Author Topic: What is your 4% rule?  (Read 1344 times)

hoping2retire35

  • Handlebar Stache
  • *****
  • Posts: 1401
  • Location: UPCOUNTRY CAROLINA
  • just want to see where this appears
What is your 4% rule?
« on: November 08, 2016, 01:53:07 PM »
So once you have cash flow to cover your expenses, then what? I am throwing out three things that i have reduced everything down to.

1. Account for vacancy; increase cash flow by 10% gross(what if you have never/rarely had a vacancy in years of landlordship?).

2. Increase stache to cover a certain amount per unit and emergency fund for yourself. Perhaps 20% PP for leveraged units, 8-10% paid in full units, 2 years of personal expenses. Not sure. Would this just be ridiculous if you had 10+ units? Do you adjust these numbers the more units you have?

3. increase cash flow for expected additional costs in retirement (kids college/young adulthood, business startup, more active charity). This seems to be a wild number and just depends on the individual.

I have looked but not really found a clear answer here before. post a link if previously discussed or tell me a different way to think about this.

Blindsquirrel

  • Pencil Stache
  • ****
  • Posts: 657
  • Age: 1
  • Location: Flyover country
Re: What is your 4% rule?
« Reply #1 on: November 13, 2016, 05:58:30 PM »

1. Account for vacancy; increase cash flow by 10% gross(what if you have never/rarely had a vacancy in years of landlordship?).-

- Use your own experience, if you have a low vacancy rate, plan on it being a bit higher in the future to be on the safe side but depends on what/where you rent. 1 Bed apts in a war zone will give you very high turn over for the most part. 3 bedroom + SFRs in a good school system will have astoundingly low turn over.

2. Increase stache to cover a certain amount per unit and emergency fund for yourself. Perhaps 20% PP for leveraged units, 8-10% paid in full units, 2 years of personal expenses. Not sure. Would this just be ridiculous if you had 10+ units? Do you adjust these numbers the more units you have?

- Yes if you have one house rented you are in a very different position than if you have 30 rented. Adjust accordingly.

3. increase cash flow for expected additional costs in retirement (kids college/young adulthood, business startup, more active charity). This seems to be a wild number and just depends on the individual.

- Plan on your future cash flow being about what it is in current dollars. Rent increases have smoked inflation but leaving rents alone for good tenants can be cost effective also, turnover costs money.

hoping2retire35

  • Handlebar Stache
  • *****
  • Posts: 1401
  • Location: UPCOUNTRY CAROLINA
  • just want to see where this appears
Re: What is your 4% rule?
« Reply #2 on: November 15, 2016, 08:54:13 AM »
Ok, I think a few issues I was dealing with is; If you have your giant emergency fund indexed and it is $100-200k* and is building all on its own, do you really need the 10% gross (vancancy rate) on top of your expenses?
Somewhat conversely, if you can get much better rate of return through rental units is seems absurd to have 100s of $ks of money tied up in equities. I guess you need to have portfolio diversity...

*I could FIRE with <$400k.

Enigma

  • Bristles
  • ***
  • Posts: 485
  • Age: 40
  • Location: Clarksville, TN
Re: What is your 4% rule?
« Reply #3 on: November 15, 2016, 12:22:39 PM »
FIRE and my 4% rule I think are at odds with each other when you calculate residual income.  The 4% rule is great with the stock market where investors calculate their returns on their investments.
1MIL invested = 40k/yr

I think with my properties, I look at it the other way...  my 4% is based solely on my income minus every expense (PITI+repairs)
120k income - 80k expenses = 40k/yr

Currently, I am still aggressively paying off my mortgage on my properties.  So I keep my mindset believing that I am broke because every extra dime that I have goes towards my loan.
120k income - 80k expenses - 40k/yr extra pmts = Broke Enigma (whom cannot retire early)