A reader asks, “If there is a Real estate component (physical) in a retirement planning portfolio, what is the best way to consider this during the rebalancing of assets? Or when considering the equity vs debt allocation”.
“For example. Without considering RE investment, my portfolio is at 65: 35. ( 65 % equity). However, if I consider the RE component as a debt asset, the balance is closer to 50: 50”.
Our response is relevant only to those already holding real estate. If you are considering a real estate investment, see: Can I invest in real estate for passive income after retirement?
Also, note that a “RE investment” does not include a self-occupied property (as this is a consumable).
The biggest problems with real estate are it is indivisible and ill-liquid. One cannot sell a portion of it (except under special circumstances), and one cannot sell it quickly at a fair market price. There is no “fair” market price. The pricing is arbitrary, leaving both the buyer (who wants to pay less) and the seller (who wants a bigger payout) disappointed.
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Therefore, if you already hold a property, do not add it to your asset allocation. In the present case, assume you hold 65% equity and the rest in fixed income and rebalance and de-risk (systematically reduce equity) accordingly.
Important caveat: Do not add the property value to your retirement corpus! If you wish to sell the property in the future, then do so and only include it. If you wish to use the property as a source of income, you can use a tool like the freefincal robo advisor that allows you to account for three sources of income. This could significantly reduce the net retirement corpus required and, therefore, the amount you need to invest for a financially independent retirement.
Related links:
- passive income is a crucial part of your retirement plan
- Building the ideal retirement portfolio that goes beyond money.
- Real Estate Returns Calculator
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