Portfolio allocation with rental houses?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
jayes619
Posts: 1
Joined: Thu Jul 01, 2021 9:16 pm

Portfolio allocation with rental houses?

Post by jayes619 »

Hello all, I'm new to the forums and to investing in general, I've been reading and studying but I would like some of your advice on my portfolio and situation!

I am a self employed general contractor, and also invest in real estate. I know this isn't a real estate investing forum, but I'd like to quickly explain my real estate situation. My primary residence is a duplex, and I have the other unit rented and generating $430 per month after expenses (property tax/insurance). I live in the largest unit for absolutely free, if I wasn't living here then the duplex would bring in $1330 per month after expenses. I also own another single family home which brings in $900 profit after expenses.

My main goal is to achieve an annual $75,000 net income from the rentals. I estimate that I would need to purchase an additional 4 homes to reach this goal. I need around $200,000 cash to do reach this goal (I buy destroyed homes and rehab them so I don't pay labor, and I use a lot of second-hand materials so if this number seems low, that is why). I am a firm Dave Ramsey follower and am not interested in taking on any debt or mortgages.

I currently have around $10,000 per month to invest or save towards the rentals. Currently, I am auto-investing $520 weekly in my SEP IRA (that is 15% of my gross income) and the rest goes into savings for the real estate purchases. Ideally, I'd like to reach my real estate goal in slightly over 2 years, and I am on track to do so.

I have no plans to use any of the money in the vanguard accounts for at least 30-35 years. I also firmly believe that the markets always recover, and I would never sell in a bad market (I would actually dump more money in during those times to "buy the dip") so I have a very high risk tolerance.


Questions:
1. I am looking for advice on how to allocate my savings every month between my Vanguard portfolio and saving cash to purchase additional rentals. Is my "vanguard to real estate savings" ratio ok (approx 20% vanguard, 80% real estate fund)? Do I need to be investing more or less in vanguard every week? I have considered pausing vanguard contributions and focusing 100% on my real estate goals, but not sure if this is a good idea either.

2. I would like advice on my portfolio, if I need to be heavier or lighter in bonds, and if there are any other mutual funds or ETF's that you would recommend for my situation.

3. I need to rebalance my portfolio (all 3 accounts) to achieve the correct stock/international stock/bond ratio, but I need some opinions as to what a good allocation would be.


Emergency funds: 6 months in a separate savings account
Debt: No debt at all


Tax Filing Status: Single

Tax Rate: 28% Federal, 3.23% State

State of Residence: IN

Age: 32

Assets:
Primary residence ($0 Debt, $160,000 value)
Rental property ($0 debt, $90,000 value)


Desired Asset allocation: ?? I think 85% stocks / 15% bonds (Currently 96.5% stocks/3.5% bonds)
Desired International allocation: 15% of stocks

Taxable Brokerage Acct at Vanguard ($72K)
0% cash
52.7% VANGUARD TOTAL STOCK MARKET ETF (VTI) (0.03%)
14.5% VANGUARD TOTAL INTL STOCK INDEX FUND ETF (VXUS) (0.08%)

SEP IRA at Vanguard ($24K)
13.2% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.04%)
3.8% Vanguard Total International Stock Index Fund Admiral Shares (VTIAX) (0.11%)
3.5% Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX) (0.05%)
(My weekly auto contributions are 65% VTSAX, 15% VTIAX, 15% VBTLX)

Roth IRA at Vanguard (13K)
12.3% Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX) (0.04%)

Contributions

New annual Contributions
$27,000 into SEP IRA


Thank you all in advance for taking the time to read this post, I look forward to learning more about all of these topics and hopefully I can start contributing to the community as well.
User avatar
David Jay
Posts: 14586
Joined: Mon Mar 30, 2015 5:54 am
Location: Michigan

Re: Portfolio allocation with rental houses?

Post by David Jay »

Welcome to the forum!

I wouldn’t even try to establish a specific “ratio”. I would continue to put 15% - 20% of income into your SEP because the day will likely come (maybe when you are 60, or 70, or 80) when you no longer want the “job” of being a landlord. These savings will provide a nice supplement to your SS income and allow you to leave a legacy from the cash-out of your real estate holdings.

We have some rental property owners here on BH, but we also a good number of ex-landlords who reached the point where they no longer wanted the hassle.

I think your fund selections look very “bogle-ish”, with the core 3-fund foundation.
It's not an engineering problem - Hersh Shefrin | To get the "risk premium", you really do have to take the risk - nisiprius
anewboglehead
Posts: 68
Joined: Tue Mar 10, 2020 1:03 pm

Re: Portfolio allocation with rental houses?

Post by anewboglehead »

Hi Jayes,

I am of similar age (34) and in a similar situation, and I have no idea what the "right" ratio is. :D

For reference, my primary and rentals equity is about 1.5x my retirement and brokerage. I've been fortunate to have lucked into investments in areas which are now desirable, and so I enjoy appreciation and rental demand (higher rents, lower vacancy).

I think one important thing to realize is that you will be concentrating risk by accumulating RE, especially locally, so the risk is not only RE but single market. That being said, of all my RE investments, I do prefer local RE investments so I can do the work involved myself (stuff a PM would typically do - screen tenants, minor repairs though I am nowhere are skilled as you are, etc). Regarding risk - in the pandemic, I had two properties go vacant for a few months, both in "hot" areas - Austin and Bay Area, and I have also had a few properties that were unexpectedly cash flow negative for a few years. Stuff happens.

I know this is not a real estate forum, but suffice it to say you are probably setting yourself up well if you are doing a lot of the legwork yourself (forced appreciated via rehab is my preferred approach as well, screening tenants, collecting rent, etc) and this income is likely very tax efficient (ie positive cash flow and negative income on sch E). This is balanced with the concentrated risk in RE, though I think you are in a position to mitigate much of the risk by lowering your capital investment via sweat equity. For me, it's been a worthwhile bet to take to concentrate risk in RE and gain benefits of tax-efficient (fairly) passive income, potential upside for appreciation, and having properties around the country that my kids may be able to use in the future.
Post Reply