Real estate and Net worth

5 Replies

Hi All,

  I'm curious to get members opinions on how much of your net worth is OK to have tied up in real estate? 

I recently completed my second deal which put a large amount of my net worth into the 2 properties I own. If you count IRA and retirement accounts I have 70% of my net worth in real estate. If you take retirement accounts out and only look at what I would consider "accessible cash" ( I would never dip into retirement savings so I prefer to pretend I don't have that money) then this number is closer to 85 or 90%.

I still have an emergency fund and I could most likely get easy access to cash through a heloc if needed but I'm curious if other members think it is crazy to have this much of my net worth in one asset class? 

Where do you fall in what % you have in your real estate holdings?


it come a down to an individual preference. I've got about 1/3 in real estate at the moment but am looking to get up to the 80-85% mark. 

Thanks for the reply Francis. I would definitely prefer to have a lower % but in the area where I live and invest (Northern NJ), the prices are very high on quality houses in good towns which is what I look for. 

As a general recommendation when it comes to portfolio construction and traded REITS only about 10% is advisable.  I believe it's a much different situation if you are actively managing your properties, purchasing properties with built in equity and properly allocating reserves for vacency, repairs, ect.  you can take steps to reduce your risk when you buy the hard asset that you can't do when you invest in traded REITS.  I think you'll find many real estate investors that only own real estate and cash.

Excluding primary residence....I have about 1/3rd of my net worth in real estate, about 1/3rd in tax sheltered retirement account that hold stocks (Or stock like assets..MLP, REIT) and 1/3rd in taxable brokerage or cash accounts.

Good question and there have been some good BP posts on diversification.  I can't find one post that I really liked but I am going to steal a quote from it.

"Diversification is protection against ignorance. It makes little sense if you know what you are doing."  Warren Buffett

I diversify stuff that I find unpredictable or do not know well enough.  For me, that is the stock market and the notes that I invest in.  I purchase low cost ETFs and diversify across small, mid, large cap and international funds and tax loss harvest occasionally.  I purchase notes and diversify by funding small pieces of many notes and use an RIA that specializes in this asset class.  With passive real estate investments in others' projects, I spread them out to reduce risk.  I have to diversify in these asset classes because I do not have enough knowledge in them or the time to acquire it.  Diversification for me just means "I don't know" so I need to hedge.

With direct investing in my own real estate though, that is right in my wheelhouse.  I can allocate a disproportionate amount of my family's capital to it because of that knowledge.  It does not create uncertain risk and it has the best risk-adjusted return for me.  As I get older, I re-allocate more capital to the asset classes where I have the most knowledge.

Your thought of hedging by maintaining reserves and reasonable LTVs is a good one.  The (in)stability of your particular market and property class is part of the equation too.

The decision on how to allocate personal capital is an important one.

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