Author Topic: How to value rental property in NW calculation?  (Read 746 times)

Ocinfo

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How to value rental property in NW calculation?
« on: May 10, 2017, 03:12:53 PM »
How does everyone count rental property when doing their NW calculations? Let me explain a bit.

Right now, I handle it the straight forward way of value - mortgage and add the result to my investments, cash, other assets.

However, a recent thread got me thinking about what percent I am towards reaching FI. The simple calculation is .04xNW/yearly budget. However, this doesn't account for the actual income from the rental property.

So, the question is whether people include net property value in their NW or subtract net income from FI budget, or take yearly net rental income/0.04 to normalize the value of the property to include in NW?

Quick example:

Property value: $100k
Mortgage: $60k
Typical NW contribution: $40k

Possible net yearly rents (profit): $6k
Value of rent (how much investment money would be needed at 4% WR): $150k

In this example, owning rental is the same as having $150k in stocks/bonds but would only contribute $40k to traditional NW calculation.





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leighb

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Re: How to value rental property in NW calculation?
« Reply #1 on: May 14, 2017, 11:19:30 AM »
Here's my take on it.

You're net worth is increased by that 40K. However, the idea of a 4% SWR doesn't apply to that 40K until you sell and invest in assets that the 4% rule typically applies to, stocks and other highly liquid investments. What you do have is passive income. I would think more about the passive income decreasing your target fire amount.

So, for example you decide your target income is $2000 a month and your passive income is $500. You need $1500 to be covered by the 4% SWR sans rental.

Same goes for your primary residence. It brings down expenses, adds to net worth but shouldn't be factored into a SWR unless you plan to sell.