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How would you value rentals for sake of understanding future retirement value?

1,926 Views | 13 Replies | Last: 7 yr ago by JSKolache
aggiefan2002
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You can use plenty of calculators out there to see that $xx in the stock market today at y% interest will give you $zz at some determined point down the road. Pretty simple.

But how do I understand the same calculation for rental properties?

Lets say I have 3 houses in BCS worth an average of $200k each. From a cash flow standpoint, I will assume rent will go up to offset tax increase so net income will stay the same. But what can I estimate they are worth in 20-30 years when paid off?

1% average appreciation for 20 years would be $244k value. 2% would be $297k. 3% would be $361k.

So should I assume that each house will be worth between 244-361k in 20 years for a retirement value of between $732,000 and $1,083,000?
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AG
Not an answer to your question, but what are you doing with the cash flow on your houses? You should be able to afford another house every 2-3 years and more often as the number of houses increase.

So if you continue to invest more homes, in 20-30 years you will have multiple homes at various stages of pay-off.

Also, depending on interest rates, you can also cash out equity or sell your homes and reinvest that money.

So, when comparing the stock market to buying homes, I'd consider more variables to the final cost in 20-30 years on a house you own today.

To answer your question, 1-3% seems reasonable. College Station does feel like it's at a peak of some sort but you can only get so close to campus... I feel like college towns will always be good investments.
mazag08
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AG
Worry less about what the property is worth and focus on turning the revenue streams into more properties. You will benefit more in the long run.
aggiefan2002
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Thanks for the replies. Yes, I am planning on using extra cash flow to buy more houses. Goal is to have 12 by the time I'm 45.

Jmazz - I understand your point for sure, and that is my goal. But my question still stands, even if just to make myself feel better about where I am with things.

jmazz
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AG
I didn't reply...yet...that was mazag08 (similar, I know).

To answer your question, yes, I think you can ASSUME 1-3% appreciation per year for purposes of valuing your real estate portfolio. However, you never know what the future holds.
CS78
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Historically and nationally, the rate of increase tends to be about 1-1.5% above inflation or around 4-4.5%. Obviously, as with all things real estate, the local market matters more than anything. A top location might get you 6-7% annually while a terrible locale might get you nothing. If you're concerned with comparing it to other investments, with all things considered, it will beat the snot out of most. I've done loose calculations that include net cash flow, principal pay down, and appreciation and it always comes out above 20% total annual return on investement. That doesn't include the tax benefit that I get by receiving ALL of my W2 taxes back each year. Or the much larger benefit of using the equity in one property to leverage in to the next. The last five properties I've picked up have cost $0 out of pocket. Calculate the ROI on them. It's all really a no brainer, IF AND A BIG IF, you don't mind the extra work.
aggiefan2002
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Thanks guys. I'm less concerned with knowing how it compares to other investments (totally sold on that aspect) but more want benchmarks for myself like if I were putting money in an Ira or 401k. Some of that's probably prideful, but a lot of it is just me wanting to have all my ducks in a row and know when I can let off the gas a little.
CS78
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I wouldn't be too concerned with it for now. I almost guaranty you, if you work hard at it, make good buys with equity, and make use of leverage, you will surprise yourself how fast it will build. The first 5-6 are a grind financially, then it will explode and before you know it the money is the easy part and your time will be the pinch point. There is a definite bell curve in the growth process.
aggiefan2002
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What specifically makes money a grind at first and then least of the worries after 5-6?
CS78
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aggiefan2002 said:

What specifically makes money a grind at first and then least of the worries after 5-6?


Coming up with new down payment money.
Premium
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AG
CS78 said:

aggiefan2002 said:

What specifically makes money a grind at first and then least of the worries after 5-6?


Coming up with new down payment money.


So if you have $200K you should be able to jumpstart with 5 homes? Is that a fair # - or more/less?
aggiefan2002
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No more down payment money needed after first 5-6?
62strat
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AG
aggiefan2002 said:

No more down payment money needed after first 5-6?
I imagine the idea is that you have enough cash flow after 5-6 that a down payment is much easier to obtain.
WoMD
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62strat said:

aggiefan2002 said:

No more down payment money needed after first 5-6?
I imagine the idea is that you have enough cash flow after 5-6 that a down payment is much easier to obtain.

Or borrow off the value/equity of your other properties.
JSKolache
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AG
Sounds like you are on the right track building in assumptions based on historic benchmarks. There's really not much difference in valuing real estate or valuing stock holdings, from the long term view. Prices of both fluctuate contstantly in both directions, but the past can give some indication of the future. Just don't spread your cash flow too thin that the inevitable downturn in real estate or stocks (or any asset class) blows up in your face.
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