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Old 04-30-2011, 12:06 PM   #41
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I can't get my mind around the idea of someone getting $50k from real estate without putting in any capital or labor. So the hypothetical just doesn't compute for me.

Taking a more realistic case, if I had some combination of SS and a CPI-adjusted pension that provided all my likely expenses plus a 10% annual cushion, I could imagine retiring.

The risk is that my actual spending won't follow the CPI. That may be offset by some conservatism in my spending estimate (I may have some luxuries in there that I know I could give up in response to bad times.)

Personally, I'd work a couple more years.
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Old 04-30-2011, 12:17 PM   #42
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I'm not certain the OP owns any real estate at all, although his responses have been a little coy about that. I took his initial post as a mere hypothetical, although I am not yet certain what his ultimate aim may be.
Heh, sorry, I wasn't trying to be coy, just trying not to focus on the particulars of my situation or even real estate in general, just trying to get at the idea of retiring based on cash flow rather tan net worth.

Estimating the value of said cash flow as an annuity is the key idea I hadn't thought of.

Not that it matters, but I do have 3 rental properties. One of them is indeed upside down, but providing positive cash flow.

Thinking about this, I took the idea to the logical extreme of "what if I had a bunch of properties, all providing cashflow, all of which were 100% financed or values had dropped so you had no equity, could you retire with no net worth."

I also am a few years into a job with a COLA'd pension, and wanted to know about living just off cash flow, rather than building up a huge net worth.

In any case, there is huge other issues with relying on one source of income, with having real estate, with being a landlord, etc. etc., which is why I didn't want to sidetrack into those discussions.

But my basic question was answered (i.e. it's not that you have no net worth, you do have net worth by treating the cash flow as an annuity.. the problem is that if you sell, you have basically no net worth, so you have no liquid net worth)

The social security example was another good way to think of it.

Thanks for the thoughts everyone!
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Old 04-30-2011, 12:18 PM   #43
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I can't get my mind around the idea of someone getting $50k from real estate without putting in any capital or labor. So the hypothetical just doesn't compute for me.
I never said they didn't put in any capital or labor. Just that said equity (cash or sweat) no longer exists.

Plenty of people right now have real estate that they put in capital or labor, but is not adding to (or is even subtracting from) their net worth.
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Old 04-30-2011, 12:21 PM   #44
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I can't get my mind around the idea of someone getting $50k from real estate without putting in any capital or labor. So the hypothetical just doesn't compute for me.
I am not sure why so many posters exert so much energy on hypothesis. What's the real scenario faced by the OP?

If the income stream (or cash flow) is predictable, reliable and sufficient to fund all your future expenses, you can retire!
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Old 04-30-2011, 02:28 PM   #45
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Anything that throws off $50k a year in net passive income has economic value, whether that is a spouse, a business, a website, a SS check, a pension, annuity, stock, bond, TIPS, real estate, or whatever.

The actual dollar value depends on the risk of continuing to receive the $50k a year into the future. The lower the risk, the higher the economic value -- TIPS that throw off $50k per year may be assigned a relatively low "risk" of 2%, so the $50k / 2% = $2.5 million. The higher the risk, the lower the economic value -- real estate in a bad part of town may be assigned a relatively higher "risk" of 10%, so the $50k / 10% = $500k.

If you have $50k in income and are assigning it a value of $0, then either the risk is infinite (perhaps you believe that the US dollar is going to experience hyper-inflation in the next few months), or you are mis-pricing the value or the risk.

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Old 04-30-2011, 02:48 PM   #46
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I think the issue is one of confidence in those cashflow projections. If they are close to 100% along with a COLA, then they are better than most pensions.

Properties can indeed supply positive cashflow when their equity would suggest otherwise. This is the inefficiency in the rental market reflecting a lag to current market values. How many renters in Las Vegas have had their rents reduced by over 40%?
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Old 04-30-2011, 05:24 PM   #47
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Anything that throws off $50k a year in net passive income has economic value, whether that is a spouse...
How is the market for spouses lately?

