Author Topic: What's the consensus for simply living off the Rent? Will that last 30 years?  (Read 1544 times)

andysandp

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Let's say you have 1 million in Real Estate giving off $40,000 in rent (after Cap Ex and all Expenses).  Let's assume you have no mortgage.

Is it reasonable to live off this $40,000 and adding inflation each year for the next 30 years?  Or should you only live off $35,000 or so to prepare for worst case scenarios?

For example Stocks has a 4 percent rule because you might run into the worst 30 year return in stock history.

Lmoot

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What do you expect to do after 30 years? I think the answer depends on how old you are. At some point I would just sell the properties and live off of the profit. I have a rental property and want to add more, But if the time were right, I would sell them if it meant I could get more from the sale then from additional years of rental income. Whatís the point of having over $1 million in assets, if you donít ever plan on tapping into it?

nereo

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Let's say you have 1 million in Real Estate giving off $40,000 in rent (after Cap Ex and all Expenses).  Let's assume you have no mortgage.

Is it reasonable to live off this $40,000 and adding inflation each year for the next 30 years?  Or should you only live off $35,000 or so to prepare for worst case scenarios?

For example Stocks has a 4 percent rule because you might run into the worst 30 year return in stock history.

Your example is a bit confusing, but here goes...

First off, if you have $1MM in real estate and are only generating $40k/year after expenses you are doing very poorly, and the wisest course of action (if raising rents isn't possible) would be to sell and pocket the $1MM.
For perspective, I'd want $1MM in real estate to gross somewhere between $10k/20k per month.  Rule-of-thumb 50% goes to expenses/vacancies/T+I yielding me with a minimum off $60k net profit per year.  Anything less and it's sell-baby-sell.

Now let's assume that the $1MM was just a number tossed out and your real question is "suppose I have real estate which nets $40k/year after expenses - is it reasonable to live off this $40k/year?"
unfortunately the answer to that question is much harder to pin down.  Real estate is hyper-local, and occasionally individual markets will go belly up.  This is more common in small cities/towns that rely on a single industry (e.g. Flint Michigan) but can also happen to larger cities (e.g. New Orleans in 2006; San Juan now). For that reason alone its good to diversify - either by owning properties in mutliple markets or by having other income streams (equities, side income).  Depreciation can save your ass in many cases, and as noted above the value real-estate holdings in a normal year yield substantially more than 4%.  So while you might want $1MM in an index fund to generate $40k to live off of, that same value of real-estate should be spitting off $60k-100k/year (after maintenance and vacancies) depending on your area.  So - you can live off of $40k/year and invest/save/pay-down the remaining $20k-60k/year for a potential housing bust in your area.  In that respect real estate can generate a LOT more $ than a similar amount of stocks.

...finally I have to mention that managing a $1MM portfolio of rentals takes a great deal more work than $1MM in an index fund. If that is twenty doors (e.g. 10 duplexes) you are probably doing maintenance or filling vacancies on average a few days each week, or paying a property management firm to do this for you.

MaikoTsumi

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...finally I have to mention that managing a $1MM portfolio of rentals takes a great deal more work than $1MM in an index fund. If that is twenty doors (e.g. 10 duplexes) you are probably doing maintenance or filling vacancies on average a few days each week, or paying a property management firm to do this for you.

$1MM is not much in real estate, but it's also not necessarily a choir to manage.  My portfolio is more than that, but I'm only in SFR's.  My average turnover is 3-5 years, so it's about as passive as you get.  I manage everything including repairs.  I probably will think about offloading some of my properties to management when I add another 15-20. 

andysandp

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It doesn't have to be 1 million in Real Estate giving off $40,000 in Rent.  I just used conservative numbers for an example.

Whatever the Rent is,  do you live off the rent?  Or do you live off a percentage of rent to prepare for worst case scenarios.

Let's assume you won't ever sell it, and you will live for another 30 to 50 years.
« Last Edit: January 25, 2018, 10:45:56 AM by andysandp »

nereo

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Quote
Your example is a bit confusing, but here goes...

First off, if you have $1MM in real estate and are only generating $40k/year after expenses you are doing very poorly, and the wisest course of action (if raising rents isn't possible) would be to sell and pocket the $1MM.


Well it doesn't have to be $40K, I just used it as example.  Whatever the Rent is,  do you live off the rent?  Or live off a percentage of rent to prepare for worst case scenarios.

Let's assume you won't ever sell it, and you will live for another 30 to 50 years.

