Valuing a rental property in calculations...

[Dd852]

I am curious how you all value (or would value) a rental property in your retirement "income" calculations.

Method 1: (this is what I have been doing) I do a WR off the value of my liquid assets and then add in the rental income as if it were a pension. eg., liquid assets of $1,000,000. rental property value (ignore) of $500,000. and rental income after expenses of $15,000. At a WR of 4%, I take $40,000 from liquid assets and add in the rental income to = $55,000 spending annually.

Method 2: treat the rental income as a dividend and put current assessed value into the assets for the WR calculation. Using the values as above: $1,000,000+500,000=$1,500,000 @4% = $60,000

The logic of method 2 is that the underlying value of the rental asset could be liquidated (sold) at some point and the cash used for whatever, so it really isn't like a pension. The logic of method 1 is that it is a pain to liquidate property and you never can be totally sure of where the market is.

With rental property #1, bought before I ERed, it really doesn't matter and having started with method 1 I'm happy to continue. BUT I'm asking the question because I'm ERed now and considering using some of my liquid assets to buy property #2 and I'm wondering how I should adjust my calculations and the mix.

Your thoughts please! Is this simply diversifying my AA into another asset class (use method 2) or is this like buying an annuity (albeit without a guaranteed income stream ... so use method 1. Reduce the liquid portion, "re-retire" and do my SWR calculation all over again with the new value and add in the rents as an income stream).

Or is there yet another better way that I've ignored?

 

[bld999]

I use method one, and thus don't include the net rent payment stream and the property value at the same time in any wr calcs. I reason that you can't have the benefit of both at the same time.

I have never tried to break a retirement planner down to produce results that would reflect rent income for a period, then reflect property sale and the resultant increase in investable assets.

As you mention, the payment stream is knowable because it is in real time; property values and sale dates are only known in the future, and suffer those effects of uncertainty.

 

[Senator]

I just use the income as "additional Income".

Part of my FIRE is my 24 rentals. And of course my investments. Make sure you allocate at least 5% for vacancy, 10% for maintenance and 8% for management. And even then, I typically only figure in about half, in case I am off a bit.

You can have an end date for the rentals, and then a lump sum at that point as a sale occurred too.

 

[calmloki]

....

You can have an end date for the rentals, and then a lump sum at that point as a sale occurred too.

That's what I do. I use the tax man's "True Cash Value" as the value for figuring our net worth, and according to Quicken's retirement planner under their "planning" tab we were to have sold them a couple years back.

Every year that we keep them after that date boosts our net worth with whatever rental income we don't spend. I also figure every year we continue to have our net worth grow beyond what it would be after figuring in the effects of inflation is a year we don't need to fund with retirement dollars. So every year the rentals pay our bills is worth 3-4% extra in unneeded retirement stash.

 

[ajs56]

I am curious how you all value (or would value) a rental property in your retirement "income" calculations.

Method 1: (this is what I have been doing) I do a WR off the value of my liquid assets and then add in the rental income as if it were a pension. eg., liquid assets of $1,000,000. rental property value (ignore) of $500,000. and rental income after expenses of $15,000. At a WR of 4%, I take $40,000 from liquid assets and add in the rental income to = $55,000 spending annually.

Method 2: treat the rental income as a dividend and put current assessed value into the assets for the WR calculation. Using the values as above: $1,000,000+500,000=$1,500,000 @4% = $60,000

The logic of method 2 is that the underlying value of the rental asset could be liquidated (sold) at some point and the cash used for whatever, so it really isn't like a pension. The logic of method 1 is that it is a pain to liquidate property and you never can be totally sure of where the market is.

With rental property #1, bought before I ERed, it really doesn't matter and having started with method 1 I'm happy to continue. BUT I'm asking the question because I'm ERed now and considering using some of my liquid assets to buy property #2 and I'm wondering how I should adjust my calculations and the mix.

Your thoughts please! Is this simply diversifying my AA into another asset class (use method 2) or is this like buying an annuity (albeit without a guaranteed income stream ... so use method 1. Reduce the liquid portion, "re-retire" and do my SWR calculation all over again with the new value and add in the rents as an income stream).

Or is there yet another better way that I've ignored?

Hi DD,

I use MS Money Lifetime Planner along with some spreadsheets for FIRE planning. I handle my rental income/assets in 2 stages:

1) I use your method #1 for the period which I will hold the rentals and derive an income from them, treating the net rental income like a pension or other income stream which will offset expenses and reduce any withdrawals I need to make.

2) At some point when I dispose of the rentals I will (hopefully?!?) have a lump sum of cash to invest. For projections, I add the net (after estimated CG taxes, sale expenses, etc.) sale proceeds to my FIRE investments total. Then from that point forward, I project my investment gains along with inflation, SWR, etc based on the total FIRE investments including the rental sale proceeds.

In MS Money Life time I can adjust the sale timing, amount of sales proceeds, etc., along with the amount, start/stop times and amounts of other incomes, expenses etc. That way I can play "what if" with when to sell, etc.

Hope this makes some sense and helps!