To avoid capital gains tax and landlording hassles, DW's parents bought us a house five years ago after selling their rentals. We pay them market rent and when the total paid (minus taxes/insurance) equals the purchase price, the will give us the house (~15 years from now). It's a great deal for us obviously and gives them cashflow without responsibility (i maintain the property) until their RMDs kick in.
But...
We plan to move closer to the in-laws in 2016 for a low COL and small town environment for our school-aged kids. We want to relocate before our oldest enters 1st grade, but I'm not 100% confident that we will be FI by then. In-laws have already agreed to let us rent the house out. We won't benefit from cash flow, but rent will generate ~$19K in equity each year (after expenses). It's about a 16% return. How do we factor this into our long-term planning?
We'll have a mortgage in our new location, total annual spending of $43K (including mortgage) and investable assets at about 18x spending. DW will continue to work part-time for a few years generating ~$25K per year while I start a small side-business.
Should the rental income take the place of bonds in our asset allocation? Should DW be open to working longer? Should I look for work in our new location? Chances are we will be fine, but a series of unfavorable returns, or zero income in a side-business could put us at risk. Home equity isn't going to pay our bills if the market decreases by 50%.
Factoring in appreciation to date, if we sold the original house and put the equity towards a less-expensive home in our new location - which we would continue to rent from my in-laws - we would be FI at a 4.1% annual drawdown (and not including wife's ongoing income). But if we keep the house, in 15 years it will be paid off and generate more than 50% of our annual inflation-adjusted expenses. I think the in-laws have put us in a position to cut years off our working life, but I'm not sure. Input appreciated.