90% of my net worth is in S&P 500 index funds – is a rental property a good idea?

When it comes to knowing the right time to call it quits in the FIRE (financial independence, retire early) world, it’s not easy. As everyone has different goals and ideas about retirement, it’s okay if your FIRE number is a little different than someone else’s or if your strategy of getting there, like through a rental property, is not the same as the rest of the crowd. 

In the case of one Redditor posting in r/ChubbyFIRE, a subreddit is typically reserved for those with a net worth between $3 and $5 million, they are wondering how to know if they are financially on track. The good news is that this individual is already on their way to early retirement, but they have questions about their rental property and the best path forward. 

Seeking Reddit Advice

The original poster is a 34-year-old father with a three-year-old daughter and a wife, also 34, who live in the greater Milwaukee area. As the Redditor explains, they plan to retire sometime in the next 10-15 years while also focusing on allowing the wife to shift into a stay-at-home spouse role in the next 12 months. 

Currently, the family has a net worth of around $2.8 million, which is split between cash, 401(k), high-yield savings, Roth, and a taxable brokerage account. The poster makes around $240,000 per year, though he acknowledges it can fluctuate, while his wife adds another $50,000 as a teacher. 

The good news is that the family doesn’t believe in overspending, and they have a modest $700,000 home and don’t worry about nice cars or fancy things. Their overall cost of living is about $10,000 per month ($120,000 annually), of which the Redditor’s income is more than enough to cover. 

Stay Or Sell A Rental Property

One of the biggest decisions the Redditor has to make here is whether they sell their investment property, which is only generating $1,350 per month. The property’s current value is believed to be around $405,000, while $218,000 is owed at a 3.25% interest rate, which is a pretty attractive mortgage rate these days. While the interest rate is reasonable, the Redditor indicates he doesn’t enjoy being a landlord, which is understandable.

However, the bigger concern is the small profit margin, as it’s pretty easy math here to see that the best scenario is to sell the rental. If the rental can be sold for the $405K value and the family can take the expected profit of $187,000, it would take them 138 months or 11.5 years to make the same amount of money renting it for $1,350 a month in profit. This is a convincing argument to sell and get rid of this potential headache once and for all. 

The Current Math

With the rental issue settled, there are a few more factors to consider that make selling the rental property even more attractive. First and foremost is whether or not any more children are planned, as having more children also means more expenses associated with kids’ activities, sports, travel, and other costs accompanying a growing family, like increased grocery expenses and a 529 fund.

This means the original poster has to figure out how best to utilize their current $2.73 million, plus another $187,000 from selling the rental property (and not using a 529 account), for $2.92 million. 

Thankfully, we can do some back-of-the-napkin math and determine that at their current holdings of $2.92 million, a 6% return would be $5.2 million in 10 years, without investing one more dollar. Bump this up to a 15-year strategy, and the Redditor is looking at $6.9 million without investing another dollar.  

Let’s also assume that the original poster will live by the 4% safe withdrawal rate to cover their expenses after retirement. Their 10-year retirement benchmark would be equivalent to $208,000 annually or $17,333 monthly. Postpone retirement to 15 years from today, and the family would have around $276,000 in pre-tax earnings annually or $23,000 monthly. 

The Bottom Line

Based on these quick calculations from the Redditor’s own situation, it’s pretty clear that they are in a better-than-good position to call it quits. Whether or not it’s 10-15 years is really irrelevant as far as being able to retire. It’s hard not to consider the 15-year investment strategy, which means a significantly larger amount of money, almost $2 million, to be fair, which means a lot more opportunities to travel and enjoy life. 

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