If rentals cover living expenses, how much in financial assets needed to Fire?

[BreathFree]

Greetings, Fire community!!

I searched and read many rental property posts going back to 2013 last night. I appreciate all of the insight. Any one have any opinion on the amount of financial assets that would be needed if your rental income covered all of your living expenses in early retirement?

My rentals bring in aprox $45,000.0 after expenses (yes, I planned for future roofs, ACs, flooring, general maintenance, termites (I'm in Florida), Hurricanes (Florida strikes again), property management, vacancies, taxes, insurance, and liability insurance. I've owned these for nine years and they have been fairly steady, even through the great recession.

My living expenses are approx 36,000 to 42,000 (I'm single, and cheap) depending on travel.

How much would you recommend I have in financial assets (stocks, bonds, CDs, Cash) before I Fire. I am currently at $700,000.

My plan originally was to save up one million but due to my current employment situation (oil and gas) I don't think I will make it without having to work an extra five years. I am currently 45 years old and want to quit. I know technically since the rentals are covering living expenses I can quit but I don't feel safe with rentals alone. Seems like too much in one basket.

I have learned a lot from this forum over the years and appreciate any comments.

 

[Sunset]

What are your rentals worth if you sold them after real estate fees and depreciation recapture tax of 25% ?

Here are some issues I see, you are young at 45 so that is a very very very long time to be retired on $700K + rentals, meaning you are probably looking at a 2% withdrawal rate to be sure it lasts estimated 45 years. So that is $14K / yr from the 700K investments.

Plus, lets say you did it, then in 5 years meet mr/mrs wonderful and want to get married, if that person doesn't have as much or more than you saved, you cannot afford to live with or support that person. So you are limiting your social options.

Who are you going to hang out with ? Old people or the park bums ? everyone your age is working or wanting to work as they need the cash, or they are rich jet set and you cannot afford to even travel to where they are currently partying.

 

[JDARNELL]

Any financing on the rentals? One of the things I did was restructure debt to increase cashflow. I still continued to pay off my rentals in the process but could slow down if I got into a cash crunch. I have a friend who also has several rentals but has minimal cashflow due to refining shorter terms at a 1/4% lower rate. When anything goes sideways he gets frustrated as he feels the immediate impact. Him and I took different forks on the rental road and will end up in the same place eventually however I get to enjoy mine a lot earlier. Now in 12 yrs he will have more $$ than he needs however he wants to spend it now. He can't get there. Cashflow is king. Him and I both retired at 46 and are still under 50.

We both talk about our peers are busy working and can't do the things that we can. Gym time is a couple of guys and the soccer moms. Kids baseball is the same. Weather sucked last winter so I flew to Cabo for a few days. Made the decision the day before. All my buddies had to work. Oh well.

I just took the first withdrawal off my portfolio in the last month. I laid out my planned large purchases and two college tuitions for both my kids over the next 3 yrs and took that money off the table even though my cashflow is more than enough. I don't think anyone went broke taking profits.

When you are ERd you have more time to find the deals thus spending on the same items tend to go down. One of the things I do is travel hack. I just looked this morning and YTD I have spent $8700 on travel that cost me $4200. Well within my spending limits.

 

[BreathFree]

What are your rentals worth if you sold them after real estate fees and depreciation recapture tax of 25% ?

Here are some issues I see, you are young at 45 so that is a very very very long time to be retired on $700K + rentals, meaning you are probably looking at a 2% withdrawal rate to be sure it lasts estimated 45 years. So that is $14K / yr from the 700K investments.

Ah yes, I left out a bit. So, my plan was to not touch the $700,000 until age 65 barring some unforeseen circumstance. I have it invested at 60/40. So if I get just 3% real return, I'm looking at $1,260,000 real at 65. Assuming no increase in property value, after depreciation recapture tax of 25%, I would net approximately $300,000. So, that would give me 1.5 million at 65 in today's dollars. My problem with this is the length of time in retirement, as you said, so many things could go wrong. How would you even begin to come up with a reasonable number without being overly pessimistic and working until age 65. I don't know how to quantify the financial asset part. What number would you suggest would be appropriate?

Plus, lets say you did it, then in 5 years meet mr/mrs wonderful and want to get married, if that person doesn't have as much or more than you saved, you cannot afford to live with or support that person. So you are limiting your social options.

Mom? jk. I appreciate your concern. Let's keep it to the financials, I don't care to discuss my personal relationship issues.

Who are you going to hang out with ? Old people or the park bums ? everyone your age is working or wanting to work as they need the cash, or they are rich jet set and you cannot afford to even travel to where they are currently partying.

I don't hang out. I am an introvert. I have a few friends but find them exhausting. This is a fair question though and I have thought about it. I may either start a programming project, take some college classes (I could really up my math game) or even take on a part time job for social interaction. I don't want to need the job, it can't be about the pay, only something I find interesting.

