[USER]

33yo F needing some guidance
Married with 3 year old
Goal is FatFire ($5M)

Combined Salary $250k
$1.7M in stocks (1.2 in taxable brokerage)
Rental property paid off (~$400k)

Primary ($250k in equity)
I can sell the rental using 2 in 5 rule for tax free gains, making 4% return on equity with rental income, therefore I think I can do better in stocks albeit less diversification.

Thoughts?

[Dion]

If you meet the 2 in 5yr rule I would sell. I have a personal formula that helps me determine whether to hold or fold so to speak.

If the rental income over the next 10yrs is more than the cash I could get today, I hold, if the cash is more today I fold.

My formula doesn’t account for expenses such as insurance/maintainence, etc because that should offset your annual taxes with a good accountant.

So, in short, the rent would need to be more than $3333/mo ($3333 x 120 months = $400k) to be more than the $400k you could get today.

Add in the fact that this money is relatively tax free and I’m guessing it’s a no brainer it to sell.

[John]

It depends on what your purpose is. Appreciation of the asset, just plain cashflow, or some combination of both.

My folks are retired and their income property is paid off. They’re just collecting rent without a mortgage on it. Could it be leveraged for more gains?

Yes, but at this point in their lives, they don’t care about accumulating more wealth.

They want money to spend!
So to the original OP, it depends on your situation.

[Lee]

For the rental – I believe you still have to pay back some of the depreciation even with the 2 in 5 rule.

Personally – I like the diversification and would either keep the rental or do a 1031 (perhaps you can buy two in this scenario).

For stock market – I would just continue to have both of you max out 401k contributions (23500 each person) since you are reducing your taxable income.

Additional then to your taxable brokerage

[David]

Paid off rentals don’t perform that well, need to have some debt on them to make it worth your trouble. Look into cashing out about 40-50% of your equity in the rental to put down on another property.

If that doesn’t interest you or the numbers just don’t work with rates too high then selling while you still have the capital gains exclusion is something to consider.

Also, 4% return on equity doesn’t tell the whole story. How much is it appreciating?

You need to calculate an IRR which considers everything including appreciation.

I would personally keep the rental and cash out for another, but depends on your local market and your goals.

[Author]

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