To Diversify Further or Not

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You have probably noticed that the stock market has gone crazy. Last year was an incredible year with 20%+ rises in most market. So far in 2018 most markets are up over 5%,  our portfolio is up by more than my entire salary for my last full year when I worked in just 3 weeks. It’s insane.

As I’ve mentioned before most of our portfolio outside of our primary residence is in time balanced mutual funds which are smoothed out with some bonds, so we are reaping the current market benefits. At some point though things are going to go south, the market will correct. The problem of course is that no one knows when that will be, maybe it will happen tomorrow. Maybe there is another 10% to go, maybe another 20%. The simple fact is that no one can market time.

However the longer this goes on the more i’m considering moving some investments into cash and possible diversifying further. The big part that is missing in our portfolio is real estate, so if we do diversify then that would be a market we would look at.

So lets look at if it’s worth buying a second property here in Portland and renting it back out.

Firstly how much could we afford to buy. Realistically I don’t think we would want to free up more than $500,000 to buy a second property. There are houses here in Portland that cost that much, but they are further out, smaller and not as nice. So already we have an issue.

The Portland housing market has been rising rapidly the last few years, and although it isn’t as crazy as San Francisco or Seattle it’s still not terribly affordable. If you want to live in the city and get a reasonable 2000 sq ft house you will probably have to find $600,000 plus to live in a reasonably nice area. This is very different from the Houston market we recently left. Other than a few areas, you can live in the suburbs of Houston for less than $300,000 and get a really nice house with a garden.

My feeling is if we are renting a house we would want to rent long term to a stable family, maybe someone moving in from out of state to work for Intel or Nike. However the houses we are seeing in the $500,000 range are probably not the sort that would attract families.

We then looked at rental prices in Portland. The general rule of thumb is that you want to rent for about 1% of the house cost per month. So a $300,000 house would rent for $3,000. So our hypothetical $500,000 house would rent for $5,000. However typically here in Portland, these sorts of houses are only renting for $2,000 a month. So realistically it looks like we wouldn’t get back as much rent as we would need to make this worthwhile.

Thirdly there is the hassle factor. If you start becoming a landlord, then unless you have a management company you will need to be available 24/7 to deal with problems. I’m not sure I want to be receiving calls at 2 am to get a plumber out. This could rapidly go from being an investment opportunity to being a full time job.

Finally, and this is a bit more socially conscious, Portland has a massive problem with affordable housing and a large part of the driving up house prices is people buying own to rent houses. I’m not sure I want to be part of that.

So if we are not buying a new house to rent out, then we might need to look elsewhere for investing in real estate. So I am now considering pulling out some cash in order to invest in the crowd funded real estate program realtyshares. I have mentioned this before, and it seems to be well organized but I do want to do a bit more due diligence. I like the idea of being diversified within real estate.

So I think real estate is something we need to get further into, its just working out the best way to do it and also to get over the inertia and actually liquidate some assets to invest.

 

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Steve TraylenIncome MasterFully Franked Finance Recent comment authors
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Not an easy decision, but a good problem to have! I also avoid real estate for the hassle factor (and the fact that the vast majority of our wealth is in our own home), but something like realty shares could be a good option for diversifying. My general philosophy is to stick with what you know! Look forward to hearing what you do next.

Cheers,

Frankie

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” our portfolio is up by more than my entire salary for my last full year when I worked in just 3 weeks. ” That is incredible. I’m definitely making the most of this bull market at the moment. Will be interesting to see how long it ends up lasting.