 

[BreathFree]

Any financing on the rentals?

No financing on anything if I can help it. I planned from the begging to live off the cash flow. I am in a town that does not grow, so expected virtually no property appreciation.

 

[RunningBum]

Who are you going to hang out with ? Old people or the park bums ? everyone your age is working or wanting to work as they need the cash, or they are rich jet set and you cannot afford to even travel to where they are currently partying.

I would never let this factor in. Plenty of people don't work the typical M-F 9-5, for one thing. For another, no matter who you find, if you even need someone to hang with, they will be of your choice and not forced on you by who else you work with.

 

[Winemaker]

No financing on anything if I can help it. I planned from the begging to live off the cash flow. I am in a town that does not grow, so expected virtually no property appreciation.

You just answered it. If the town doesn't grow, there's no demand. If no demand, rents stagnate or decrease. You must be able to increase with inflation, at least.

I've been fortunate the last 17 years.

 

[BreathFree]

You just answered it. If the town doesn't grow, there's no demand. If no demand, rents stagnate or decrease. You must be able to increase with inflation, at least.

I've been fortunate the last 17 years.

You are correct, that could be a future problem. It is one reason I don't own 100% rentals. I can't control what happens to an area 20 years down the road. It is a gamble. I do try to buy in desirable areas, walking distance to high schools, community centers, malls, universities. This makes finding and keeping tenants easy. I also rent the units out less than market. Tenants are better people when they are getting a good deal. Less turnover, less headache.

 

[Markola]

And SS down the road? Part time work options? Liquidate everything and move to Latin America or Thailand? Looks to me like you have lots of options. I'm not sure what the point of an early retirement forum is if the advice one gets here is why one shouldn't retire early.

 

[calmloki]

Good question. Our rentals bring in somewhere between 1.2 and 2 times our annual outgo. Selling them means all of a sudden our net worth drops substantially thanks to depreciation recapture, and we have to scramble to find something that brings in a better return than the rentals since we have a big asset drop. We have some assets in the market and a substantial amount we have been doing hard money loans with, but I do worry about coming to a screeching halt in the income area and running for an indeterminate time on what we have accumulated.

Thing is, while I do the old war horse thing on the rentals when I gotta, my eagerness to enter the ruck of battle is greatly diminished at the age of 66: more and more I just don't wanna.

The gal's Mom lasted till 95. If I figure 29 years at our current living expense with a 3% annual inflation rate and figure our assets will make 3.5% we should be ok. Should. Doesn't stop the concern, and I've fewer years to be concerned about than you...

 

[BreathFree]

And SS down the road? Part time work options? Liquidate everything and move to Latin America or Thailand? Looks to me like you have lots of options. I'm not sure what the point of an early retirement forum is if the advice one gets here is why one shouldn't retire early.

LOL!! I think this is why I am comfortable with a small financial asset number. I am very flexible and have many options for adapting to a temporary set back.

Still, I haven't been able to find a metric to gauge the adequacy of the financial asset side. The rentals have to add some value. I shouldn't need to save (living expenses) / SWR or 42,000 / 3.5% = 1.2 million.

Maybe then subtract the liquidation value of the real estate?
1.2 million - 300,000 = aprox $900,000.

 

[dallas27]

No financing on anything if I can help it. I planned from the begging to live off the cash flow. I am in a town that does not grow, so expected virtually no property appreciation.

Uhg, the whole point of real estate is to keep it levered.


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[BreathFree]

Good question. Our rentals bring in somewhere between 1.2 and 2 times our annual outgo. Selling them means all of a sudden our net worth drops substantially thanks to depreciation recapture, and we have to scramble to find something that brings in a better return than the rentals since we have a big asset drop. We have some assets in the market and a substantial amount we have been doing hard money loans with, but I do worry about coming to a screeching halt in the income area and running for an indeterminate time on what we have accumulated.

My plan is to sell around the time I am going to collect social security, to take the sting out of the loss of income. I am making 8.6% return (after expenses and not counting appreciation) on my rentals on the present value. If the property value at least keeps up with inflation, I don't know where to find a better return. I'm sure if I am lucky enough twenty years from now to look back at this moment, all of this planning will seem ridiculous. There are an infinite number of doors yet to open and I don't have a crystal ball.

 

[BreathFree]

Uhg, the whole point of real estate is to keep it levered.
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I purchased most of my properties in 2005 and 2007. I sailed right through the housing crisis and recession, no sweat. I was surrounded by foreclosure signs. You can keep your leverage; I wanna sleep at night.

 

[JDARNELL]

I purchased most of my properties in 2005 and 2007. I sailed right through the housing crisis and recession, no sweat. I was surrounded by foreclosure signs. You can keep your leverage; I wanna sleep at night.

I agree.

 

[Winemaker]

I purchased most of my properties in 2005 and 2007. I sailed right through the housing crisis and recession, no sweat. I was surrounded by foreclosure signs. You can keep your leverage; I wanna sleep at night.

