock investors that bought low and stuck it out, we "went the course" and time has worked its magic and we're out the other side. 

Since this is the Real Estate portion of the forum, and the topic is "How much is too much?" I'm chipping in with this example of a 90% real estate portfolio, and some of the investment bumps and personality traits that got us there.  I'm glad your path is working and support all the choices that work for you.  FI takes discipline --to earn, invest whatever you can and save to your goals. Yay!   It's all good!

monarda

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Re: How much real estate is too much?
« Reply #22 on: February 23, 2019, 07:26:59 PM »
Summary: Over time, we moved toward the real estate path.   We understand real estate, we like it, it's been good to us. You can see it, walk around on it, improve it with your own sweat.  Plant a tree and watch it grow. Paint the house and admire it. We like that.  We're hands on people and it's a good fit.  We don't know stocks.  Stocks feel less comfortable, more of a leap of faith.

We agree, but we are probably older than you. We'll plan to keep our rentals for maybe 10-15 more years at which point we'll be in our mid 70's. Then we'll unload. Maybe get some kind of annuity, which we figure is like rentals but without the tenants. Unsure, but we have a decade to figure it out.

How long do you think you'll keep the 90% RE??
« Last Edit: February 23, 2019, 07:28:43 PM by monarda »

SeattleCPA

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Re: How much real estate is too much?
« Reply #23 on: February 25, 2019, 02:09:03 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.

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

All very interesting. Thanks for the links.

Something I'm wondering about now: In the aggregate residential real estate isn't very correlated with equities (0.2-0.3), which is great in theory but difficult in practice without something like a REIT fund, and yet Vanguard Real Estate Investment Trust is more highly correlated with equities, 0.75 according to the referenced blog. Is this because the liquidity of a REIT fund makes it more susceptible to market psychology? I.e. are the inherent drawbacks of owning RE directly what leads to it being less volatile?

I don't know why REITs show (relative to direct real estate investment) a relatively high correlation. I mean, sure, I can throw out plausible ideas. But they would only be guesses. Sorry.

BTW, one problem with a REIT is you've got the managers siphoning off part of the return through their generous salaries, etc. Also, another issue with direct ownership is you do have ability to inject sweat equity and boost your returns... (that's outside the set of issues the Rate of Return on Everything paper looked at though...)


SwordGuy

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Re: How much real estate is too much?
« Reply #24 on: February 27, 2019, 05:58:04 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.

So whatís the point for you to even have such a large stocks and bond portfolio if you donít plan to/need to access it? Leaving a large inheritance?

Well, we were a year out from FIREing when my mom died and we inherited $500,000 worth of farmland.   Otherwise the ratio would be quite a bit different.   

(Actually, I have no idea what that farmland would sell for.  It's a shared investment with my aunt and uncle and I'm not rocking the boat.  It regularly returns $20,000 a year so I valued it based on a stock/bond portfolio and the 4% rule.)

We have a mentally handicapped daughter.  The "extra" investments are there to do our best to make sure there is a lot of income to take care of her.   Our son or grandkids will need to step up and let her live with them or arrange for assisted living, but at least we can do our best to get her an income that will make those choices pleasant or at least manageable.   We don't trust Uncle Sam to take good care of her.

So, our real estate portfolio is intended to cover (along with our social security income) our basic, year in, year out living expenses.   That way, the stock portfolio can grow and won't be depleted by having to sell when the market is way down.


anonperson

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Re: How much real estate is too much?
« Reply #25 on: February 27, 2019, 10:29:31 AM »
Loading up on real estate first then overtime shifting more toward equities has worked well for me.  Real estate currently constitutes 39% of my investable assets (excluding 529 plan).  I bought a building at rock bottom when I was 1.5 years into my first job (high income, low expenses, high SR) using all of my savings and as much leverage as I could get.   I opened a separate bank account and ran the property like a business, and I paid off the mortgage in full with the net income over a relatively short period of time.  A couple years ago I sold the building and 1031íd the proceeds into a duplex in a nice location nearby that grosses $5k a month and nets about $3k a month after mortgage interest, property taxes, insurance and maintenance, and for a while I used the extra income for capital improvements so I could bump up rent and attract better tenants, then I switched to paying down the mortgage.  If my life wasnít so chaotic right now, Iíd probably use the net income to build up a cash reserve to buy another property.  I put very little effort into this asset compared to how hard I work at my day job but itís going to end up being a significant source of retirement income for me.  Iím not remotely handy and I hate painting and cleaning, so Iíve always outsourced those things.  My biggest effort was the 1.5 years of savings that I needed for the down payment.  At various times with both properties Iíve managed capital improvements, which took some effort.  But now I pretty much just coordinate occasional repairs and fill vacancies, and stay disciplined about keeping it completely separate from my personal account (which was much easier before I got married as my partner would rather spend the income on our current lifestyle).  I could always either downsize and live off the income from the duplex (plus Iíd still need and want a fun job), or downsize by moving into one of the two units, both of which are nice enough that Iíd be content, which is why Iíve been able to attract quality tenants.  Based on the assumptions that (1) Iíll be able to reinvest $20k annually into the duplex (net income after $10k in ordinary income taxes because our effective rate is really high right now) and invest $24k annually into my 401k (includes my employerís contribution); and (2) the returns on my 401k will outpace appreciation on the duplex over time, then my allocation of real estate and equities is going to keep shifting in favor of equities, which I think is a good thing. 

