90% of Net-Worth in Real Estate, now what?

[Jonathan Bombaci]

Hi Everyone,

We grew our portfolio and networth very rapidly through real estate over the last 3 years. I woke up in a cold sweat a few weeks ago when I realized 90% of our current networth is wrapped up in real estate or real estate related businesses. I spent 10 years in corporate finance before getting into real estate and quick math confirmed 89.6% of our networth was indeed in real estate. The other 10.4% is in stocks (index funds), retirement accounts (mostly index funds), and cash. 

Let me be clear, I still believe real estate is the BEST place for my money however a 90/10 split seems like unnecessary risk. I’m planning to sell/refinance some properties and reduce the split to 70/30 by 6/1/22.

My problem, and where I’m looking for advice, is where should I put the other 20% of my net worth when I pull it out of real estate? 

I don’t want to hold too much cash and I know anything I invest in won’t be as sexy as real estate. I’m not comfortable with crypto and hoarding gold seems silly to me but I’m here looking for advice so I’m open to any knowledge people are willing to share. 

What’s safer than real estate, or maybe what responds inversely to real estate, where the returns don’t suck? 

Best,

Jon

[Nick Robinson]

@Jonathan Bombaci
Are you including your personal home as part of the 89.4%?  I look at personal homes as an expense more than an investment.  The equity put in your home does nothing for you because you have monthly expenses every month.  A better investment would be to rent the home out make positive CF.  I know a lot of people will say they can refinance their house but then you have a bigger expense every month.  The advantage of a house is living where you want to live, some people see it as a security, but I still would not see it as an investment, or I would see it as a bad investment numbers wise.  That does not mean do not buy a home just be aware of what you are buying.

In terms of your portfolio allocation, I want 80% of my portfolio to pay me to own it, 10% is speculative and 10% in safe liquid asset.  If your RE is making positive CF it does not cost, you anything to hold it.  If you are going to refinance, I would make sure the building will still be cash flow positive and you have reserves in the bank.  With that refinanced money I would be very careful investing in anything right now even before the Russian/Ukrainian conflict the economy was in bad shape.  In the first week of Dec. the Eurodollar futures inverted, and the yield curve for US treasuries has been getting flatter.  The war has accelerated this even more to where there is less than 25 basis points difference between the 2yr and 10yr treasury.  The economy has gone into a recession every time there is a yield curve inversion and after every yield curve inversion there has been a recession.  There is a very high probability of a stock market crash and since WW2 real estate has crashed just under two thirds of the time.  If you are refinancing it would be smart to take a step back and look for the next opportunity.  When people panic you will see deals come up and you just have to stay unemotional about your thought process/decisions.  The 10% speculative could be what we are talking about waiting to deploy that capital when you see a move in a market.  For the last 10% of your portfolio your goal is to protect/preserve your purchasing power.  This can be precious metals, specifically gold, you could hold on to more cash now if you think the market will move and there will be buying opportunities available.  

On your last comment about hoarding gold being silly.  Gold has outperformed the S&P 500 and Dow since 2000.  S&P500 in 12/1999 $1,498.58 to $4,328.87 that's a 2.89x, DOW 12/1999 $10,921.93 to now $33,614.80 that's a 3.08x, Gold was $278.40 in 12/1999 today it is $1,974.90 that is a 7.09x.  I am not saying to be a nut and go crazy but owning some gold protects your purchasing power.