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Buying a house can all-of-a-sudden make 90%+ of a person's portfolio be invested in real estate, actually one very specific piece of real estate! Which is against all the advice we're given to diversify our savings.

Granted this is somewhat offset by the fact that along with this large asset, there is a balancing large long term liability that isn't going away (the requirement for somewhere to live), but still it seems this investment focus can be potentially problematic as evidenced during the last housing crash.

What are some good options for buying a house and simultaneously reducing one's exposure to real estate? I'm aware thats its possible to short certain real estate ETFs but that ties up capital... any other good ideas?

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Simple answer: the house you are living in is not an investment. It is part of your net worth, as is any mortgage against it, but since it is completely illiquid you shouldn't count it as part of your portfolio. You've taken money out of your investments and spent it; rebalance what's left.

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    If a house is not an investment wouldn't that mean buying a $500k house should be no more risky to net worth than buying a $50k house? – Brad Thomas Apr 25 '15 at 2:02
  • You are withdrawing money from your investments and purchasing real property with it. That property saves you money that would have been spent on rent, and may or may not eventually be resold or rented out as a business, but it is no longer part of your investment portfolio and doesn't really play into your investment decisions. – keshlam Apr 25 '15 at 2:10
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    Btw, I'm in an area where $500k is a typical house and $50k might buy you a garage. Rents are scaled appropriately. That's part of the problem, housing is not completely fungible. – keshlam Apr 25 '15 at 2:15
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    It's wrong to think of a house that you occupy purely as an investment. Compare what you would reasonably pay to rent, against what you pay on a mortgage. Only the difference is investment, the rent amount is a living expense. – jamesqf Apr 25 '15 at 18:27
  • More specifically, compare with what you would reasonable pay to rent and insure another house or equivalent space, against the mortgage plus maintenance costs and insurance costs for the house. When you consider everything, the house is less of a bargain. There are reasons to buy a house, and it may deliver decent returns... But there are reasons not to, and an increase in value large enough to offset them should not be counted upon unless you are doing something very specific to make that happen. – keshlam Aug 10 '16 at 14:09
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A common misconception

Your premise is wrong: that 90% of your portfolio isn't invested in real state, it's spent in a home and a home is not an investment.

Notice that you already had the answer, all along.

Buying a house can all-of-a-sudden make 90%+ of a person's portfolio be invested in real estate, actually one very specific piece of real estate! Which is against all the advice we're given to diversify our savings.

Even if we consider a home an investment (the worst one a madman could come up with), it goes against all sensible advice and common sense. And so we arrive to a contradiction and impossibility.

What are some good options for buying a house and simultaneously reducing one's exposure to real estate?

By design, buying a house will always take away a big % of money you could have actually invested elsewhere.

Specific advice

If you want exposure to the real state market, buy some real state ETF's. This way you choose exactly how much of your portfolio want invested in real state, so you stay diversified, and is way more liquid and safe than a single house.

You may consider renting instead of buying a house. This might be tricky since it goes against the common rhetoric. I encourage you to read online why home ownership isn't inherently good. Here's a useful tool for comparing renting vs buying. And let's not forget that moving to a less pricey neighbourhood is always an option whenever you aren't tied to a mortgage.

  • You may consider renting instead of buying a house. This might be tricky since it goes against the common rhetoric. what rhetoric is that? I've heard people say things against renting as if it was an absolute, but how common it is I'm not sure. What financial planning guru is spouting this stuff? – CQM Apr 27 '15 at 18:52
  • It largely depends on the country, but it's somehow inserted in the 'settling down' process. You can cohabit with your partner without being married, but it's not the traditionally advised thing to do. Something similar happens with renting. At least in some Western countries you're expected to get a mortgage once you're 'settled'. I'm glad to hear this dogma isn't as omnipresent as I initially thought. – Calculus Knight Apr 27 '15 at 19:15
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Buying a house no more over exposes you to real estate than buying groceries over exposes you to supermarkets, going to a doctor over exposes you to healthcare, or paying your internet bill over exposes you to tech.

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    A house is a 'big ticket' item, which makes it different from these mentioned expenses. While I think I agree with your underlying idea, I'm not sure I'm grasping it fully. – Calculus Knight Apr 27 '15 at 19:18
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Please don't take this personally, but your question asserts some investing philosophies that really don't apply to this situation.

First, I'd like to share with you my favorite Warren Buffet Quote, being: "Diversification is cover up for ignorance" (i didn't google it to get it exactly right so this is the gist) You seem to be wanting to hedge more than diversify...

I do agree with the first answer in that you're personal home shouldn't fall under the "normal" investment categories, such as Real Estate ETFs. The reason for this is because unlike an ETF (or any investment), where you have alternatives; for instance, you can simply not own that investment. You do not have the choice of not living somewhere.

So the questions you should be asking should be centered around a rent vs own comparison; which most everyone knows owning is almost always better. Obviously there are details to every situation which must be reviewed, but for the vast majority of situation, you should absolutely buy.

Now, if you're looking for some kind of insurance against loss in your home value, that's a much harder question. There's no ETF (so similar investment) that I know of, that would counteract the value variances of one property. The issue being your home is located in one place, and Real Estate investments like ETFs are very broad. You could lose value in yoru home, AND the ETf at the same time.... I think the best thing to do is be conservative with your home purchase, home sin the US have a historic average of 3% annual gain (even with the recent crash). They're really really safe investments, and you get to write off the interest...

I hope this helps you, please comment if you have more questions.

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    "owning is almost always better" - certainly not! Especially not in the area where it is buyer's market - all these buyers are leaving somewhere which becomes a rental, or are investors who are buying a rental. You should also disclose that you earn money from people buying real estate and as such you're extremely biased and cannot be trusted. – littleadv Apr 25 '15 at 6:09
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    no, I don't think that buying a home in buyer's market is bad. I think that claiming than buying is almost always better than renting is a false statement. I am not upset at you and you haven't proven me wrong. In fact, you continue with your practice of misleading and false statements with no factual backup to substantiate them and vicious attacks against anyone who calls your bluff. – littleadv Apr 25 '15 at 20:22
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    The actual Buffet quote is "Diversification is protection against ignorance. It makes little sense for those who know what they’re doing.” I know SE hates offsite references, but I strongly recommend reading businessinsider.com/… for a nice clear explanation of why this statement is both true and means something very different than Jared believes. In a nutshell: if you have Buffet's skill and resources available, you can do better with focused investment in areas that you're more certain will do well. – keshlam Apr 25 '15 at 23:47
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    ... but us ordinary mortals who don't want to spend 40 hours a week managing our money are demonstrably well served by diversifying most of our money and investing limited amounts in higher risks. (Demonstrably, as in proven by simulation against historical market data and Monte Carlo simulation systems). Jarid disagrees with all of this. He's entitled to do so. But he hasn't yet offered a good reason to believe him rather than just about everyone else. Extraordinary claims require extraordinary evidence. – keshlam Apr 25 '15 at 23:56

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