Ha
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Old 04-30-2011, 05:40 PM   #48
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Heh, sorry, I wasn't trying to be coy, just trying not to focus on the particulars of my situation or even real estate in general, just trying to get at the idea of retiring based on cash flow rather tan net worth.

Estimating the value of said cash flow as an annuity is the key idea I hadn't thought of.

Not that it matters, but I do have 3 rental properties. One of them is indeed upside down, but providing positive cash flow.

If you don't mind I'd be interesting in more detail (how much you paid, worth and rent) on the underwater house. If the market value of house gets cut in 1/2 the rent should drop also, although probably not by 1/2.
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Old 04-30-2011, 05:51 PM   #49
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Rents are actually on the rise. I live in the Boston area and there's been a spike in rents. I think it's due to the economy coming around, kids moving out of their parents houses etc.

It also may be due to foreclosures, and people needing to rent a place..and some that don't want to own anymore, and would rather just rent.
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Old 04-30-2011, 06:24 PM   #50
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Rents are actually on the rise. I live in the Boston area and there's been a spike in rents. I think it's due to the economy coming around, kids moving out of their parents houses etc.

It also may be due to foreclosures, and people needing to rent a place..and some that don't want to own anymore, and would rather just rent.
All real estate is local. AFAIK Boston prices didn't appreciate as fast or fall as far as California. One of the implications of real estate market where it is more expensive to rent than own, is that expectation of future housing prices will continue to decline.
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Old 04-30-2011, 06:41 PM   #51
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I do not believe I could retire with 0 net worth. First off if you have some sort of emergency fund you have some net worth, maybe not much but some. Zero indicates not emergency fund. Does your $40,000 cover LTC, a sinking fund for repair replacement of auto and other big ticket items, deductibles if you get cancer of some other really expensive ailment that your health care only covers 80% of?

With zero net worth it is the things you did not plan for that are going to ruin you, and if you know what those are, you would plan for them. So no, I don't think you can retire with zero net worth.
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Old 04-30-2011, 06:58 PM   #52
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The OP question is hypothetical.... but who cares...


YES... if you have a steady cash flow that meets all your living needs you do not have to work....


But your hypo of zero net worth is where most have a problem... if you do own real estate, and it has a positive cash flow then you have net worth... you might not be able to sell the RE for more than you owe, but the positive cash flow has an economic value that you can calculate and that is your net worth...


Or another way to look at it... you buy an annuity that you can NOT cash out of no matter what... you only get the monthly payments.... is that annuity worth zero You do not have any assets if you spent your last check... when you die you will not have anything either... but with your RE, you will...
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Old 04-30-2011, 08:11 PM   #53
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If you don't mind I'd be interesting in more detail (how much you paid, worth and rent) on the underwater house. If the market value of house gets cut in 1/2 the rent should drop also, although probably not by 1/2.
Sure. I'll probably start a thread soon with more details of our financial picture to get some thoughts, but the house in particular you're referring to was bought for 120k. It's in Vegas, and was bought at the very end of 08. Prices had fallen since the peak in mid 06, so I figured after 2 and 1/2 yard of dropping - it had last been sold for like 260k or so in 05, I'd have to check the public records - it was an okay time to buy. Whoops.

15% down (so 102k loan), which in the last two years has been paid down to like 98k. Is now worth about 85k. Whoops.

Mortgage, taxes, and insurance payment is 750/month. Rents for 1100/month. Built in 2004, so not too many repairs needed as of yet.

Not too underwater on that one (have another bought at the end of 07 which is worse), but I could see a similar case where one bought the house for a lot more earlier, had a bigger down payment so the mortgage was much smaller, but then the price dropped a bunch so they're cash flow positive but equity negative.

