Mark Bole wrote:

- quote -

I see your point, but this thread started asking if a house which had a
100% mortgage was less a real estate asset allocation than a full paid
house and I'd think not. If I read you correctly, you'd not agree that a
30yr bond and cash both should be treated as cash. We can split hairs
over short vs long term, and perhaps agree that the pie chart can take
on all the granularity one chooses.

In terms of timeline, you are right, but I still am not convinced that
the owner has any less house in his portfolio due to the mortgage (the
reverse mortgage aside, since its nature isn't that of a standard loan,
but the more I think about it, it's like a put option for the homeowner.
I still need to sleep on that thought)
JOE

joetaxpayer wrote:

[...]
- quote -

Hmm, I'm not so sure that makes sense. Back when I learned some
accounting theory, I was taught that short-term (current) assets should
be matched to short term (current) liabilities, and long term to long term.

On my personal balance sheet, I list assets in decreasing order of
liquidity, ditto for liabilities. Therefore, while credit card debt,
accrued property tax, insurance, and anything else that I expect to pay
off in a year or less, "cancels" my cash positions, my mortgage clearly
"cancels" my homeowner's gross asset value (market value of my house) --
they are both long-term.

In other words, I see the mortgage canceling (offsetting) the house
value not because it is secured by the house, but rather because they
are both long term. Perhaps 12 month's worth of mortgage payments would
"cancel" my cash position, because 12 month's worth of payments could be
considered short-term (current). But the remaining 0 to 29 years worth
of mortgage payments (assuming 30-yr term) are clearly long term, I
don't have to worry about paying them for at least a year and probably
much longer!

If I borrowed against my home equity to purchase a rental property, same
thing: long term liability matches long term asset. If I borrowed
against my home equity to buy-and-hold stocks, same thing: long-term
liability matches long term asset.

-Mark Bole

Beliavsky wrote:

- quote -

Ok, I am wrong. I see your point, to a degree. Portfolio-wise you have
swapped the real estate for an annuity (or single payment as you
suggest), if the terms are as you describe, i.e. you can't be forced to
move out, your estate won't owe any money to the bank. And there may be
a little option thing going on as you would have the potential that if
the property shop up in value, you still have the option to sell and
zero out the reverse mortgage.
JOE

On Sep 5, 5:08 pm, "Default User" <defaultuse...[at]yahoo.com> wrote:
- quote -

I think Joe is incorrect -- a reverse mortgage DOES reduce one's
exposure to real estate. If your home is worth $500K and you take out
a reverse mortgage on it, getting a lump sum, the bank cannot call the
loan and force you to sell the house just because the market value of
the house declines. If you plan to live in the house until death and
you don't care about leaving an estate, I think you are indifferent to
the value of the house.

joetaxpayer wrote:

- quote -

Correct.



Brian

--
If televison's a babysitter, the Internet is a drunk librarian who
won't shut up.
-- Dorothy Gambrell (http://catandgirl.com)

Default User wrote:
- quote -

But that still doesn't change the amount of house in the portfolio, as
selling a stock would. As I drew down at the magic 4%, over time the
'real estate' portion would be a much larger piece of the pie. It just
creates a loan against the house.
JOE

joetaxpayer wrote:


- quote -

Well, you can via a reverse mortgage. Whether that's a cost-effective
method is another question.




Brian

--
If televison's a babysitter, the Internet is a drunk librarian who
won't shut up.
-- Dorothy Gambrell (http://catandgirl.com)

On Sep 4, 9:12 pm, Tad Borek <bore...[at]pacbell.net> wrote:
- quote -

In general, I like equity REITs. They have a simple business model of
owning property and paying out rent after expenses as dividends. They
benefit from not paying corporate income taxes, and CEOs are forced to
be disciplined in allocating capital because of the limited ability to
retain earnings.
Of course, at a low enough price they are attractive as an asset class
and at a high enough price they are unattractive. I think investors
and especially the financial planners who advise them need to have
basic valuation models for the various asset classes rather than
suggesting a fixed x% allocation at all times. "Everyone knows" that
market timing is BAD, but I think buying things without some
conception of fair value is worse.

joetaxpayer <joetaxpayer[at]nospam.com> writes:

- quote -

That's why I'd use the term "exposure" not equity. As in:
You have $50k equity in the house (meaning the amount you'd
net if you sold it off today), but you have $250k *exposure*
to real estate - meaning that if real estate goes up by 10%,
your net worth due to that move goes up by 10% * 250k = $25k.

- quote -

Pie charts kind of stink when there are potential negative
values included!


--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

kastnna wrote:
- quote -

Don't get too drawn into the bond analogy. Rich helped me out by calling
it a 30yr sinking fund, which better describes its nature, but even that
may be throwing you off.

