Asset Allocation Considerations

Should I Sell/Refi My Rental Property?

So, you’re like a large number of real estate investors that were fortunate enough to acquire/hold properties during the golden years of very, very low mortgage interest rates, strong debt paydown (from the low rates) and significant price appreciation.

Now, you’re sitting on properties with low rates, high equity and a muted return on equity—your properties are not quite performing at the high level they were when they had less equity.

And, so you’re considering selling or refinancing a property you own.

There’s a lot to discuss here from the non-mathematical reasons to sell/refi to the mathematics-backed considerations of what you’re currently earning on the property from all 5 areas of return (appreciation, cash flow, debt paydown, depreciation and the return on your reserves) and if you can beat that return by investing in something else.

Plus… does the new return get you to your goal of financial independence faster/safer than not doing anything with your current property.

But one thing that many real estate investors don’t think about is asset allocation.

Traditional Asset Allocation for Non-Real-Estate-Investors

I taught a class on Asset Allocation for real estate investors a couple years ago and in that class I talked about one traditional model for asset allocation for non-real-estate-investors.

It was the model of what percentage of your assets should you have in stocks and what percentage should you have in bonds.

While there is debate over what is correct, a common belief is that you should have 100 minus “your age” invested in stocks.

And, have the rest invested in something less volatile, and therefore less risky, like bonds or cash.

The theory: younger people can take on more risk. Older folks have a shorter time horizon and should, therefore, take on less risk.

For example, a 20-year-old, should have 100-20 = 80% of their assets in stocks.

A 40-year-old, should have 100-40 = 60% of their assets in stocks.

OK… so that’s a rule of thumb for someone investing in stocks and bonds.

Asset Allocation Real Estate Investors

What is the rule of thumb for real estate investors?

Here’s what I suggest and, additionally, a 2-hour class I taught on it…