How do you factor RE in your FIRE calc?

[DINKFIRE]

I'm not sure if this has been discussed before (did a quick keyword search and didn't come up with any recent threads), I would like find out how we should factor our real estate investments in our FIRE calculation. I believe most of us here own some RE investments.

Our current net worth is approximately 45% in physical real properties, including our main home and several investment properties that we collect rent from. The remaining portfolio is in marketable securities and cash. We have zero debt. We use Personal Capital to analyze our portfolio balance for reasonableness, but PC does not include RE in its model. We constantly getting warnings that our portfolio is too high in equity and not enough in alternatives. The retirement planner in PC does allow us to add RE as "events", such as rental streams and dispositions. It is far from sophisticated. Elsewhere most the calculators don't have an option to include rental RE in retirement planning.

What do you do with RE investments when you calculate your ER cashflow?

 

[Dtail]

I would think most folks would include rental properties in the FIRE equation, but not their personal residence.

 

[flintnational]

I do not include our home's value in our investable assets. I would include investment real estate in your calculations. Firecalc does not have a specific field for real estate. However, it does let you model a portfolio with a specified average return. Or, you could use one of the investments listed in Firecalc as a proxy for your RE investments.

 

[RobbieB]

You could just use your net income from the properties to reduce your spending.

 

[DINKFIRE]

One follow-up question. Our plan is to sell our primary residence in a decade or so and move to one of the investment properties, and sell that in another ten years or so, then move to another of our property, and so on, because these properties are purchased based on our LT plan of different life stages. In that case, do I exclude our current home from the calculation, or the last property we plan to live in?

 

[bingybear]

personal residences are not counted, full stop.

I think you need to sort your own model for your rental business as much is dependent upon how you run it and have organized it. I would be hesitant to just use it as an income stream since a major expense on a property could shift that income to pay for the expense.

 

[bingybear]

One follow-up question. Our plan is to sell our primary residence in a decade or so and move to one of the investment properties, and sell that in another ten years or so, then move to another of our property, and so on, because these properties are purchased based on our LT plan of different life stages. In that case, do I exclude our current home from the calculation, or the last property we plan to live in?

When you sell you current home.. it is just that. You have the proceeds that could go to your investments. The house you move into which was a rental is now removed from your rental business so you need to remove those assets from being an investment.

 

[HI Bill]

One follow-up question. Our plan is to sell our primary residence in a decade or so and move to one of the investment properties, and sell that in another ten years or so, then move to another of our property, and so on, because these properties are purchased based on our LT plan of different life stages. In that case, do I exclude our current home from the calculation, or the last property we plan to live in?

I agree with others. Do not include the house price in the FIRE assets initially. But do subtract out the income you'll receive from other than your primary residence.

Then:
Under the Portfolio Changes tab (second to the last tab), add the anticipated sales price of each property (less commissions and taxes), and the year you plan to sell them. Each time you sell a property, choose "Add" a Lump Sum, and list the year.

 

[cathy63]

I don't analyze real estate as a percentage of our portfolio. When I run a tool like FIRECalc, I count the annual net income that the RE produces, and I count the one-time cash infusions (and corresponding drop in income) that will occur when we sell it.

Most of the tools I've seen have a way to specify that you'll add $x to your equity portfolio in year yyyy and then that becomes part of your spendable assets going forward, so I treat each RE sale as a different $x. The tools don't have a way to take the current value of your RE and estimate how much it might appreciate between now and when you plan to sell it, so you have to use your own knowledge of your local market to put a future value on your property.

This doesn't help if you're trying to figure out what your net worth will be 7 years from now before you sell your main home, but that's not something I would care about at all. The main thing I'm trying to understand with retirement planning tools is whether we'll have enough money to support our desired lifestyle every year, and treating RE sales as cash infusions is sufficient to accomplish that.