In the big pie chart of asset allocation, as I previously posted, why
would debt cancel real estate equity? You hold $250K of house and do so
regardless of the mortgage attached. The impact to your net worth if the
house goes up or down 20% is +/- $50K, again, regardless of the
mortgage. To put it a different way, say I have a banker friend who
would offer me a personal line on my signature, instead of the mortgage.
Does my position change because my loan is not secured by the house?

I'm guessing you are thinking "equity" as in I have a $250K house, but
$200K mortgage, so I have $50K in equity. Well, I'd not keep too many
friends if I felt compelled to offer, "no, you really have $250K equity
as that's the value of your house, and you are short a X-yr sinking bond."

If I pie-ed my worth to include the house, the mortgage cancels my cash
positions, not the home equity. (even to the point of showing negative
cash).

To your question on the actual bond - it depends. I'd be inclined to
"mark to market" and treat a bond at its current value. You have a bond
that can sell today for $900, that's what it's worth.

I hope this helps. (hey, I'm still dense on a series of issues, no problem)
JOE

kastnna <kastnna[at]auburnalum.org> writes:

- quote -

Renting vs. 0% equity are *very* different. 0% equity means you
have a real-estate position equal to the value of your house,
plus a *negative* position in loans/bonds. Renting really
does mean you have a zero position in real estate. If you
are a renter and real estate goes up in value, all that
happens is your rent probably goes up. If you are an owner
with zero% equity and real estate goes up, your loan doesn't
get any bigger, but your portfolio's value (and your equity!)
go up a lot - the magic of leverage.

Similarly, if you rent and real estate values go down, well,
your rent probably doesn't go down. Such is life. But if
you own with 0% equity and real estate values go down your
portfolio actually goes negative.

Before the move in real estate values, yes, the renter and
the 0% equity guy have portfolios worth the same - zero.
But one's portfolio is *highly* exposed to movements in the
value of real estate and the other is not exposed at all.

--
Plain Bread alone for e-mail, thanks. The rest gets trashed.
No HTML in E-Mail! -- http://www.expita.com/nomime.html
Are you posting responses that are easy for others to follow?
http://www.greenend.org.uk/rjk/2000/06/14/quoting

On Sep 4, 10:48 pm, Rich Carreiro <rlc-n...[at]rlcarr.com> wrote:
- quote -

I think I must still be missing the point. If you have a traditional
bond (corp, muni, treas., etc) that matures in 30 years to $1000, but
is currently selling at a discount (suppose $900) do you consider
yourself to have a $1000 or $900 bond position? Maybe these are not
the same, but I am having difficulty separating the two in the old
noggin. A mortgage does indeed mean what you and JOE say, but it can
only be realized AT THAT INSTANT as the equity value. To do so
otherwise seems to suggest that we base asset allocation on what we
expect to have in 30 years.

Again, I apologize for my thickness and am by no means firm on my
position. If you will bear with me, could you please explain further.

Kast,

I agree. But I think the 5%-10% guideline is based only on the
capitalization of real estate versus the capitalized securities
universe. It is not necessarily the "best" amount to allocate to real
estate. That depends upon desired risk/reward and certain assumptions.

Let's say that you have a portfolio that is 60% stocks, 30% bonds, 10%
real estate. If the stock market tanks - your portfolio pretty-much
tanks. A larger investment in real estate may help to better support
a portfolio during a bear market in stocks, such as we saw in
2000-2002, while still supporting excellent long-term returns.

-JJ

kastnna <kastnna[at]auburnalum.org> writes:

- quote -

You've missed joetaxpayer's point. If you own a $300,000 property
and carry a $300,000 mortgage, you most definitely *do* have a
real estate position.

As joe said, your "portfolio" is:
(A) a $300,000 piece of real estate
(B) a short position in a $300,000 30-year sinking fund bond

(B) does not in any way negate (A). (A) and (B) are completely
different assets and will not move together at all. You are just
as fully exposed to real estate as someone who owns the $300,000
property free and clear.

--
Rich Carreiro rlc-news[at]rlcarr.com

kastnna wrote:

- quote -

I'd think not.
$200K House
$200K mortgage
$400K Stock

is not much different than;
$200K house
no mortgage
$400K stock
$200K margin loan

Of course the dynamic is different, a drop in house prices doesn't force
a margin call, just hinders one's ability to refinance. And the margin
loan tends to be at higher interest rates, and variable. Both people
above have $200K RE, $400K stock, -$200K cash.
JOE

On Sep 4, 8:54 pm, joetaxpayer <joetaxpa...[at]nospam.com> wrote:
- quote -

I think what I am asking is IF one were to consider their home as part
of their portfolio does the "rule of thumb" change based on equity
ownership? Renting or 0% equity means you actually have no real estate
position. You may in the future (by paying off your mortgage) but if
you liquidated all your holdings today and headed to beach, you'd get
nothing for your "holdings". 100% equity would be a different
scenario. It just so happens that I don't count my residence in my
portfolio so this is a moot point for me.