Schwatt

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Re: How much real estate is too much?
« Reply #26 on: February 27, 2019, 11:14:56 AM »
I think it depends on your relative knowledge of Real Estate in your area. Real Estate is local.

I am a Realtor and work heavily in the REO/foreclosure area, so I have a pretty good grasp of undervalued properties when I see them.

My investments are over 95% rental real estate because I think it is one of the most recession-proof and safe investments if you are knowledgeable of your market.

Disclaimer: Most everyone on here would do primarily real estate if they could buy properties with >25% COC returns :)

Papa bear

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Re: How much real estate is too much?
« Reply #27 on: February 28, 2019, 06:36:16 AM »
I think it depends on your relative knowledge of Real Estate in your area. Real Estate is local.

I am a Realtor and work heavily in the REO/foreclosure area, so I have a pretty good grasp of undervalued properties when I see them.

My investments are over 95% rental real estate because I think it is one of the most recession-proof and safe investments if you are knowledgeable of your market.

Disclaimer: Most everyone on here would do primarily real estate if they could buy properties with >25% COC returns :)

What market are you still finding 25% cash on cash???!!??


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Schwatt

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Re: How much real estate is too much?
« Reply #28 on: February 28, 2019, 12:23:43 PM »
I think it depends on your relative knowledge of Real Estate in your area. Real Estate is local.

I am a Realtor and work heavily in the REO/foreclosure area, so I have a pretty good grasp of undervalued properties when I see them.

My investments are over 95% rental real estate because I think it is one of the most recession-proof and safe investments if you are knowledgeable of your market.

Disclaimer: Most everyone on here would do primarily real estate if they could buy properties with >25% COC returns :)

What market are you still finding 25% cash on cash???!!??


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Midwest. 2-4 unit multi-family in a medium sized community with a University.

Jon Bon

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Re: How much real estate is too much?
« Reply #29 on: February 28, 2019, 12:24:41 PM »
I think it depends on your relative knowledge of Real Estate in your area. Real Estate is local.

I am a Realtor and work heavily in the REO/foreclosure area, so I have a pretty good grasp of undervalued properties when I see them.

My investments are over 95% rental real estate because I think it is one of the most recession-proof and safe investments if you are knowledgeable of your market.

Disclaimer: Most everyone on here would do primarily real estate if they could buy properties with >25% COC returns :)

What market are you still finding 25% cash on cash???!!??


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Midwest. 2-4 unit multi-family in a medium sized community with a University.

Cool, Post a link and we will check it out.


Schwatt

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Re: How much real estate is too much?
« Reply #30 on: February 28, 2019, 02:22:38 PM »
I think it depends on your relative knowledge of Real Estate in your area. Real Estate is local.

I am a Realtor and work heavily in the REO/foreclosure area, so I have a pretty good grasp of undervalued properties when I see them.

My investments are over 95% rental real estate because I think it is one of the most recession-proof and safe investments if you are knowledgeable of your market.

Disclaimer: Most everyone on here would do primarily real estate if they could buy properties with >25% COC returns :)

What market are you still finding 25% cash on cash???!!??


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Ohio is one of the best multi family markets in the country for COC return. How hard are you looking?

Disclaimer: I don't live there, just research I have done.

Papa bear

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Re: How much real estate is too much?
« Reply #31 on: February 28, 2019, 08:44:41 PM »
I think it depends on your relative knowledge of Real Estate in your area. Real Estate is local.

