Modeling rental properties

[surprising]

I've modeled rental properties two different ways and see pretty significant differences for max spending @ 95% success:
1. Rental income as 'pension income' inflation adjusted - max spending $171K
2. Rental property values as part of investment portfolio - max spending $140K

I guess this represents the extreme range of possibilities - 1) hold rentals until the day I die, and 2) sell all my rentals today and invest.

The reality is somewhere in the middle, where I sell rental properties sporadically over the years. I'm thinking the best way to interpret the firecalc results is: while I have all my rental properties, $171K is a reasonable max spending target. As I sell the properties, I should reduce overall spending to something between $171K and $140K, until I've sold all of them, at which point $140K is a more reasonable spending target. Does it make sense?

 

[Family]

Interesting. I only use FireCalc to model my investment portfolio and keep my rentals separate. I suggest running FireCalc every year based on updates to your situation (portfolio value, did you sell a rental, etc).

The difference above may be due to the fact in 1. you assume or provide the spendable 'pension' income generated from your rental properties that is 100% secure and ONLY increases with time, whereas in 2. FireCalc is calculating a rate of return based on an investment portfolio size which can increase AND decrease and have Sequence Of Return Risk. Also, your inflation adjusted rental income may average out to be more than the FireCalc rates of return.

I don't see how 1. takes into account the amount your rental property appreciates. Rentals in my area have appreciated significantly over the last few years (8%/yr or so...). Also, when you sell, you'll need to pay taxes on the capital gains (& all the depreciation) plus possibly realtor fees. However, if you die owning rental property, your heirs will inherit the property on a "stepped up" basis and will only owe capital gains (when they sell) using the property value on your Date of Death (avoiding a potential huge tax hit).

That said, I'm in a similar boat as you...we have some rental property and right now I'm fine actively managing them for the foreseeable future. However, as we age, I can see wanting or needing to sell them.

 

[NgineER]

Hard to say... How do you value the "pension" vs. the value of the properties? Is the pension your conservative estimate or an average real number?

I assume your tax situation will be different too based on you selling one each year vs. selling them all at once.
I will face something similar also as we age and don't want to actively manage.

 

[pb4uski]

I've modeled rental properties two different ways and see pretty significant differences for max spending @ 95% success:
1. Rental income as 'pension income' inflation adjusted - max spending $171K
2. Rental property values as part of investment portfolio - max spending $140K

I guess this represents the extreme range of possibilities - 1) hold rentals until the day I die, and 2) sell all my rentals today and invest.

The reality is somewhere in the middle, where I sell rental properties sporadically over the years. I'm thinking the best way to interpret the firecalc results is: while I have all my rental properties, $171K is a reasonable max spending target. As I sell the properties, I should reduce overall spending to something between $171K and $140K, until I've sold all of them, at which point $140K is a more reasonable spending target. Does it make sense?

What did you use for rental income in relation to property value? I'm guessing it was a lot more than 4%.

I'm thinking that the rental income approach is probably more valid... rental income would have less SORR than invested assets.

If I put in FIRECalc with a 60/40 portfolio and solve for maxsafe withdrawals it turns out about 4%, as would be expected. 100/0 maxasfe withdrawals are about 3.9%. So if your rental income exceeds 4% of the property value then you will get higher maxsafe withdrawals using the rental income.

 

[surprising]

What did you use for rental income in relation to property value? I'm guessing it was a lot more than 4%.

I'm thinking that the rental income approach is probably more valid... rental income would have less SORR than invested assets.

If I put in FIRECalc with a 60/40 portfolio and solve for maxsafe withdrawals it turns out about 4%, as would be expected. 100/0 maxasfe withdrawals are about 3.9%. So if your rental income exceeds 4% of the property value then you will get higher maxsafe withdrawals using the rental income.

That maxes sense. I have 3 rentals, and (yearly rental income / property value) = 5.8%, 6.4%, 7.4%. If I feel I can get a better return in the market then it would be beneficial to sell.

 

[NgineER]

How do you value you your properties? I do a simple 100x monthly rent. There is also the tax assessed valuation and comps. I know my 100x sets a low valuation of the properties, but maybe it is what I will take home in the end.

 

[surprising]

How do you value you your properties? I do a simple 100x monthly rent. There is also the tax assessed valuation and comps. I know my 100x sets a low valuation of the properties, but maybe it is what I will take home in the end.

I use current value (from zillow) minus mortgage.

 

[surprising]

Since my original post, I've realized a few things that change the picture.

1. Assuming rents will increase with inflation every year is flawed. In reality in my area, that's not the case. Costs such as HOA and property taxes are increasing faster than rents, and so over time I'm losing money each year.
2. If I sell the rentals, I will have fewer expenses each year (currently around $30K of expenses is rental (hoa, prop taxes etc). Taking that into account, the original experiment shows similar real expenses.

Currently the rents are providing between 1.5% and 4.5% return (rent / (current value - loan) ). I am pretty sure I can make better use of that equity in the stock market or bond market.

The one property making 1.5% return is a real stinker, and the only reason we want to keep it is it's the only one we would downsize to later on in retirement. It's a great location with everything in walking distance.

 

[pb4uski]

If it is a great location with everything in walking distance why is it a real stinker?

 

[surprising]

If it is a great location with everything in walking distance why is it a real stinker?

It's very near the top of what we can get for rent, but currently provides very little income after expenses. It doesn't help us with day to day costs in retirement, so the only reason to hold right now is for appreciation. Housing prices have been going down for last few years since the Covid bump, so that's a bummer too.