- quote -

Agreed. I wonder if the practice of not including it will change as
underfunded retirement plans, unsustainable defined benefit plans, and
reverse mortgages become more common?

I also don't recommend my clients take a large RE position (usually
4-7%). I am a buy and hold investor so I don't care how the RE market
does. I'm gonna rebalance and keep'em in that range regardless. Using
ETFs also helps in that with 1 or 2 funds I can obtain well
diversified positions for my clients.

kastnna wrote:
- quote -

Don't confuse the size of one's mortgage with the amount of real estate
one has. The 0% equity guy happens to be short a bond which happens to
have the same value as his house. But they are both subject to the rise
and fall of the real estate market, in term of impact to their wealth.

Having no intention to use my home's value to retire (e.g. no particular
plan to downsize and take money from the house to invest) I don't count
the house as part of my 'portfolio'. Not like I can withdraw 4% each
year at retirement. I think there's little to be gained in overweighting
real estate in one's portfolio. Chasing sectors to me is a form of
market timing, isn't it?

JOE
www.blog.joetaxpayer.com

wizard12342002[at]yahoo.com wrote:
- quote -

JJ, without knowing specifically what you're looking at it's hard to
say, but I'd be wary of any rules of thumb about asset allocation. Some
people don't even consider REITs to be a separate asset class, for
example, so they might say 0% is appropriate. Others might be relying on
historical models over time periods where REITs performed extremely
well, and weren't highly correlated with other asset classes, using that
as a justification for a high investment in them. Just looking at the
numbers you can find periods that would justify allocations higher than
20%...they've outperformed US stocks over quite a few time periods.

One rationale for keeping it small is that it is, as another poster
mentioned, a relatively tiny part of the public equities market, based
on total market capitalization. It's a small subset of the Russell 2000,
really. Commercial real estate may have a lot of value associated with
it, but a small percentage of properties are owned by REITs. So I
question the capacity of existing US REITs to absorb a 20% allocation by
the "typical investor"...that'd be too much money chasing too few
stocks. There was some commentary about this after REIT gains earlier
this year; some blamed institutional dollars that were tied to
investments in the 200-odd public REITs that are members of the major US
REIT indices.

I don't know how relevant home ownership is to a REIT allocation -- as
you said, they're really different things. To some extent there may be
correlations in value but even that strikes me as tenuous. And as you
said, one's an investment, the other is the place you live.

-Tad

I've seen this rule of thumb many times but never seen it attributed
to existing home ownership (as it has been in some of the above
posts). I have to ask, if home ownership is the reason for the rule,
how much should a renter have invested in real estate? Still 5-10%?
And how do we vary our plan for a 0% equity home owner as opposed to a
100% equity homeowner. I have never seen that distinction made in
regards to asset allocation. With reverse mortgages, post-retirement
downsizing, etc, etc.. becoming more popular it seems that residences
may begin to play a larger part in portfolio development.
Traditionally they have not, nor do I believe this is the primary
reason "they" recommed 5-10% (but perhaps it will be some day or
should be now).

The essence of the "rule of thumb" is to reduce non-systematic risk
through diversification. Diversification relies upon the intermingling
of NON-CORRELATED assets, not just having a bunch of funds/stocks. As
PeterL said, the rule is not specific to real estate. Its a general
rule used for lots of sectors to help assure non-correlation. Its also
the reason many of us use index funds and ETFs. By getting broad
exposure to the entire market, non-correlation is most efficiently
achieved. Focusing a large % of assets in one sector, even if you have
a large number of funds, may still result in a high correlation and
little diversification. Imagine if an investor had "diversifed" by
only buying a bunch of different tech stocks in 2000-2001.

Ron,

I think there's a difference between how much real-estate you "need"
versus how much might make sense in your portfolio. For example, a
real estate fund generally invests in commercial property. I think
owning commercial property around the country or the world can be a
significant diversifier above and beyond owning a single home in a
single location. In addition, you cannot sell a portion of your home
[or buy a little more] to rebalance your portfolio. Thus, your home
cannot particpate in the Efficient Frontier.

I can state with certainty that over the past 5 years, having some
real estate in my portfolio [20%] has significantly boosted returns
and reduced volatility. Going forward - one can never say?

-JJ