I am a Realtor and work heavily in the REO/foreclosure area, so I have a pretty good grasp of undervalued properties when I see them.

My investments are over 95% rental real estate because I think it is one of the most recession-proof and safe investments if you are knowledgeable of your market.

Disclaimer: Most everyone on here would do primarily real estate if they could buy properties with >25% COC returns :)

What market are you still finding 25% cash on cash???!!??


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Ohio is one of the best multi family markets in the country for COC return. How hard are you looking?

Disclaimer: I don't live there, just research I have done.

Columbus market is terrible for coc rentals right now.  I’ve been in the northeast Ohio market with multi units, usually looking at 20% coc for properties.  25% coc I haven’t seen since 2012!


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Schwatt

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Re: How much real estate is too much?
« Reply #32 on: March 01, 2019, 03:20:44 PM »
If one is truly after cashflow, I believe the sweet spot is 2-4 unit, undervalued properties in mostly C neighborhoods. Good tenant screening and PM is the key.

Paying market rates in A and B neighborhoods is not the best for Cashflow. Appreciation, yes.

Another Reader

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Re: How much real estate is too much?
« Reply #33 on: March 01, 2019, 03:45:33 PM »
If one is truly after cashflow, I believe the sweet spot is 2-4 unit, undervalued properties in mostly C neighborhoods. Good tenant screening and PM is the key.

Paying market rates in A and B neighborhoods is not the best for Cashflow. Appreciation, yes.

How many properties do you own and where?

Sam Richards

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Re: How much real estate is too much?
« Reply #34 on: March 04, 2019, 02:58:52 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?
I do not think that there is such a thing as too much real estate. In my opinion, the more the better. Real estate is one of the most stable investments out there and it is definitely going to bring you value over time.

Schwatt

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Re: How much real estate is too much?
« Reply #35 on: March 08, 2019, 09:41:58 AM »
I think it depends on your relative knowledge of Real Estate in your area. Real Estate is local.

I am a Realtor and work heavily in the REO/foreclosure area, so I have a pretty good grasp of undervalued properties when I see them.

My investments are over 95% rental real estate because I think it is one of the most recession-proof and safe investments if you are knowledgeable of your market.

Disclaimer: Most everyone on here would do primarily real estate if they could buy properties with >25% COC returns :)

What market are you still finding 25% cash on cash???!!??


Sent from my iPhone using Tapatalk

Ohio is one of the best multi family markets in the country for COC return. How hard are you looking?

Disclaimer: I don't live there, just research I have done.

Columbus market is terrible for coc rentals right now.  Iíve been in the northeast Ohio market with multi units, usually looking at 20% coc for properties.  25% coc I havenít seen since 2012!


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New report:

https://www.foxbusiness.com/features/looking-for-a-home-under-100k-better-head-to-ohio-report-finds

drmoneybeard

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Re: How much real estate is too much?
« Reply #36 on: March 09, 2019, 01:08:59 PM »
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?

Mine is very similar to yours.
63% RE
26% Equities
10% cash (I'm hoarding)

I used to think I should work on balancing towards more equities, but after some of the info in this thread, I'm rethinking that.

SwordGuy

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Re: How much real estate is too much?
« Reply #37 on: March 09, 2019, 07:22:19 PM »
I used to think I should work on balancing towards more equities, but after some of the info in this thread, I'm rethinking that.

Our first 3 rentals provided a $30k bump in net worth as soon as it was renovated plus about $4800 a year in profits for an investment of $45k to $50k.   Not a bad deal.   In theory we could wait 2 years and then refi them to get ~70% of the new value back out as cash (though of course the cash flow would suffer since they would now have a mortgage).

In theory I could do this:

Purchase plus renovation cost of $50k.   
New value $80k.   
$9.6k rental profits for 2 years.   
Refi 70% of value = $56k.
Cash now in hand = $65.6k, or $16.6k more than I started with.
Cash flow reduced to ~$750 a year with the mortgage at 6%.  Tenant pays for the house.

So, in theory, I would invest $50k for 2 years to make $16.6k for a 16.8% return per year and get a free house plus $750 a year in cash flow income.  And that $65.6k cash in hand could be used to get another property.

If I weren't FIRED already I would seriously do all that work to double the number of properties I owned.