No - you cannot "live off the rent". 
First, understand everything I am about to say is broad-scale, rule of thumb sort of stuff.
When you are a landlord about 50% of your rent is used for expenses.  These include vacancies, repairs, taxes and insurance. Note that some of those will be very inconsistent; you may have $0 in repairs one year but need to replace the roof for $8,000 another year. You may have a tenant for 24 months straight but will then spend 2 months repainting and finding a new tenant (with no rent during that time).
So if you are bringing in $40k in rent, you can expect your profit to be around $20k.
If you want $40k to live off of from rental properties you'll need to gross closer to $80k in rent.  However, done right you can do this with a lot less than $2MM of rental properties (4% of $2MM = $80k).  Depending on your market you might gross $80k in rent with $400k-$600k in properties.

andysandp

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"No - you cannot "live off the rent"."

To clarify, I mean Live of net Rent (After all expenses, vacancies, and Cap Ex).

I want to know if people live off the "Net Rent" or live of a percentage of the Net Rent.  They need to prepare for Inflation and downturns  of rental market for the next 30-50 years.  No selling of the Real Estate either.

Thanks!


cchrissyy

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does your question boil down to "when you are making money off rental real estate, can you live off that money?" 
if so, yes! I'm doing it right now and I expect to do it for the rest of my life.

SeattleCPA

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Let's say you have 1 million in Real Estate giving off $40,000 in rent (after Cap Ex and all Expenses).  Let's assume you have no mortgage.

Is it reasonable to live off this $40,000 and adding inflation each year for the next 30 years?  Or should you only live off $35,000 or so to prepare for worst case scenarios?

For example Stocks has a 4 percent rule because you might run into the worst 30 year return in stock history.

If you're not already up to speed on that 150 year history on the returns of everything paper you would probably find that interesting:

https://forum.mrmoneymustache.com/real-estate-and-landlording/rate-of-return-on-everything-a-150-year-history/

Real estate per that study delivers the same rates of return as equities but with half the variability. That should mean you can enjoy a higher withdrawal rate.

BTW, real estate also appears to often be very poorly correlated with equities which means it should be possible to construct portfolios that are much more robust.

Edit: Added the boldfaced, italicized word "not" to my first sentence... omitted that in original post.
« Last Edit: January 25, 2018, 01:17:39 PM by SeattleCPA »

nereo

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To clarify, I mean Live of net Rent (After all expenses, vacancies, and Cap Ex).

I want to know if people live off the "Net Rent" or live of a percentage of the Net Rent.  They need to prepare for Inflation and downturns  of rental market for the next 30-50 years.  No selling of the Real Estate either.

Well yes... after you've accounted for all expenses what's left over you can live off of.  Broadly speaking that's going to be ~50% of your rent. 

The real caveats is that you need to properly prepare for very infrequent but very costly repairs as part of that ~50%... new roof, foundation repairs, major renovation to keep the property 'modern' enough to attract good rents, tenants from hell, natural disaster etc.  Over several decades some of those issues *will* happen but when isn't always predictable.  So you either need to keep a maintenance account to cover them or you may have months or even years when all your rent goes towards necessary repairs. We simply put 50% of all rents into an account and pay all expenses from that account.  It ebbs and flows.

So yes you can live off just the rent, and there's some good data (see SeattleCPA's link) showing that real-estate can be less volatile than equities.  Better still, if you are choosy with your rentals you can get the same $xx,xxx/year to live off with much less capitol than you could with index funds. Hence my example how $400-600k in rentals can provide you with the same income stream as $1MM in an index fund and a WR of 4%. That has less to do with them getting a better return (they don't really) and more to do with rentals avoiding negative years as stocks occasionally do.

totoro

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Of course you can live off of rental income.  Lots of people do.   As far as inflation goes, depends on your area as to whether rents will keep up with it.  Only thing with rental income is that you need a contingency fund for repairs and replacement.  If you have that sorted and are insured for loss I would be okay with rental income only myself.   

SwordGuy

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From your original question, if you have some sort of idea in your head that the 4% rule has anything at all to do with rental property, kill that thought.  Kill it dead.

If I've misunderstood you, even better!

If I had 20 rental properties instead of 3, I would have $1M invested in in them.   Now, I've bought homes at steep discount that needed repairs, and the after repair value of those homes would be more like $1,600,000.

I would expect a gross income of around $192,000 if all were fully rented.
Net profit after expenses, set asides for repairs and vacancies, etc., would average around half that, or $96,000. 

I could certainly expect to live on that $96,000 a year.   Rents lag inflation (at least) by the length of the lease, so they would go up with inflation but not necessarily as fast as inflation.  (Assuming you don't have  a local area melt-down in population like Detroit.)