Can you help me put a value on my real estate?

[MarciaB]

I'm hoping some of you really smart Mustacheans can help me with this query.

Situation: I own property that hasn't been appraised since 2005 (and I have no plans to sell it, so no plans to appraise it). It has 2 income streams - one is the rented house ($1495/month) and the other is the vineyard ($17,300 this year). We purchased the land 15 years ago (for $280,000) and put gobs of money into establishing the vineyard (pretty much all depreciated at this point), and building the house. In 2005 the whole shootin' match was appraised at $760,000. The mortgage balance is $64,000 (and I'll finish it off by the end of 2015).

Dilemma: I love to use the calculators that help you determine how close you are to retirement, how much you need to save, etc. I've got retirement accounts and taxable accounts, and there's no problem adding those up to get a number I can plug into the calculators. But then I want to add the property as part of my pile of assets...and I get stuck.  What number should I use?

[TomTX]

That's cash flow. There have to be expenses, and a reserve to pay for repairs/upkeep/etc.

What is your net annual profit?

Figure that your property income is equivalent to a 4% SWR, so multiply the net by 25.

[MarciaB]

Thanks TomTX.

Expenses are $6390 (prop. mgt, prop taxes, prop insurance, repairs, G&A).

So - you are saying take gross ($35,240) minus the expenses ($6,390) and that gets me to a net of $28,850. And then multiply that times 25, and I get $721,250.

So, use the 4% SWR on the net income (not the gross). Right?

And, as you say, there needs to be contingency funds stashed away (there are), but would you include those in any value calculations?

[the fixer]

I think you should count the profit from the property as extra income you'd have in retirement, like a pension. The trick would be figuring out profit projections over time to decide if you should expect it to keep pace with inflation or not.

If you actually wanted to put a dollar value on the property for the purposes of selling it, you would do like TomTX says and divide by a percentage, but instead of a SWR it would be called a cap rate. The cap rate you'd pick would be based on what cap rate the market demands for a certain type of property at a given time. It's kinda like the yield on a bond, and it's tied to the interest rates at which borrowers can get mortgages. If your property had a 5% cap rate based on its profit & asking price, but loans started at 6%, no one would want your property at that price because they either couldn't afford the mortgage if they needed one, or they'd be better off putting their cash in mortgage securities.

[arebelspy]

There's an easier way.

Take your personal annual expenses.  Subtract what positive annual cash flow you get from the property (though you may be overestimating it, I'm not sure - be conservative in your estimates).

The amount that remains is the amount of annual spending you need your stache to cover.  Multiply that amount by 25 (or 33 if you like a 3% SWR).  That is the amount you need to save in a portfolio.  Then your property will cover some of your living expenses, and you'll withdraw 3-4% from your portfolio to cover the rest.

No need to try and figure out how to count the value of the property when you have a more precise number - the amount of revenue it generates.

[plantingourpennies]

Personally, I use a discounted cash flow analysis on the expected cash flows from our rental property when considering what value the cash flows bring to our portfolio over the long term.  (And to mentally calculating the market value at which we would sell and invest the sale proceeds in a different, more liquid place.) 

[Thegoblinchief]

Knowing the history of the property also helps, particularly whether it's prone to long vacancies. Some people have rentals in college or tech towns with close to zero vacancy, whereas rentals in my neighborhood often sit for months.

And I'd personally be conservative in the amount of assets it effectively displaces, so use a multiplier slightly lower than 25x.