Author Topic: Rental investment cost allocation - spending or net worth?  (Read 228 times)

MelodyG

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Rental investment cost allocation - spending or net worth?
« on: January 26, 2021, 07:42:19 AM »
I am spending quite a bit of money to remodel my former primary residence to get it ready to rent at market rates.  My dad has been living there for a few years, and he's going to live with my sister and it needs some serious upgrades.
I'm probably going to realize this is a stupid question as soon as I get the answer, but I'm going to ask it anyway.

Do you include rental investment upgrade costs as part of your spending that you use to calculate your 'stache needed for FIRE, or do you make the adjustment to your net worth? Net worth change may even be a wash (i.e 10k of upgrade cost = 10k of home value increase) and $10k of spending has a much higher impact with the 4% rule than a 10k (or less) change to net worth.  Which is more practical for long term financial health?

Paper Chaser

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Re: Rental investment cost allocation - spending or net worth?
« Reply #1 on: January 26, 2021, 08:05:00 AM »
I feel I should emphasize that "upgrading" a property does not necessarily raise the value of the property by that same amount. You can pay a bunch for new counter tops or something that don't really add much value. They might make it rent faster or for slightly more money, but value seems to be driven more by location, sqft, and number of beds/baths. Now if that $10k in upgrades ends up with another bedroom or bathroom, then it might be a better financial move. It just depends what you're spending money on. Each property is unique.

I'd bet that it's not even going to break even from your Net worth perspective (Spending 10k might increase the value of the home by little or nothing in which case you spent money and saw little or no gain in net worth). Maintenance and repair is just a necessary expense that comes with property ownership. You absolutely need to budget for ongoing costs to a rental just like you would for a personal residence, so you'll need to have some plan for that in your FIRE budget. The 50% rule is designed to handle most of the common expenses related to supporting an investment property and making it mostly self sufficient, so if you're following the 50% rule, you're probably in good shape budget wise and may not need to do much tweaking to your personal FIRE budget.



MelodyG

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Re: Rental investment cost allocation - spending or net worth?
« Reply #2 on: January 26, 2021, 02:25:24 PM »
I knew it was a stupid question!

Thank you!