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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: Patches on March 03, 2017, 11:11:35 AM

Title: How much faith should I have in future RE income?
Post by: Patches on March 03, 2017, 11:11:35 AM
Hello folks, thanks for taking the time to glance at my happy predicament.  I’ve been following MMM for about 5 years and have enjoyed lurking on these forums for the past couple years.  You all have greatly benefited me with angling my finances towards FI. 

Anyway, I’ve got a piece of industrial real estate that cash flows and the note will be paid off in 2030.  Once this occurs it will generate enough net income to cover my retirement living expenses.  I currently have enough liquid assets to cover my living expenses until that occurs.  However, it would be an aggressive draw-down and by 2030 those accounts will be approaching zero.  It's not a SWR for 60 years like most people around here discuss.  More of a SWR for 15 years.

Working/saving another year or two would actually put me in a much cozier 4% or 5% withdrawal rate on the liquid assets… but once 2030 hits I’ll have about 2x more than I need.  Not something I’m complaining about, just something to note.

I may be, in some estimation considered FI now, but I’m hesitant to quit my job now and do this aggressive draw down. Cash is king after all…

But with this future cash cow, should I be so hesitant on drawing down the cash?  I suppose my real question is, how much faith would you put in these future earnings of the RE?  Enough faith to dwindle your cash to zero?

Thanks… y’all are the tops.

Added for clarity:   The property contains four buildings with four different tenants in Seattle.  Heavy machine shops... mostly servicing Boeing and shipping industries.  5yr +nnn leases, 3% increase to base/year... these companies survived the big down turn in these spaces and are well established.  I would hope things continue to be great in Seattle... but one never knows.
Title: Re: How much faith should I have in future RE income?
Post by: Enough on March 03, 2017, 12:12:20 PM
To me it would depend on the lease agreement and type of industry that occupies the real estate.  Is this a steady, well established company with a 10-50 year lease?  I know that industrial / commercial real estate is more passive and steady than residential real estate, but I've also seen commercial property sit empty for years.   I see it as a similar problem to a lack of investment diversity, I.E. if that business closes, is the property such that it could be readily released to other businesses?  If that business goes bankrupt 5 years down the road, you don't want to be stuck in a market downturn pulling out your investments to both live off of and pay the note. 
Title: Re: How much faith should I have in future RE income?
Post by: waltworks on March 03, 2017, 12:15:48 PM
File under "all eggs in one basket".

I would look at ways to diversify your income stream. One building is great, until it isn't.

-W
Title: Re: How much faith should I have in future RE income?
Post by: Patches on March 03, 2017, 01:59:24 PM
To me it would depend on the lease agreement and type of industry that occupies the real estate.  Is this a steady, well established company with a 10-50 year lease?  I know that industrial / commercial real estate is more passive and steady than residential real estate, but I've also seen commercial property sit empty for years.   I see it as a similar problem to a lack of investment diversity, I.E. if that business closes, is the property such that it could be readily released to other businesses?  If that business goes bankrupt 5 years down the road, you don't want to be stuck in a market downturn pulling out your investments to both live off of and pay the note. 
File under "all eggs in one basket".

I would look at ways to diversify your income stream. One building is great, until it isn't.

-W

The property contains four buildings with four different tenants in Seattle.  Heavy machine shops... mostly servicing Boeing and shipping industries.  5yr +nnn leases, 3% increase to base/year... these companies survived the big down turn in these spaces and are well established.  I would hope things continue to be great in Seattle... but one never knows.
Title: Re: How much faith should I have in future RE income?
Post by: Heroes821 on March 03, 2017, 02:09:34 PM
Well for what it's worth you probably won't stop all work forever after RE so there will probably be some other incomes as well, but if 1 to 2 more years makes you more comfortable or able to eat into much less of your cushion I'd say that is a nice FIRE date.  Unless you feel that 1 or 2 more years would be more stress or physical strain that could impact FI down the road.  The peace of mind that the little extra bit will give you might be worth those few more months of work.
Title: Re: How much faith should I have in future RE income?
Post by: Tyson on March 03, 2017, 02:12:21 PM
I'd work the extra year or 2.  A massive draw down on the nest egg is not something I'd be comfortable with.
Title: Re: How much faith should I have in future RE income?
Post by: waltworks on March 03, 2017, 02:12:32 PM
Yes, you have a classic Pascal's wager low-probability/high consequence situation there. There's a 90% chance you're golden, and a 10% chance something crazy happens to heavy industry in your area (for whatever reason) and you're totally screwed.

There's no easy way to assign accurate probabilities here, though. So it just depends on your personal comfort level. I'd rather have my money in the stock market than a cluster of buildings in one place (or at least 50/50), but that's just me.

Then again, OMY is almost always a mistake. I'd try out RE and see if you end up doing profitable hobby/side gig stuff that ends up making the question moot. Many people find that to be the case.

-W
Title: Re: How much faith should I have in future RE income?
Post by: Patches on March 03, 2017, 04:17:30 PM
This is all perfectly reasonable advice and I like the Pascal reference.

