How to Count Rental Income in a Coast FIRE Plan

Rental income counts toward Coast FIRE the same way a pension does: every dollar of net rent you’ll collect in retirement is a dollar your portfolio doesn’t have to produce. At a 4% withdrawal rate, $12,000 a year of reliable rent takes $300,000 off your FIRE number. The two ways people fool themselves are counting gross rent instead of net, and counting the same property twice.

How much of the rent actually counts?

Only what’s left after the property pays its own bills. A $2,400 monthly rent looks like $28,800 a year. It isn’t.

Here’s a rough budget for a single-family rental at that rent. The percentages are my assumptions for an older house in decent shape, not a standard.

That’s 45% of gross rent. Landlords have a shortcut for this called the 50% rule: assume operating costs, not counting the mortgage, eat about half of gross rent. Treat it as a rough rule of thumb and nothing more. It’s close for plenty of properties and far off for others, like a condo with a big HOA fee or a house in a high-tax county.

My approach: build the budget from two or three years of actual statements, then use the lower of that figure and 50% of gross. And put management in the budget even if you manage the place yourself today. At 68 you may not want the late-night call about a leak, and if you hire someone then, the plan should already cover it.

For the rest of this post I’ll round the net down to $12,000.

Option 1: count the rent as retirement income

This is how I’d model a property you plan to keep. Subtract the net rent from your retirement spending and size the portfolio for what’s left.

Take Greg. He’s 40, has $300,000 invested, adds $2,500 a month, wants to retire at 60 and expects to spend $60,000 a year. For now, assume he owns the rental above free and clear. The mortgage comes later.

The rent moves Greg’s Coast FIRE date from age 58 to age 50. That’s a big enough change to decide when he can drop to part-time work, which is exactly why the net figure has to be honest.

Option 2: count the equity you’d get from selling

The other way is to treat the rental as something you’ll sell and fold into your portfolio. That fits if you don’t want to be a landlord at 70.

What counts is equity after selling costs and taxes, not the online estimate minus the mortgage. Say Greg’s rental would sell for $350,000. Commissions and closing costs vary by market and by what you negotiate. At 7% combined, he’d walk away with $325,500 before tax. Then federal and state tax take their share, and on a property you’ve depreciated for years that can be tens of thousands of dollars (more on that below).

If you’d sell in the next year or two, add the after-tax proceeds to what you have invested and drop the rent from the plan. If the sale is 15 years away, don’t enter the equity as if it were already sitting in index funds. The calculator assumes everything in “invested today” grows at the return you entered. A single house, after repairs and selling costs, is a different and lumpier bet.

Don’t count the house and the rent

This is the mistake I’d watch for most. Someone enters their $350,000 of equity under “invested today” and also subtracts the rent from spending.

That counts one asset twice. The rent is what the house earns. Sell the house and the rent stops. Keep the house and the equity isn’t compounding in a portfolio you can draw from.

Greg shows how far off it gets. With the rent counted, his Coast FIRE number is $560,080, and his real portfolio of $300,000 has years to go. Add the house to “invested today” as well and the field reads $650,000, more than $560,080, so the calculator says he’s already coasting at 40. He’d stop saving a decade early on a number that isn’t real.

Pick one: rent as income or equity as an asset.

What if the mortgage isn’t paid off yet?

Most rentals carry a mortgage, and early on most of the rent goes to the lender. That rent isn’t retirement income yet, but it becomes income the month the loan is gone.

Now suppose Greg still owes on the rental and pays $900 a month in principal and interest. Taxes and insurance are already in the budget above. That’s $10,800 a year, which leaves him about $2,040 of cash flow today. The loan has 25 years left, so it’s paid off at 65, five years after he wants to retire.

Model the rent as income that starts in 25 years. Our Social Security calculator handles that gap the same way it handles benefits that start after you retire: for each year between retirement and payoff, the portfolio covers the full spending, so the missing rent gets added to the target.

1. Target with the rent: $48,000 ÷ 4% = $1,200,000.
2. Bridge from 60 to 65: 5 × $12,000 = $60,000.
3. Target at 60: $1,260,000.

That puts Greg’s Coast FIRE number at $588,084. The five mortgage years push his date from age 50 to age 52, and he’s still well ahead of ignoring the rent. The bridge treats that $60,000 as earning nothing after inflation, which leans conservative. For a number you’re about to stop saving toward, I’m fine with that.

The rent keeps covering the mortgage during those five years, so there’s no extra cost to add. If yours doesn’t, the shortfall belongs in your spending figure. And if you’re weighing extra payments to close the gap, Coast FIRE vs paying off the mortgage runs that trade-off.

How is rental income taxed?

Taxes change both options, so it helps to know the basic rules.

Rental income and expenses go on Schedule E, and the net is taxed along with your other income. Our calculators don’t model taxes, so if the rent will be taxable in retirement, build the tax into your spending figure, as our methodology page explains. Above $200,000 of modified AGI for a single filer or $250,000 for a married couple filing jointly, rents can also be hit by the 3.8% net investment income tax.

Depreciation is what makes rentals tax-friendly while you own them. Residential rental buildings are depreciated straight-line over 27.5 years, and land can’t be depreciated at all. On a building worth $200,000, not counting the land, that’s about $7,273 a year of deductions, which can wipe out much of the taxable profit on a modest rental.

The bill comes when you sell. Depreciation lowers your basis, and IRS Publication 527 says that includes depreciation you could have deducted, even if you didn’t. The part of your gain that comes from depreciation is taxed at up to 25%. If Greg has taken $80,000 of depreciation by the time he sells, that piece alone could cost up to $20,000 in federal tax, before any tax on the rest of the gain and before state tax.

Rental losses have their own rules. Rental activity is generally passive, and passive losses generally can’t offset your wages. The exception: if you actively participate, which means things like approving tenants and setting the rent, and own at least 10% of the property, you can deduct up to $25,000 of rental losses against other income. That allowance shrinks by 50 cents for every dollar of modified AGI above $100,000 and is gone at $150,000. Losses you can’t use carry forward, and they’re freed up when you sell the whole property.

A 1031 exchange lets you defer the gain by trading into other investment real estate, as long as you identify the replacement within 45 days and receive it within 180 days, or by your tax return’s due date if that comes first. It postpones the tax without erasing it, and it keeps you a landlord, so it fits Option 1 better than Option 2.

What the calculator can’t see

Inflation first. The calculator works in today’s dollars, so entering $12,000 assumes your net rent keeps pace with prices. Over long stretches rents have tended to rise with inflation, but not every year and not in every city. Insurance and property taxes can climb faster than rent. A fixed-rate mortgage payment is the one line that works in your favor, because it shrinks in real terms every year.

Then concentration. A single rental is one tenant, one roof, one local economy and one state’s landlord laws. A tenant who stops paying and a slow eviction can take a year’s net rent in one go, and an index fund never calls you about a broken furnace. That’s why I’d count a single rental more cautiously than a pension. With the mortgage still running to 65, counting 75% of his net rent moves Greg’s Coast FIRE date from age 52 to age 53. That’s roughly another year and a half of saving, which I think is cheap for the protection it buys. Our Monte Carlo calculator shows how much the portfolio side can swing too.

Last, your time. Managing a rental yourself is a part-time job with no set hours. Coast FIRE is supposed to make work optional, and a property that needs you every other weekend quietly undoes some of that. The 9% management line in the budget is the price of getting those hours back. If you’d never pay it, fine, but count the hours as work when you decide how much you want to coast.