Real estate investments are one of the best FIRE accelerants I know of.










partgypsy

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Re: How much real estate is too much?
« Reply #38 on: April 05, 2019, 09:48:00 AM »
Here's a question. I am seeing someone (just dating, no merged finances) who is in real estate. Buys, fixes up and rents houses. The thing that is worrisome to me, is that he wants to cash flow everything, but his preference is that all his cash flow is to go back into his businesses. Whether it be, repair work, upgrades, paying property taxes. If he has enough of a cushion he then takes that money and buys another property. Even after saying he was going to take a break, he bought 3 properties in the past year. Two of them are extreme fixer uppers that need extensive work (and investment) before being able to be rented.

For me, it seems like he cuts the cash flow part very tight. From what I understand, he has nothing saved aside from his real estate. His argument he doesn't need savings, because if he needed money he could always sell one of his properties. But in the same breath he says he doesn't ever wants to sell any of his properties (he is emotionally attached to the idea of owning lots of property).

Anyone have a good sound argument for saving money separate from real estate?
« Last Edit: April 05, 2019, 09:50:23 AM by partgypsy »

sammybiker

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Re: How much real estate is too much?
« Reply #39 on: April 05, 2019, 10:37:21 AM »
@partgypsy

Plenty of sound arguments but probably none that will work.  If he has equity (aka he can sell a house if he gets into a pinch) or credit or both, he's going to feel pretty confident running with thin reserves.  I'm not saying this is a best practice but will admit that I do the same from time to time.

I assume he's had a string of good projects lately?  Once he hits a bad project, where he makes significantly less than expected, breaks even or loses money, he'll get that reality check and probably reset himself for a bit.

The dopamine release from making money flipping/capturing equity/finding a good deal in real estate is, in my experience, no different than the release I used to get day trading or I get playing poker, at least when winning.  When you're winning, you experience a high and naturally want more.

Goodluck.  Not an easy conversation to have.  I've had a couple exes bring this up over the years and whether they intended or not, it came off not as they were truly concerned for my financial well being but more that they were 1) less risk adverse, 2) didn't support my pursuits and 3) almost in competition with my passion for REI vs my passion with them personally. 

That sounds odd but it was my experience on two different occasions with prior serious relationships (financially unmerged).  Something to think about if you do go about framing this discussion.
« Last Edit: April 05, 2019, 10:41:24 AM by sammybiker »

partgypsy

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Re: How much real estate is too much?
« Reply #40 on: April 05, 2019, 11:02:22 AM »
He's an impressive person in terms of thinking of something he wants to do, and executing it. He is an extremely capable and competent person.  In the past he invested in a couple areas that were great to invest in, and gentrified. However, the last few years he has been buying properties in an area that is, dubious (it is literally considered the worst town in our state in terms of crime, education, job opportunities, etc. Even people who work there, often live elsewhere). Demand for housing is flat or falling. But, he feels that it is a buying opportunity similar to what he has already experienced. And rather than finish a project there and rent it, see how the market actually is, he keeps buying yet another property. It's been 2-4 years and they are still at point of needing money and no return. It seems to me if something is speculative, to invest a smaller percentage of your money until you figure out if it's worth it. But every time he buys another property, more of his net worth is weighted to that area. and the more he is personally invested, that the whole enterprise must succeed.
 
I know he wants me to be super supportive and positive, and not question what he is doing. And over all I do appreciate he is such a positive can-do person. He just seems to have a big blind spot in this case.
« Last Edit: April 05, 2019, 11:36:56 AM by partgypsy »

sammybiker

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Re: How much real estate is too much?
« Reply #41 on: April 05, 2019, 11:54:36 AM »
@partgypsy   Gotcha.  I have nothing further to add but good luck.

He's an impressive person in terms of thinking of something he wants to do, and executing it. He is an extremely capable and competent person.  In the past he invested in a couple areas that were great to invest in, and gentrified. However, the last few years he has been buying properties in an area that is, dubious (it is literally considered the worst town in our state in terms of crime, education, job opportunities, etc. Even people who work there, often live elsewhere). Demand for housing is flat or falling. But, he feels that it is a buying opportunity similar to what he has already experienced. And rather than finish a project there and rent it, see how the market actually is, he keeps buying yet another property. It's been 2-4 years and they are still at point of needing money and no return. It seems to me if something is speculative, to invest a smaller percentage of your money until you figure out if it's worth it. But every time he buys another property, more of his net worth is weighted to that area. and the more he is personally invested, that the whole enterprise must succeed.
 