I'm not dissatisfied with my work and the money is good.  I probably ought to just firm up the cash situation before jumping ship for a while.  I also imagine I'll start up a little service-based business that only requires work in spurts... landscaping... or window washing... would be good to clip another $10 or $15k a year for a bit.
Title: Re: How much faith should I have in future RE income?
Post by: lhamo on March 03, 2017, 07:28:30 PM
I'm going to pull a Dave Ramsey here:   What would the property net you if you were to sell now?    If you had that money sitting in cash, would you buy the property again?    If not, how would you invest it?

Personally, I would be nervous having so much tied up in that kind of asset.   But my dad was a Boeing engineer in the 60s-80s and watching the ups and downs of Boeing and his career probably birthed my Inner Bag Lady.....
Title: Re: How much faith should I have in future RE income?
Post by: AccidentalMiser on March 04, 2017, 06:19:39 AM
This is all perfectly reasonable advice and I like the Pascal reference.

I'm not dissatisfied with my work and the money is good.  I probably ought to just firm up the cash situation before jumping ship for a while.  I also imagine I'll start up a little service-based business that only requires work in spurts... landscaping... or window washing... would be good to clip another $10 or $15k a year for a bit.

Based on this, I'd work for a little while longer (and, in fact, am working for a little while longer) to lower the risk of running out of money at 90!
Title: Re: How much faith should I have in future RE income?
Post by: SwordGuy on March 04, 2017, 09:00:39 AM
We've diversified into 4 main income streams at the moment:

1) SS
2) Rental Property Income
3) Rental Farm Income
4) Stock Market

I would not feel comfortable with all my eggs in any one basket.
Title: Re: How much faith should I have in future RE income?
Post by: Patches on March 06, 2017, 04:21:45 PM
I'm going to pull a Dave Ramsey here:   What would the property net you if you were to sell now?    If you had that money sitting in cash, would you buy the property again?    If not, how would you invest it?

Personally, I would be nervous having so much tied up in that kind of asset.   But my dad was a Boeing engineer in the 60s-80s and watching the ups and downs of Boeing and his career probably birthed my Inner Bag Lady.....

This is interesting... I've never cared for Dave Ramsey, but then again I've never had consumer debt.  However, this gave me the idea that perhaps I refi and pull out some equity, say my original cash outlay + opportunity cost adders.  Appreciation has gone bananas these last few years. 

Back of napkin sez I could simultaneously distribute back my outlay+interest and lengthen the note (lower the payment and immediately net out $1,000/mo). 

Seems like that solves the puzzle...


Title: Re: How much faith should I have in future RE income?
Post by: aspiringnomad on March 06, 2017, 10:01:40 PM
I'm going to pull a Dave Ramsey here:   What would the property net you if you were to sell now?    If you had that money sitting in cash, would you buy the property again?    If not, how would you invest it?

Personally, I would be nervous having so much tied up in that kind of asset.   But my dad was a Boeing engineer in the 60s-80s and watching the ups and downs of Boeing and his career probably birthed my Inner Bag Lady.....

This is interesting... I've never cared for Dave Ramsey, but then again I've never had consumer debt.  However, this gave me the idea that perhaps I refi and pull out some equity, say my original cash outlay + opportunity cost adders.  Appreciation has gone bananas these last few years. 

Back of napkin sez I could simultaneously distribute back my outlay+interest and lengthen the note (lower the payment and immediately net out $1,000/mo). 

Seems like that solves the puzzle...

That seems a good option. Alternatively, what about a line of credit against the property? That could give you just the flexibility you might (but likely won't) need without extending the note. Or plan to work maybe one more year with the attitude that you'll quit as soon as you really want to.
Title: Re: How much faith should I have in future RE income?
Post by: Patches on March 07, 2017, 11:16:21 AM
I'm going to pull a Dave Ramsey here:   What would the property net you if you were to sell now?    If you had that money sitting in cash, would you buy the property again?    If not, how would you invest it?

Personally, I would be nervous having so much tied up in that kind of asset.   But my dad was a Boeing engineer in the 60s-80s and watching the ups and downs of Boeing and his career probably birthed my Inner Bag Lady.....

This is interesting... I've never cared for Dave Ramsey, but then again I've never had consumer debt.  However, this gave me the idea that perhaps I refi and pull out some equity, say my original cash outlay + opportunity cost adders.  Appreciation has gone bananas these last few years. 

Back of napkin sez I could simultaneously distribute back my outlay+interest and lengthen the note (lower the payment and immediately net out $1,000/mo). 

Seems like that solves the puzzle...

That seems a good option. Alternatively, what about a line of credit against the property? That could give you just the flexibility you might (but likely won't) need without extending the note. Or plan to work maybe one more year with the attitude that you'll quit as soon as you really want to.


Yes, that's another interesting option.  However, with an LOC against this property (an LLC) I'd probably have to deal with variable interest rates.  Short term trends are pointing to increasing rates... and if retired I think I'd prefer to avoid that ever-present question mark.