Rental income, Markets, or both?

[wildatheart]

Hello-

I'm going to be closing on my second rental property. This one is a vacation rental. The other is a full-time rental with great long term renters. I'm only in the rental business to diversify from the stock market but maybe I'm being too cautious. I'd really like some opinions on my options - mostly I just want to quit this super-stressful job.

Situation:
Long Term rental - no mortgage, net income =$18,750. Current market value - $265,000. Basis = $200,000
Vacation rental - no mortgage, net income =$9,000. Current market value - $370,000. Basis = $312,000
Existing home - $245,000 mortgage. Current Market Value = $650,000. Basis = $390,000

401K = $820,000
Cash on Hand = $550,000

I make about $300k per year. My hubby doesn't work but will have teachers retirement income in a few years.
He is 52 I am 53.

2, older model, Mustachian cars with no car payment.

College investments = $350,000 for 3 kids in 529 accounts. (1 is almost done and 1 is halfway through. The last one starts next year.)

I do my own taxes, have market investments in index funds and just recently sold some lower-earning long term market assets to invest that cash into the vacation rental. I don't think this stock market will hold and want to have my safety net in real estate.

But, am I being too cautious? Should I sell these rentals and put it back in the market?
What's my next step? Your opinions and experience are most welcome. Like I said, I just really want to really quit this job.

Thanks to all of you and Happy New Year!
10,001



 

[LightStache]

So roughly adding up, looks like you have $2.75M NW, and plenty of liquidity to get you to 401K withdrawal age. But I have a few questions -- how much do you spend/plan to spend per year, including tuition, and why are you buying a rental property that only yields 2.4%?

[wildatheart]

Thanks for the response.
The newest rental property needs some construction to maximize the value for future rentals. So, in the first year, I'm including that construction in the basis.

What other questions were on your mind? I'm really interested in finding out other options to maximize the future.

[NonprofitER]

I think it would be helpful to understand what your income level is (IE, what dollar figure income you are trying to replace, the full $300k)?  And your level of risk tolerance for leverage in real estate?

We're a fan of both RE investments and market investments, but we have pretty clear goals about the cashflow and appreciation we're looking to achieve with RE, and how RE gains feed into increases in what we can add to taxable investments (market). 

Can you elaborate more on the stressful job you are trying to replace - do you need $300k/yr continuing forward?

Have you checked out some more info on RE investing, re books, or Bigger Pockets website, etc.?

[GoCubsGo]

I'd probably keep the first rental if the renters are good and you think it will stay that way (keep it as a diversified investment).  I'm totally confused about the vacation rental.  You said you just closed on it?  Why would you immediately think of selling? Did something change?  In my research, vacation rental properties rarely yield strong enough results on a cash on cash basis.  Have you figured out what the realistic cash on cash return will be on that property?  That's the only way you can compare to investing in stocks or anything else.

I'll second that the most important piece is what your income needs are in retirement.

[LightStache]

Thanks for the response.
The newest rental property needs some construction to maximize the value for future rentals. So, in the first year, I'm including that construction in the basis.

What other questions were on your mind? I'm really interested in finding out other options to maximize the future.

Ok that sounds reasonable. The other question I asked was along the lines of the other posters. How much are you planning to spend while kids are in college and then afterwards? I guess we're wondering why you haven't stopped working at this point since $2.75M is enough for most Mutachians, but not all.

In terms of rental vs. "the market," just treat your RE investments like any other asset class and allocate appropriately. I have one rental now, so I'm generally for keeping some non-traded RE assets, but I think people tend to underestimate the risk. You get illiquidity, concentration risk, geographic risk, legislative risk -- that's what comes to mind ATM -- way more than other assets. They're not gold bars in a safe deposit box in Zurich. So keep your rentals for now and keep your stocks and keep your bonds. Over time if your vacation rental under performs, you can offload it and 1031 or do some advance tax planning to sell in a low income year.

[SwordGuy]

$100,000 in the stock market will yield you $4,000 via the 4% rule.

A $265,000 property, less 7% transaction costs (realtor and fixing it up a bit), produces $246,450‬ in stocks/bonds.   The 4% rule would yield $9,858.
This property is yielding $18,750.     This is a keeper.

The vacation rental, well, that doesn't measure up using the same approach.   

What's your annual spend, not counting the rental property costs?   How much of that would the pension cover and how long do you have to wait for it?

Because, honestly, a lot of people on this forum would sell your house and the vacation rental, buy a home in a lower cost area (there are gobs of awesome homes for a pittance compared to HCOL prices), and declare FIRE.