harikaried wrote: ↑Tue Jul 27, 2021 5:24 pm
Oddball wrote: ↑Thu Jul 22, 2021 9:19 amWhen we first set up our AA we were at 80/20, but given the amount of mortgages we have (3, one on each property) it didn't seem to make much sense to have a large bond portion.
You seem to have associated moving from 80/20 to 90/10
because you had the mortgages -- as in if you had even more debt, you would have reduced your bond allocation even more? If I'm understanding that correctly, in other words because you decided to take on risk by having loan payments, your asset allocation should match that willingness for risk to be consistent?
Oddball wrote: ↑Thu Jul 22, 2021 9:19 amEquity in the properties is about 1/2 our NW, so a large dip in the market doesn't affect our NW too drastically.
This sounds like as you pay down the debt to increase your equity in the properties, a smaller portion of your net worth would be in the stock market, so that also gives the ability for your liquid assets to be allocated more aggressively? Did I get that right?
Our current plan is to pay down the debt while also making our gross asset allocation more aggressive, so that does seem to match up with the above. I don't have a good intuitive explanation of why other than to maintain a net asset allocation, but maybe we should be thinking more about the equity portion of net worth.
We moved from 80/20 to 90/10 because 1) we have several mortgages and I have read enough on here about "negative bonds" to see that having a large bond portion at a low interest rate while also carrying mortgages doesn't make much sense (note that over 90% of our mortgage debt is at 2.9 or 3.0%) and 2) since we have growing equity in our properties we can be more risky with our stock/bond allocation because we are not reliant on that alone for our retirement. Having rentals makes our overall portfolio LESS risky, imo. As outlined below, we have a separate way to increase our NW than just stocks/bonds. If we took on more debt, we won't change the 90/10. Should we be 100/0? Should we be 50/50? Are we at 500/-400 or whatever with "negative bonds"? Who knows. We are happy with 90/10 and that is what we plan to stay at.
Right now, with our 5 rental units over 3 properties (plus another unit we live in at one of those properties) we, really the tenants, pay down $3400 a month on the mortgages, that is $3400 increase in NW per month, $40,800 per year increase in NW. In 5 years, assuming no refi on the properties, we will be up to ~$48,000 per year in principle recapture, and so on due to the mortgage amortization schedule. In 15 years we will have $1.2 million in equity across the 3 properties in today's dollars, and I assume the properties will appreciate at the rate of inflation so at 2.5% the value in 15 years will be closer to $1.7 million.
Our NW is ~50% property equity and ~50% stocks/bonds but that is not a target. We don't have a target for that ratio. If we end up with 75% equity and 25% stock/bonds or 75% stocks/bonds and 25% property equity, it doesn't really matter and it does not affect how aggressive we invest. We invest 90/10 stocks bonds, and we buy property when we need or want move; each of the 3 properties we own has been our primary residence at one point, and have lived in 4 out of the 6 units we own.