I know he wants me to be super supportive and positive, and not question what he is doing. And over all I do appreciate he is such a positive can-do person. He just seems to have a big blind spot in this case.

ilsy

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Re: How much real estate is too much?
« Reply #42 on: April 05, 2019, 02:17:36 PM »
He's an impressive person in terms of thinking of something he wants to do, and executing it. He is an extremely capable and competent person.  In the past he invested in a couple areas that were great to invest in, and gentrified. However, the last few years he has been buying properties in an area that is, dubious (it is literally considered the worst town in our state in terms of crime, education, job opportunities, etc. Even people who work there, often live elsewhere). Demand for housing is flat or falling. But, he feels that it is a buying opportunity similar to what he has already experienced. And rather than finish a project there and rent it, see how the market actually is, he keeps buying yet another property. It's been 2-4 years and they are still at point of needing money and no return. It seems to me if something is speculative, to invest a smaller percentage of your money until you figure out if it's worth it. But every time he buys another property, more of his net worth is weighted to that area. and the more he is personally invested, that the whole enterprise must succeed.
 
I know he wants me to be super supportive and positive, and not question what he is doing. And over all I do appreciate he is such a positive can-do person. He just seems to have a big blind spot in this case.
If you replace he with she, it's written about me.
By the time you figure out that it's worth buying, other investors will figure that out too, and you miss on a great deal. Though I do have a return, otherwise I won't be able to keep going, since my actual W-2 is not impressive.
But I have recently decided that I don't need a 6m reserve (12k in my case) to keep in my bank, since I can totally sell one of the properties, though they bring more money if I rent, and I can always get a new (or old CC) with that amount with no interest for at least 12m.

clarkfan1979

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Re: How much real estate is too much?
« Reply #43 on: April 05, 2019, 02:47:33 PM »
I think it's difficult to make the case for too much real estate. However, I think too much leverage on the real estate you own can be problematic. When expanding beyond a primary residence, I try to avoid having less than 40% equity. I'm probably currently around 40-45% equity, depending on market conditions.

I am a little real estate heavy. We own 2 rentals and a primary residence with a mother-in-law suite. A conservative estimate on our current net worth is around 650K. This is based what our properties would sell for if we needed to do a fire sale. We have approximately 40% equity across the 3 properties.

Assets
Real Estate Equity: 550K (81%)
Retirement Accounts (Stocks): 115K (17%)
Cash: 15K (2%)

Liabilities
Student Loans: 30K (100%)


partgypsy

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Re: How much real estate is too much?
« Reply #44 on: April 05, 2019, 03:44:18 PM »
I guess only time will tell. I hope he is right.

FatFI2025

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Re: How much real estate is too much?
« Reply #45 on: April 06, 2019, 09:34:51 AM »
Here's a question. I am seeing someone (just dating, no merged finances) who is in real estate. Buys, fixes up and rents houses. The thing that is worrisome to me, is that he wants to cash flow everything, but his preference is that all his cash flow is to go back into his businesses. Whether it be, repair work, upgrades, paying property taxes. If he has enough of a cushion he then takes that money and buys another property. Even after saying he was going to take a break, he bought 3 properties in the past year. Two of them are extreme fixer uppers that need extensive work (and investment) before being able to be rented.

For me, it seems like he cuts the cash flow part very tight. From what I understand, he has nothing saved aside from his real estate. His argument he doesn't need savings, because if he needed money he could always sell one of his properties. But in the same breath he says he doesn't ever wants to sell any of his properties (he is emotionally attached to the idea of owning lots of property).

Anyone have a good sound argument for saving money separate from real estate?

It sounds like he just has a higher risk tolerance than you. It's not the worst thing in the world to be emotionally attached to the idea of owning lots of property because that's a business. It's better than being emotionally attached to owning a big house, a boat, classic cars...

There's an argument for saving money separate from real estate, which is diversification. I plan to be 1/3 in real estate when I FIRE, but would be comfortable up to 3/4. Diversification probably won't resonate with your BF because it implies a lower-risk, lower-reward investment.

My recommendation is to show some interest and ask him questions about his ventures. If you've earned his respect, he might start asking your opinion. Instead of recommending saving more money elsewhere you could start with giving him ideas about other geographic markets -- still high-risk high-reward but at least you get some diversification.
« Last Edit: April 06, 2019, 09:45:37 AM by FatFI2025 »

Papa bear

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Re: How much real estate is too much?
« Reply #46 on: April 06, 2019, 11:15:49 AM »
Here's a question. I am seeing someone (just dating, no merged finances) who is in real estate. Buys, fixes up and rents houses. The thing that is worrisome to me, is that he wants to cash flow everything, but his preference is that all his cash flow is to go back into his businesses. Whether it be, repair work, upgrades, paying property taxes. If he has enough of a cushion he then takes that money and buys another property. Even after saying he was going to take a break, he bought 3 properties in the past year. Two of them are extreme fixer uppers that need extensive work (and investment) before being able to be rented.

