Impact of rental properties on AA

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ChrisH
Posts: 11
Joined: Mon Jul 11, 2016 4:10 pm

Impact of rental properties on AA

Post by ChrisH »

I currently own two single family rental properties, and it is my goal to acquire on average one per year between now and retirement, roughly 30 years out. I have roughly $200k in equity in the rentals and my primary residence.

I have approximately $170k ($100 tax advantaged, $70 taxable) saved for retirement, with an 80/20 AA. I am able to max out my 401k and Roth each year. My emergency fund is well stocked.

What I am wondering is should my (admittedly lofty) goal of opening 30 (hopefully) cash-flowing rentals by the time I retire, have any impact on my current AA? I feel I am very risk tolerant, although I only started saving in 2012 and so have not yet endured a down cycle. I certainly feel 'Age in bonds' is way too conservative. Am I overly cautious with 20% bond? If I make it to 30 rentals, I can realistically expect at least $10k per month in positive cash flow (in today's dollars), which would almost certainly take care of the majority of our expenses.

Any thoughts?

Sorry for the long winded question.
Thesaints
Posts: 5078
Joined: Tue Jun 20, 2017 12:25 am

Re: Impact of rental properties on AA

Post by Thesaints »

How much would you say those 30 rentals could be worth ?
Also, how much of that value would you finance ?

The first thing that comes to mind regarding your asset allocation is that your net worth would be essentially all in real estate.
Not 10 years ago we all saw how dangerous a similar concentration could turn out to be.

Tne second thing that comes to mind is that having to take care of a large number of rentals you wouldn't be an investor, but more like somebody working in the rentals market.
The feature I always found most attractive about financial investments is that they allow me to make money not with my work, but with somebody else's.
msk
Posts: 1470
Joined: Mon Aug 15, 2016 10:40 am

Re: Impact of rental properties on AA

Post by msk »

I know people who retire more or less exclusively on RE rental income, and many more on combinations with pensions. Nothing wrong with that as long as you do not get fed up with the RE hassles. I got fed up with the hassles when I hit age 65+ (retired at 55). After looking after 30 units for some 30 years. Step by step sold off more or less everything. Only advice I would offer is, as long as you are enthusiastic about RE, be more aggressive in acquiring new units earlier, while young and full of enthusiasm. One unit p.a. sounds a bit unambitious to me, but sensible while your equity is limited. Give a thought to jumping onto an apartment block next, and selling off the single-family houses. Apartments spread risk against vacancies, and enable easier hiring of trades people to fix things. Single family rentals open up the risk of major damage from a nasty tenant to a major chunk of your wealth. Good luck.
dbr
Posts: 46137
Joined: Sun Mar 04, 2007 8:50 am

Re: Impact of rental properties on AA

Post by dbr »

ChrisH wrote:I currently own two single family rental properties, and it is my goal to acquire on average one per year between now and retirement, roughly 30 years out. I have roughly $200k in equity in the rentals and my primary residence.

I have approximately $170k ($100 tax advantaged, $70 taxable) saved for retirement, with an 80/20 AA. I am able to max out my 401k and Roth each year. My emergency fund is well stocked.

What I am wondering is should my (admittedly lofty) goal of opening 30 (hopefully) cash-flowing rentals by the time I retire, have any impact on my current AA? I feel I am very risk tolerant, although I only started saving in 2012 and so have not yet endured a down cycle. I certainly feel 'Age in bonds' is way too conservative. Am I overly cautious with 20% bond? If I make it to 30 rentals, I can realistically expect at least $10k per month in positive cash flow (in today's dollars), which would almost certainly take care of the majority of our expenses.

Any thoughts?

Sorry for the long winded question.
My thought is that with such an ambitious plan for a rental real estate business your investment portfolio amounts to a cash reserve for your business and should be held in readily available cash.
RobG
Posts: 1265
Joined: Tue Feb 27, 2007 11:59 pm
Location: Montana

Re: Impact of rental properties on AA

Post by RobG »

I own a few rentals. It's about impossible to fit them in an allocation because their values can swing wildly, yet cannot be rebalanced. Perhaps set a goal, like 25% of your retirement income will come from them.

Rentals are far riskier than stocks because the rent can shut off at the same time you have to pay $15,000 for a new roof. It isn't so much about the "mental" risk tolerance as the ability to weather out those events without actual harm to your retirement plans. I think $70k of non-qualified investment is pretty thin to weather more than the possible storm of two rentals, your personal house and a bad luck streak with life. So another way to look at allocation would be what percentage of my worth do I want to give up when unexpected expenses come up?

On a personal note, two houses is already a big investment that should return well. If I were you I would not buy another property for ten years; instead put it in stocks. By then you will better understand what is at stake. Rentals are a risky pain in the a$$ and don't necessarily return as well as other investments. If your income goes up the tax advantages diminish. In ten years you may be so sick of rentals you will want to sell the ones you have. It is an expensive investment to get out of because you have to pay commissions and taxes on the gains after you've depreciated the property. It is better to only do that with two properties than a dozen.
Stay thrifty my friends.
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