Thanks for the clarification ARS. Glad you are not 100% in Las Vegas...
I thought you knew I had some rentals near you (Roseville, Eastpointe, even Warren). ;)
So as a rule of thumb, what would you suggest a suitable target buffer is of 'excess rental returns' after allowing for vacancies, management, repairs and large capital items like roofs and HVAC systems?
That's what we were trying to discuss with this thread (what waltworks was pushing at earlier).
Your efficient markets is a good point, so one could try to guess and say "stocks return X% inflation-adjusted, real estate Y%, what part of Y-X is due to risk premium, what part is due to the extra work, what part is excess capital to be reinvested." The problem is my Y% may be half of your Y%, or double it.
Essentially no real estate portfolio will be the same, so it won't be a hard number like "4%" (which really itself isn't a hard number, but based on a 60/40 stock/bond mix--Tyler's work at PortfolioCharts certainly shows different portfolios have had different SWRs in the past). Just like a 60/40 portfolio will have a different SWR than a portfolio with 50% gold, 50% TIPS, so each real estate portfolio will have a different SWR.
So the question isn't "what is the SWR for real estate" but "What formula can we use to try and determine a safe WR for one's individual real estate portfolio." Naturally it should already take into account all expenses (even if not experienced) and capital expenditures over a long time frame.
Then we want to "stress test' with:
A) Short term issues. Say, 10-20% rent drops and 10-20% vacancy for a short time frame (3-5 years?)
B) Long term issues. The "slow decline" of an area whereby rents (and occupancy levels) don't keep pace with inflation (costs of repairs, and costs of your own expenses growing)
What are the probabilities of each of these? You'll never be 100% safe, so what level is enough to be comfortable?
More importantly, what formula, or system, can we make to create a way to evaluate a rental portfolio and decide "this is sufficient to provide X annual capital with a reasonable degree of safety in the short and long term"?
I'm not sure yet, but some interesting points have been made towards things to consider when thinking about it, and some cool data by maizeman. :)