Dd852
Full time employment: Posting here.
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?
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?