do you count your house as the RE part of your allocation?

[tryan]

yup, the house is the safety net ... pull a reverse mortgage instead of eating cat food.

 

[free4now]

I 've always figured the house is part of the net worth since it will be tapped eventually (via downsizing or reverse mortgage). 

BUT I do not add the house equity into the 4% withdrawl calculation.  Since this would create an artificially high withdrawl rate. Don't want to caught borrowing against the house to eat.

Right on.  That is really the meaty question:  How does the home value affect SWR.  Among the published SWR articles I've read, almost all say not to include your home value in your SWR calculations.  This is a conservative approach and there's nothing wrong with being conservative in that way.

It makes sense to leave the house out of SWR calcs because none of the SWR studies take real estate into account...  In order to calculate a worst-case SWR you would need Shiller like data for every housing market for all time.  Since that data doesn't exist, home prices can't be included in any historical worst case SWR studies.  And there's surely going to be some housing market somewhere where local values dropped even more than the stock market in the worst periods, so a historical SWR study including housing would necessarily find a lower worst-case SWR.

Hence it's fairly well agreed that you can't plug 100% of your home value into any normal SWR calculations.  But I would also argue that assuming 0% of your home can produce retirement income is way too conservative.  You can indeed get income out of a house from reverse mortgages, downsizing, or even just selling to rent more cheaply.

So the way I look at it is that some percentage of my home (less than 100% and more than 0%) can be included in the SWR calculations.  I am still not sure exactly what percentage to use.  This is part of why SWR is still an art not a science.

 

[unclemick]

Hmmm

I didn't count my house in my SWR calculation.

Katrina made the question academic anyway.

Now in twenty years I'll be 82 - may or may not count the house if I'm living in one.

 

[tryan]

In order to calculate a worst-case SWR you would need Shiller like data for every housing market for all time. Since that data doesn't exist, home prices can't be included in any historical worst case SWR studies.

This is the pickle I am in ... FIRE'd on rental property. Relying on calculators that use historical stock and bond performance while I am ~75% real estate.

Just have to figure, if all hell breaks loose ... a part time job at a golf course or ski resort is not the end of the world.

 

[ladelfina]

$500,000 worth of R.E  costs you about $40,000+ to sell, that's a lot more than ETrade.

Maximillion, if you have mutual funds you may easily be paying 1% a year in costs that E*Trade has nothing to do with.. hold them ten years and there, you've paid your 10%. Instead, to sell my house I paid just over 5% and owned it for 10 years so for me transaction costs were .5%. My annualized gains, however, were a (tax-free) 10% yearly.

Anyway, maybe the house-buying strategy is not so different from the age-based investment strategies that dictate riskier and more expensive investments while young, taking the probable gains and switching out to less-risky and less-expensive investments later in life. Except in the portfolio scenario of 'down-sizing' you just push some buttons, whereas in the RE version you have to uproot yourself (away from the desirable areas for workers and commuters).

For tryan, the upside is that, unlike investments, the RE will always maintain a lot of its value; it can't go to zero. And the rents will more or less follow the general economy; hard to imagine them going way down and everything else staying up. The pro-renters have noted that prop. values in many areas are out of line with rents, though, so maybe that's a signal for you to look into selling and using the $ to diversify. That's what I'd do, but then again, I'd also prefer not to have the hassle of being a landlord. Best of luck!

 

[tryan]

RE will always maintain a lot of its value; it can't go to zero.

But boy, values can drop pretty darn close to zero.  Bought many of them for less than 20k in the early 90's.  Thefed cites property in Ohio for less than 20k on an earlier thread.  And rents were less than 1/2 of todays values.

The pro-renters have noted that prop. values in many areas are out of line with rents, though, so maybe that's a signal for you to look into selling and using the $ to diversify.

Exactly why I'ld like to drop a couple more before the economy slows down ... now if I just had a vacancy.

 

[ladelfina]

What are your leases like? If you are selling I think you can give a certain amount of notice and break the lease. I would talk to a realtor anyway.. you never know. They might have someone looking for income property that would take a place with tenants, if you can attest they are good ones.

 

[tryan]

All are long term ... so they're tenants at will. Problem is in MA a judge will not "put a family homeless to facilitate a sale" (was told this many years ago). Second problem is the rents are about 1/2 of todays mortgage, taxes and insurance costs. No investor in the right mind will touch it with a 10 foot pole.

Hope is sell back to the tenants; working one now. But it's slow going (these people rent for a reason).

 

[ladelfina]

Where is this, Cambridge? Or is Vida Urbana breathing down your neck?  

Is there rent control? If there isn't, why haven't you been raising the rents to keep up w/expenses? A tenancy-at-will means EITHER party can give 30 days' notice for no reason whatsoever, as far as I understand it. You can give 30 days' notice to raise the rent, too. Generally there are no limits as to how much, unless you are in some kind of gov't. subsidized tenant situation.

Take a look here:
Mass.gov site

Of course, before you take any action, make sure you are keeping up your end of the bargain w/r/t interest on sec. deposits, repairs, and so on...

 

[Martha]

All are long term ... so they're tenants at will. Problem is in MA a judge will not "put a family homeless to facilitate a sale" (was told this many years ago).

We had a judge in our town who wouldn't do evictions either. Landlords just found another judge.

 

[tryan]

A tenancy-at-will means EITHER party can give 30 days' notice for no reason whatsoever, as far as I understand it.

In MA possession is 9/10's of the law.

You can give 30 days' notice to raise the rent, too. Generally there are no limits as to how much, unless you are in some kind of gov't. subsidized tenant situation.

Hasn't happened to me ... but I heard of other landlords who tried this - as a way to evict - and had the increases thrown out in court. Judge said it was above market price.

All my units are at market (1000-1200/mo). Simply not worth the hassle of trying to throw out paying tenants (it's enough trouble getting rid of the non-payers). And the rents pay my bills.... so I wait.