Real estate in the context of FI and hitting your “number”

[Jeffrey D. Logan]

So I have started down the path of figuring out my roadmap to financial independence and trying to figure out how real estate fits into this equation. My net worth is pretty much split between a stock/bond portfolio and two rental properties. Most of the financial independence advice I seem to find online seems to either cater to those fully invested in real estate or those fully invested in stock/bond portfolio. I’ve got a mix, and am wondering how best to calculate your net worth “number” and withdrawal rate in that context.

The standard 4% withdrawal rule (must have assets of 25x needed income) assumes some rate of a return in a mixed portfolio of stocks and bonds. How does the standard 4% withdrawal rule work with real estate investments sprinkled in to your overall portfolio?

In a hypothetical example, say you have real estate investments that between cash flow, principle pay down and appreciation have been netting a rate of return similar to or better than what the stock/bond mix has, in this case I would be counting all my equity in these properties as just part of my broader, overall net-worth "number." However, I understand that the concept of "withdrawal" on a rental property isn't the same as it is for stocks/bonds. Additionally, at some point in this hypothetical roadmap, I would like to consolidate the properties and perhaps sell some to pay off others so that I own them free and clear and they're spitting off a much higher cash flow. At that point, I'll obviously be getting a much lower return on my equity going forward, but the higher cash flow will essentially be lowering the amount of income that I'd need to withdraw from other investments. I'm struggling with how to think about and classify real estate in the broader context of what my "number" is. When owning the properties free and clear, is it best to think of them only on the income side of the equation and not on the asset growth side? That is, if I own a 200k property free and clear with a NOI of 12k, should I just remove the 200k from my "number" and subsequently reduce my expenses that I use in the calculator by 12k?

Basically, in the context of FI and your broader portfolio, should you think of income properties just like any other asset with their own ROI (no different than a stock or bond), or should the expected income from these just be deduced from what you expect to spend, and you really ignore the equity portion of it.

I think this more broadly speaks to the question of how to transition from growth to income and how to plan for that as you build out your real estate AND stock/bond portfolio.

Any thoughts/advice appreciated!