Some of the more recent ones have been better (I.e. Purchasing similar houses to that one but last fall instead of 08 for 75k that rent for 1000-1100; mortgage, taxes, and insurance come to about 400/month).
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Old 04-30-2011, 08:25 PM   #54
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YES... if you have a steady cash flow that meets all your living needs you do not have to work....


But your hypo of zero net worth is where most have a problem... if you do own real estate, and it has a positive cash flow then you have net worth... you might not be able to sell the RE for more than you owe, but the positive cash flow has an economic value that you can calculate and that is your net worth...

however in the hypo 1 or both of 2 things will happen: 1) rents will fall and/or 2) RE values will increase. it is a market anomaly that $0 net worth of real estate produces cash flow unless the neighborhood said RE is in is very dangerious/risky. once the markets correct $0 net worth of RE wont produce income at least not in neighborhoods that are not ghettos. so since it is probably a temporary positive cash flow, it is not advisable to retire on it.
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Old 04-30-2011, 08:49 PM   #55
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however in the hypo 1 or both of 2 things will happen: 1) rents will fall and/or 2) RE values will increase. it is a market anomaly that $0 net worth of real estate produces cash flow unless the neighborhood said RE is in is very dangerious/risky. once the markets correct $0 net worth of RE wont produce income at least not in neighborhoods that are not ghettos. so since it is probably a temporary positive cash flow, it is not advisable to retire on it.
Right. And likely you'd start to have equity on principal pay down alone, even assuming no appreciation, eventually building net worth. Unless values continued to fall ke in line with, or exceeding, the amount your principal was being reduced by.
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Old 04-30-2011, 10:48 PM   #56
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15% down (so 102k loan), which in the last two years has been paid down to like 98k. Is now worth about 85k. Whoops.

Mortgage, taxes, and insurance payment is 750/month. Rents for 1100/month. Built in 2004, so not too many repairs needed as of yet.

Not too underwater on that one (have another bought at the end of 07 which is worse), but I could see a similar case where one bought the house for a lot more earlier, had a bigger down payment so the mortgage was much smaller, but then the price dropped a bunch so they're cash flow positive but equity negative.

Some of the more recent ones have been better (I.e. Purchasing similar houses to that one but last fall instead of 08 for 75k that rent for 1000-1100; mortgage, taxes, and insurance come to about 400/month).
The astonishing thing to me is if you can get 30% down the payments on 85K house (~60k loan) is around $300/month add a $100-150 for taxes and insurance and you do make a very nice profit.

By way of comparison, $1000-$1100 rental gets you a tiny 400-600' studio in Honolulu in crappy building. The condo would typically go for around 200K with a 30% down your payments are around ~$750. By the time you pay taxes insurance and management and condo fees you'd be lucky to break even.

I am stock guy not real estate person, but it sure appears that Las Vegas rentals are better deals than Honolulu ones.
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Old 05-01-2011, 01:30 AM   #57
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The astonishing thing to me is if you can get 30% down the payments on 85K house (~60k loan) is around $300/month add a $100-150 for taxes and insurance and you do make a very nice profit.

By way of comparison, $1000-$1100 rental gets you a tiny 400-600' studio in Honolulu in crappy building. The condo would typically go for around 200K with a 30% down your payments are around ~$750. By the time you pay taxes insurance and management and condo fees you'd be lucky to break even.

I am stock guy not real estate person, but it sure appears that Las Vegas rentals are better deals than Honolulu ones.
Yeah that's for a 3br/2bath 1600sqft place. The 400-600 sqft studios (condos) are more like 30k. But one annoying thing is most places in Vegas have HOAs, which can be a pain in the neck to deal with, and can add quite a bit of expenses (and many houses have HOAs, not just condos).

Real estate right now really does depend on the area. Vegas was so overinflated, it's fallen really hard. I wouldn't buy in Seattle right now, and California is just getting to levels approaching reasonable.

But like the famous Buffet quote goes, Be fearful when others are greedy, and greedy when others are fearful.
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