If your properties cash flow properly, and the value and rents rise, you refinance every 5 years or so, at 25% down and 75% out. You then take the tax free equity out and either use it for a down payment for the next one, or you spend it.

I purchased mine in 1999 and sailed through also. Never lost a wink over leverage; although I am restless during grape harvesting and wine season.

 

[Sunset]

...
Still, I haven't been able to find a metric to gauge the adequacy of the financial asset side. The rentals have to add some value. I shouldn't need to save (living expenses) / SWR or 42,000 / 3.5% = 1.2 million.

Maybe then subtract the liquidation value of the real estate?
1.2 million - 300,000 = aprox $900,000.

This is how I think of them, because I could sell them and then add that money into my stash of other investments.

 

[BreathFree]

If your properties cash flow properly, and the value and rents rise, you refinance every 5 years or so, at 25% down and 75% out. You then take the tax free equity out and either use it for a down payment for the next one, or you spend it.

I purchased mine in 1999 and sailed through also. Never lost a wink over leverage; although I am restless during grape harvesting and wine season.

I understand the concept. I personally do not handle debt well. The property could be perfect, in a great market and I will be hyper focused on paying off the debt. I will maintain an unhealthy level of stress over it, regardless of the liquidity that I have at my disposal and the cash flow. It is like a giant lead weight on my neck and shoulders. My palms are sweating as I type this.

The entire reason to FIRE for me is peace of mind and security. I won't have that, in my mind, If I am always leveraging up. But, I know it works for some, so go for it.

 

[BreathFree]

This is how I think of them, because I could sell them and then add that money into my stash of other investments.

That's what I'm thinking. It makes sense. Gives me something to shoot for. So, I'm a little short. I guess I'll go in to work tomorrow.

I think I originally listed my retirement date as 2020, so I guess I was getting a little greedy, time-wise.

 

[jw72]

I purchased most of my properties in 2005 and 2007. I sailed right through the housing crisis and recession, no sweat. I was surrounded by foreclosure signs. You can keep your leverage; I wanna sleep at night.

I feel the same way, paid cash for all but one. A friend said lock a 30 year mortgage, we will never see these rates again. Every month I think about paying it off, I just hate the payment.

On your question, I do not think you have enough to retire. But you do have a lot of f- you money. And that gives you the flexibility to work where you want and do what you want, congradulations!!!

 

[dallas27]

I purchased most of my properties in 2005 and 2007. I sailed right through the housing crisis and recession, no sweat. I was surrounded by foreclosure signs. You can keep your leverage; I wanna sleep at night.

You're assuming the people who foreclosed did worse than you. Likely they had far superior ROE year after year beforehand and happily walked away when things went south.


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[Markola]

For comparison, look up the Mr. Money Mustache family's budget breakdown. They live on $25,000 - for a family of three! It's not for everyone but no debt, nonexistent income taxes, thoughtful choices and simple living can get a person a long way. Also, as a single person, you can set up any lifestyle you bloody well choose. Good luck and congrats on all you've accumulated.

Here's the most recent one I could find in a hurry: http://www.mrmoneymustache.com/2014/01/12/exposed-the-mmm-familys-2013-spending/

 

[BreathFree]

You're assuming the people who foreclosed did worse than you. Likely they had far superior ROE year after year beforehand and happily walked away when things went south.


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Guys, I'm not making an argument here for which strategy is financially more rewarding. I don't care if keeping leverage has a better financial outcome, the STRESS for me would be overwhelming, but a foreclosure would be even worst. The ethical side of squeezing every ounce of equity out of your investment, with the plan in place to bail if things go bad and leave someone else holding the bag, that's bad karma.

I too have been tempted to pull out a couple hundred grand at these low rates, but I know myself, and I wouldn't be happy with it. I hate making monthly payments as well.

 

[Dd852]

I'm absolutely with you on debt. Contrary to all the professional and amateur advice we got, we paid off our main house mortgage the second we could and paid cash for the rental property. It's all about stress levels, not about returns!


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[BreathFree]

I'm absolutely with you on debt. Contrary to all the professional and amateur advice we got, we paid off our main house mortgage the second we could and paid cash for the rental property. It's all about stress levels, not about returns!

Also, you have to eat. So, since your properties are leveraged, you have a higher return on equity but much lower cash flow, which means you need to own either more property, or larger, more expensive properties to get the same cash flow. More property equals more tenants, liability, time, risk, stress. And with each passing year, more of your monthly payment goes to principal which is unavailable to you to invest, so you have to eventually refinance to pull that out, incurring loan fees and a new interest rate. Nope, not for me.

To clarify, I'm not saying I wouldn't borrow money to purchase a property. I did in fact do this. But, I paid them off as quick as possible and have no desire to KEEP them leveraged. Keep is the key word here.