### Author Topic: Calculating FI with rentals in the portfolio  (Read 844 times)

#### stephen902

• Posts: 31
##### Calculating FI with rentals in the portfolio
« on: March 03, 2018, 05:40:13 AM »
I want to get my investments to equal 25x my annual spending. How much value do you place on a home you're renting. Do you consider the actual received rent, home value, both or some other formula.

Thanks.

#### waltworks

• Magnum Stache
• Posts: 4873
##### Re: Calculating FI with rentals in the portfolio
« Reply #1 on: March 03, 2018, 08:33:47 PM »
I'd just use 50% rule - so your income on that house, for the long term, is going to be 50% of the gross rent.

That's a very, very conservative number, but the 4% rule is also hyper-conservative.

If you have a duplex that you live in one side of, or a basement apartment, or something like that, you can use a higher (I'd say maybe 75-80%) number since most of the costs are rolled into your existing mortgage/home ownership expenses.

So if you've got a place that rents for \$1000 a month, that should cover \$6k of your living expenses, basically forever.

-W

• Walrus Stache
• Posts: 5222
##### Re: Calculating FI with rentals in the portfolio
« Reply #2 on: March 03, 2018, 09:04:08 PM »
The four percent SWR is based on a portfolio of paper assets.  It is not applicable to rental values or income.  If you are doing things correctly, the yield of your rental property should be more that four percent of the value.  Dividends from a stock portfolio are usually much less than that, and you sell shares to get your four percent withdrawal.  There is no decumulation of a real estate asset unless you sell the property.

One approach that is reasonable is to make a conservative estimate of net rental income.  Subtract that number, along with the expected income from pensions and Social Security to get the income that must be generated from your paper assets.  That income should include the tax on all your income, no matter how the income is generated.  For example, assume you need \$100,000 in gross income in retirement.  You get \$20,000 in net rental income using conservative assumptions and \$20,000 in Social Security.  Your portfolio will need to generate \$60,000 to make up the difference.  Your paper asset portfolio would need to be \$1,500,000 to get the \$60,000 using a four percent withdrawal rate.

#### SwordGuy

• Walrus Stache
• Posts: 7812
• Location: Fayetteville, NC
##### Re: Calculating FI with rentals in the portfolio
« Reply #3 on: March 04, 2018, 02:19:09 PM »
I want to get my investments to equal 25x my annual spending. How much value do you place on a home you're renting. Do you consider the actual received rent, home value, both or some other formula.

Thanks.

Your question shows a complete lack of understanding of what the 25x rule means and what it does not mean.

Go back and read up on the "4% rule" and the "trinity study" and the "safe withdrawal rate" and "swr".   Read it for true understanding, not just a "too long, didn't read" catch phrase of 25x annual spending.

And then come back and tell us the answer to your question.

I'm not saying that to be mean or a hardass.  I'm saying it because it's your financial future you're talking about.  It's really important to you to get it right.   And right now, your understanding (and thus possibly your plans) are on really shaky ground.

Best of luck!

#### SeattleCPA

• Handlebar Stache
• Posts: 1684
• Age: 61
• Location: Redmond, WA
##### Re: Calculating FI with rentals in the portfolio
« Reply #4 on: March 05, 2018, 06:56:56 AM »
I want to get my investments to equal 25x my annual spending. How much value do you place on a home you're renting. Do you consider the actual received rent, home value, both or some other formula.

Thanks.

Your question shows a complete lack of understanding of what the 25x rule means and what it does not mean.

Go back and read up on the "4% rule" and the "trinity study" and the "safe withdrawal rate" and "swr".   Read it for true understanding, not just a "too long, didn't read" catch phrase of 25x annual spending.

And then come back and tell us the answer to your question.

I'm not saying that to be mean or a hardass.  I'm saying it because it's your financial future you're talking about.  It's really important to you to get it right.   And right now, your understanding (and thus possibly your plans) are on really shaky ground.

Best of luck!

I also think OP should peek at this discussion since it talks about how the standard deviation of housing investments seems to look pretty different for some investors:

https://forum.mrmoneymustache.com/real-estate-and-landlording/rate-of-return-on-everything-a-150-year-history/