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Real Estate and Asset Allocation

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  • Real Estate and Asset Allocation

    Hi All,

    I am fairly new to this forum and have found the site a great source of information. I have the following question and hope someone can help me with it.

    I am investing into the Vanguard Growth LifeStrategy Index Fund (Australia). It has a 70/30 stock/bond mix. I also have money in my tax deferred accounts and it is also invested in 70/30 Stock/bond allocation. Other than this, I have 3 investment properties with outstanding mortgage. Now from a portfolio perspective, if I look at just the stock/bond mix then I am sitting at 70/30 but if I include the real estate into this then I have 80/15/5, property/shares/bond mix.

    Other than that I do not have an property and am renting myself.

    If I include the rental properties into my portfolio then 80% in property feels a bit too high. And given that I have mortgage owing on them then then bond component would be negative (I think).

    So should I be increasing my bonds or getting rid off properties or not include property into the equation and be happy with the 70/30 share/bond mix?

    My plan is to retire in 10 years. I am 38 years old now.


  • #2
    When you state you are 80/15/5 ( real estate, stocks, bonds) are you talking about the estimated market value of the real estate or your actual equity position? There's obviously a big difference in my mind, and I personally only count my equity value. In my opinion you should only count that as well.  If 80% of your overall assets is in real estate, that is quite high.  I know people that do it, but I can't stomach much more than 20-30%. Then again, I was an investor through the 2007/8 crash, so I remember the pain of holding single family homes in that timeframe.

    You can balance that out over time by making all future savings and any positive cash flow from real estate into market investments. Or you could liquidate one or two of the investment properties. However, you know your local real estate market best, and the decision to sell should not be made on a portfolio balancing issue. Are they cash flowing? What point in the real estate cycle are you locally? What was your planned hold period?

    Someone will likely respond that you need an investment plan...and they are right.

    As far as increasing your bond purchases...arrgghh...not a fan of that idea, but once you have a well constructed investment plan then you just follow it.




    • #3
      I agree with NJ doc that you should only consider your equity value when calculating your allocation. 80% in real estate is undoubtedly high. Most institutional investors put 10 % to 20 % in real estate. One important consideration though is that you don't own your home, so you might consider part of your investment a hedge against buying a home in the future. If you have some diversification in your real estate, and you have a 10 year time horizon, being overallocated to real estate is not a bad thing in my opinion. It will probably be more stable than the stock market and there is on,y downside to bonds in this rate environment.

      if however you own three rental properties in the same market, you should think about diversifying. I am the CEO of CAPFUNDR, an online real estate fund platform, so i admit I may be biased towards real estate.





      • #4
        By the way you can download a white paper on real estate allocation from our website at


        • #5
          Agree with the above of course, but also just note that unless you continue to accumulate properties as a choice over market investments than this ratio should change naturally over time.

          If I did the calculations like you do them, I also will be primarily real estate (my house and a rental), but I know that will be changing as I am primarily putting it into the market right now.


          • #6
            I suppose the technical answer is that you should include the entire value of the property as real estate, and include the mortgage on it as a negative bond. But in practice, I think I'd just count the equity as property. So set the percentage of your portfolio you want in real estate, and you can use REITs to rebalance as needed. So if you wanted to be 40/20/40 (Stocks:Bond:Real estate) and your equity were 30%, then you'd be 10% REITs.  If the equity went up in value to 40%, you sell the REITs to buy more stocks/bonds.
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