Too much Real Estate? What Else is There?

Question

I'm just getting started in REI (one duplex, but planning on picking up more units soon!) and recently I was talking to a gentleman who is 49, who's been investing in RE since he was 20.  We were talking about risk-tolerance, and he mentioned he frequently monitors his whole investment portfolio to make sure he doesn't have too much in RE.

Just wondering from those that have been doing this awhile, do you evaluate this by ratios, such as 30% REI, 45% stocks, 25% stake/ownership in business ventures, etc.?

If most people bounce around different investment vehicles, and end up in REI, how do they survive another 2007-2008 cycle?  Is is really the best way to go?

A lot of investors who were over-leveraged with mortgages on their rentals, had to quickly sell or sadly were foreclosed on.  Maybe those who owned free and clear property were less impacted if they weren't using those properties as collateral.

Are there realistic strategies to use if you're not 100% mortgage-free on buy/hold?

Phil Kurumunda · Answer

HI the type of REI strategy matters as well. For example, if your buy and hold, leasing out a bunch of properties, what happens in the market\economy may not make that much of an impact. Your tenants will need a place to stay, pay you rent, regardless. If they can not, then you will find another tenant. People will always need a place to live. This is why it is important to purchase in the right location - Education, Amenities, Employment, Transportation, are within reach.  Also it is important to run analysis on cashflows for upper bracket of the rental market vs, lower to determine your cashflows in feast and famine years.  If you can attracts tenants based on location and amenities, your worst case scenario in lean years would be lower income or break even, but not in risk of expenses overcoming your income and default.  I am not sure of the other investors that over leveraged with mortgages - not sure if they did the right analysis or purchased in the right markets.  Bottomline is Location > CashFlow . Check out sites like Rentometer and areavibes to determine market rents and location analysis respectively

Kevin Siedlecki · Answer

@Mark Douglas

Two key points you made: "over leveraged" and "had to quickly sell."

If you keep your LTVs reasonable and don't put yourself in a situation where you have to sell, then market cycles won't kill you. If you can build a significant real estate portfolio, and have that represent only 30% of your net worth, then you must be doing very well. I don't think there is anything wrong with having a larger percent of your net worth in real estate, as long as your strategy is buy and hold long term, and you can choose to sell when it makes sense for you, never be forced in to selling. That means buying in the right neighborhoods at the right price, and managing the property well.

To twist an old cliche: Don't scatter your eggs in multiple baskets and lose sight of them. Put all your eggs in one basket, and watch that basket very, very carefully.

To me, once I really understood how buy and hold rental real estate works, I saw how it can be more like having that one carefully watched and protected basket, while stocks seem more like scattering the eggs and hoping the person watching each basket is doing a good job.

Patti Robertson · Answer

I agree with diversification of assets and income.  Personally, my husband and I do hair and houses.  We are Great Clips franchisees in addition to real estate investors.  I find employment law very similar to landlord-tenant law.

Tim Davids · Answer

diversify within RE.

As you make profits, spend them on buy and holds in better neighborhoods than your flipping in.

Levi T. · Answer

Back in the housing bubble when it popped, all them vacant commercial properties became dead weight for the owners. It dragged a good number of them under, likewise for low income residential areas. It work drys up people don't pay their rent. However, like many above said, work your numbers, if you don't over leverage you'll be be alright. Could you withstand a 30% or 50% vacancy rate? This is why I always stress on people that they need to be buying properties way-way under market value, if you had to sell today you would still make a nice little mint to stabilize the portfolio, additionally it means less debt and more room for non-performing units if we have another event like the bubble in our lifetimes, which I would not count on.

Travis Hughes · Answer

I've always been a fan of the "keep it simple" ideology.  For me, that means keeping retirement accounts in the stock market and cash investments in real estate. 401(k) and Roth IRA get maxed out and provide exposure to the equities market.  Dollar cost average into index funds.  Real estate is bought outside of retirement accounts, providing tax benefits and cash flow.  Viola - exposure to both markets and maximum advantages of each (taxes, employer match, etc).

Adam Christopher Zaleski · Answer

Some very good points by Amir Safayan. When you buy and hold, market cycles really don't matter. Never put yourself in a situation in which you need to sell. When the market gets weak, you make low ball offers and buy more.

Too much Real Estate? What Else is There?

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