Live off investment income or sell properties

[LSuzB]

Never really posted before but love reading all the great info and opinions.  I am a residential real estate broker that hates my job but have done well at it.  I'm 57 and husband is 60 and he wants to keep working which is fine.  I'm trying to decide what to do with my assets...here goes

Commercial rental property 1 - income of $26,000 net per year.  I have a small mortgage of 70k on it..valued at about $400,000 I think.
Commercial rental property 2 - Income of $18,000 net per year.  Only owned for 3 years - have a mortgage of $210,000 and it's valued at about $400,000 as well.   Was a fixer upper... Has about $46,800 gross income but have been fixing it up and hopefully the net will start to increase dramatically this year since fix up expenses are pretty much done.

Personal residence valued at $625,000 - have a mortgage of $55,000 on it.

My 401K has about $600,000; my hubbies has about $500,000.

Cash on hand $80,000.

I make on average $150,000 per year - hubby makes $70,000.

We bought a 23' camper and truck a few years ago and our main hobby is camping - plan on traveling the country when we retire in it.  Hubby wants to keep house forever - which is fine by me.

Our expenses are pretty low - we have health insurance through husbands work, have no debt other than mortgages listed above, love to cook so food is a bigger than normal expense.  Health club $83/month and life and property insurance monthly is about $400.  I think we live well on $6,000/month

Hubby wants to sell both rental properties and roll money into Schwab index funds - I'm on the fence because I would kind of like to try to live on the income to see if it is sustainable in retirement.  I'd like to be done working in real estate right now but wouldn't mind getting a part time job doing something else.

I'm terrible at spreadsheets, etc. and have been spending money on non essentials so this is the year to control spending and decide whether I should keep the real estate or sell it.

Any opinion would be welcome.

[BECABECA]

There isn’t really a wrong answer in choosing to keep your rentals vs. selling them and rolling them into index funds. If you don’t mind managing the rentals, then keeping them allows you to have a higher cash flow on the asset. But if managing the rentals sounds tedious, then they’ve appreciated enough that you could sell them and roll the equity into index funds and draw 4% off them. The safe withdrawal rate of 4% of the equity is roughly half of what you are able to make compared to continuing to rent them out.

Here’s the math:
Rental #1 continue to rent: $26,000 net per year
Rental #1 sell: (400,000 - 70,000) * .04 = $13,000 net per year

Rental #2 continue to rent: $18,000 net per year
Rental #2 sell: (400,000 -210,000) * .04 = $7,600 net per year

Since you have a lot more equity in Rental #1, and you expect Rental #2’s net to increase next year now that your remodel is done, you could just sell Rental #1 and keep renting #2.

[LSuzB]

Thank you!  That is so helpful.  Seeing it like that makes sense to me.  Appreciate it so much.

[efree]

Another way to look at it would be to calculate your rental income as a percentage on your equity:

1: 26,000/330,000 = 7.9%
2: 18,000/190,000 = 9.5%

Based on this, I would advise you to keep both properties if you don't mind doing the work. I wouldn't bet on the stock market to return 8% p.a. over the next decade.

As time goes on, all your numbers (net rental income, amount of equity, selling price) are going to change so you should recalculate the return once or twice a year. If it drops below 5 or 6% I would probably sell. Definitely if it's below 4%.

[LSuzB]

Ok another good way to look at it.  Hmmmm...I don't mind doing the work - especially if it means I can actually quit my real estate job..I'll have plenty of time to manage and I have it running pretty smoothly now - great tenants - no one wants to move..etc.
Appreciate your help.

[Another Reader]

I'm not going to give advice because I don't know enough about the properties or your situation to do so.  However, I don't think this is a cut and dried "sell." 

In making a decision, I would first consider tenant quality and stability.  Are these credit tenants?  How long have they been there?  What's the vacancy for the property type in your market?  Next, how fast are rents increasing for this property type in your market?  Are your tenants below or above market?  In the next recession will the tenants still be there?  Next, is this income true net, after factoring in vacancy and collection loss, lease up expenses for turnover, repairs and capital improvements?  I would then apply a stress test.  I would consider how comfortable you would be with the carrying costs if you had to carry 50 percent vacancy for an extended period.  Finally, how much tax would be owed on capital gains and depreciation if you sold them? 

The answers to these questions will help you make a better decision about keeping or selling.

[daverobev]

6k a month = 72k a year. 4% rule means you want 25x that invested = 1.8 million.

That's the absolute back of napkin maths.

You have 1.1mm invested in your 401s, just under 600k in rental equity. Husband is going to keep working.

Presumably you're going to get SS.

So you have 70k coming in from employment excluding yours, plus ~1.7 million invested. Quite frankly you can do whatever you like!

I think I would sell #1 and keep #2 as the numbers look better on it unless I'm misreading what you wrote, and look to diversify into a different city (assuming they aren't, and/or your home isn't - bit too much tied up in one place).

[LSuzB]

Thanks you guys - I appreciate the different approaches - and the quick responses.  Have a happy New Year!  I'll keep you posted as to outcome :)