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Why do virtually all discussions of mutual fund investing recommend less than 100% stock, yet when it comes to rental residential real estate, it is taboo to have a "mere" 100% of total value in real estate assets (i.e. paying cash for property)?
100% stock is less volatile, over long periods, than 400% real estate (and -300% mortgage notes).
Because you live in your house, not in shares of a company.
Quote:
Originally Posted by Lowexpectations
Having a place to live is a need, owing equities isn't. This becomes a cash flow issue that you have to balance with your "investment" plan
I was referring to rental property, but of course the same goes with owner-occ. The real estate pays a "dividend" which is simply the difference between market rent and non-capital costs on the same place (maintenance, repair, insurance, taxes).
As long as you adjust for that, the shelter aspect is irrelevant, because you either rent from a landlord or from yourself. You've got the same shelter either way.
Do you have some data to support the volatility delta between the two?
Well, not exactly the same, but on average, a 4X leveraged (i.e. 25% equity or 75% LTV ratio) property would have the "portfolio value" (equity) fluctuate by at least 4X the amount of the Case Shiller Index:
Now actually it would be a bit more due to lack of diversification since the values of different properties are not perfectly correlated (R^2 < 1).
The number of 10% drops of Case-Shiller (giving 40% drops of 4X leveraged equity) in a 10 year (or shorter) period is several: one in 1890's, one starting in 1917, one in 1941, one in 1981, one in 1990, and of course the BIG ONE in 2008. Six times in 120 years.
How many times has the S&P 500 dropped by that much? Since 1950, it (a 40% drop
) happened in 1974, in 2001, and 2008. This is 3 times in 60 years.
So both a 4X leveraged residential property and the S&P 500 have this size drop about once per 20 years. However, the volatility of a single 4X leveraged property is higher due again to imperfect correlation.
I would agree with your point about rental property. And reiterate my disagreement about your point with regard to owner-occupied property.
No. It isn't.
How is living in a house you own economically different (barring taxes) from renting a house from your neighbor which is identical to yours, and your neighbor renting from you simultaneously?
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