For me, it seems like he cuts the cash flow part very tight. From what I understand, he has nothing saved aside from his real estate. His argument he doesn't need savings, because if he needed money he could always sell one of his properties. But in the same breath he says he doesn't ever wants to sell any of his properties (he is emotionally attached to the idea of owning lots of property).

Anyone have a good sound argument for saving money separate from real estate?

Tell him he needs some dry powder to take advantage of the next great deal. Then suggest he invest that in the market so it can still grow if another deal doesn’t come along anytime soon.

Then maybe it just stays in the market and he uses his working capital to do the next deal.  There’s a loss aversion thing mentally. It’s harder to get rid of something that you already have, in this case, money in the market. 

Maybe it works.  Maybe it doesn’t. 


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clarkfan1979

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Re: How much real estate is too much?
« Reply #47 on: April 06, 2019, 02:27:06 PM »
I guess only time will tell. I hope he is right.

I think it's really hard to know the risk without knowing his equity position. Some people use their cash flow from rentals to buy additional rentals with no financing. Their equity position is 100%. I think it would be very difficult to conclude that this is risky. On the opposite end, in 2002 to 2008 some people built a rental portfolio on 100% financing. I don't think it turned out well for those people. Most of us are somewhere in between those numbers.

If he is at 50% equity or better, selling-off one property to raise capital is sound logic and he can sustainably grow at his current pace.

You make money in real estate by buying property for less than what they are worth (undervalued). It has nothing to do with buying in "nice neighborhoods" More people are more comfortable in buying "nice neighborhoods", which can make it more difficult to turn a profit.


partgypsy

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Re: How much real estate is too much?
« Reply #48 on: April 06, 2019, 04:32:28 PM »
I guess only time will tell. I hope he is right.

I think it's really hard to know the risk without knowing his equity position. Some people use their cash flow from rentals to buy additional rentals with no financing. Their equity position is 100%. I think it would be very difficult to conclude that this is risky. On the opposite end, in 2002 to 2008 some people built a rental portfolio on 100% financing. I don't think it turned out well for those people. Most of us are somewhere in between those numbers.

If he is at 50% equity or better, selling-off one property to raise capital is sound logic and he can sustainably grow at his current pace.

You make money in real estate by buying property for less than what they are worth (undervalued). It has nothing to do with buying in "nice neighborhoods" More people are more comfortable in buying "nice neighborhoods", which can make it more difficult to turn a profit.

hmm. That's what he said too (too many people want to buy in our town, and so you can't make money). I don't know his equity versus financing; all I know is some have mortgages and some do not (purchased with cash). 

My concern, is even if he doesn't want to buy in our town, there are a lot of nearby areas that are both less expensive than our town and more potential for growth than where he is investing in. I guess it's fine if he thinks he can buy and then rent as lower cost housing for an amount that makes it worth it, but he also mentions he thinks the area will improve in value and I disagree. Even people who work there don't want to live there.
« Last Edit: April 06, 2019, 04:56:52 PM by partgypsy »

JoJoP

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Re: How much real estate is too much?
« Reply #49 on: April 06, 2019, 09:28:49 PM »
@partgypsy, it seems like he's doing ok and he has a plan.  It's his business, no?

I think the upthread posters hit it on the head: His risk tolerance is higher than yours.   Not every path is straight up, but he must have an idea/reason he's buying these properties as opposed to the ones you think would be better.   My suggestion is that you, since you're not part of the business nor are your finances commingled, support him and his projects, his hopes and dreams. You've got to give some credit to the fellow with his tail on the line, and the old "arm chair quarterbacking" is an easy position to get right.

Did you ever ask him why here and not there?  What did he say?   
As far as liquid assets, yes, houses are liquid.  They aren't as easy to liquidate as stocks-- it usually takes 3-6 months to get the money from a sale, start to finish-- but they are assets and can be sold if necessary.   Our piggy bank is 90% real estate, so "too much" didn't kick in to our portfolio for a long time.  There are plenty of online resources for RE investing, like Bigger Pockets-- where that kind of behavior/ratios would seem normal and be encouraged,  but MMM not as much.