Investing in rental real estate is not only a practical way to make passive income but, if scaled properly, can provide a sufficient and continuous stream of income that can be passed down as an inheritance.
Mr. Haley, founder of Moving Astute elaborates points out one of the benefits of having real estate rental “The economic advantage of having rental properties for your retirement is that you derive income from those assets, while the expenses are paid by someone else (your tenants).“
Have you ever wondered how many rental properties you’d need in order to have enough passive income to retire? Keep on reading and you will find out:
- How much passive income you should shoot for
- The best practices on making passive income through rental properties
- What costs to keep in mind
It Is Not An Exact Science
There are general formulas that can help guide you but each case requires a level of personalization based on your lifestyle and goals.
This means there is no perfect formula for the portfolio needed to retire and the exact number of rental properties that you need.
It is important to keep in mind – all the tips provided from now on are merely that – tips – and have to be taken into account with your current circumstances, location, the market situation, demand, and other relevant factors.
Nonetheless, there are certain steps that can be taken to get a good idea of what you should set as a goal in terms of acquiring rental properties. Once you have determined your ideal number of rental properties, you can start your real estate investing journey, pick an investing strategy and start working towards your retirement goals.
Figuring Out Real Estate Retirement
While you can find certain online tools, websites such as CanIRetireYet.com, or a calculator at FinancialMentor.com you have to keep in mind that these tools are mostly dedicated to mutual funds and stocks.
When it comes to retiring solely as a result of rental income, the math is quite simple.
You will need just two formulas:
- The monthly amount needed for retirement ÷ The cash flow per rental property = The number of rental properties you will need
- Cash flow = Income – Expenses
For this purpose, the source of income is mainly rent from your tenants. The expenses include the mortgage, interest, taxes, maintenance, vacancy, and all the other relevant factors.
Here Is An Example:
Let’s use a fictional character: George. George needs to make a monthly income of $9,000 per month to be able to retire in order to keep his current lifestyle.
George bought a few rental properties and calculated an average of $500 per month in cash flow per rental property. So how many properties does he need to retire? (He has acquired several high-end properties, so, $500 is a very conservative number)
$9,000 ÷ $500 (per rental property) = 18 properties
George should then be on track for his retirement if he purchases 18 properties. He must factor in other expenses as well, such as renovations and unforeseen events. With this many properties, it would be wise for George to get additional landlord insurance to mitigate risks!
Estimating Your Annual Retirement Expenses
The first step to take when making an estimate is to consider your current spending levels. You might have a ballpark figure of your annual expenses but you are not really sure about the precise numbers.
If this is the case start tracking your spending habits. Luckily, there are numerous tools out there that can help you simplify the process. Such as:
There is a bit of a learning curve, but once you get the hang of it, you will find that tracking your spending not only provides a better overview but also helps direct your finances more efficiently.
Kendra Barnes, Founder of The Key Resource and a real estate investor, adds her input on the question “How many rental properties do you need to retire”. According to Kendra, the number doesn’t actually matter. What matters is finding out questions such as this:
How much income do I need per month to support my lifestyle?
Here’s the thing- 8 rentals in Washington DC will produce different rental income than 8 rentals in Detroit, but the cost of properties and the cost of living in both areas is different as well!
*No matter if you are trying to retire early, or just be a successful real estate investor while you climb the ladder in your career- There *really is no magic number of properties. That’s why it’s important that you implement a strategy that is specific to your situation.
You need to figure out:
- What your living expenses are
- How much you need per month to sustain those expenses + saving
- How much rental income you need to make that happen
Your goal should look a little something like this-
“I want to own 8 rental properties” My goal is to make (X amount) in rental income per month.”
Once you’re clear on your monthly money goal, you can work backward from there to figure out how many rentals you’d need to reach that goal.
Adjusting Your Current Expenses for Retirement
After you have estimated your current spending it’s time to plan how you can adjust your habits to be on track for your retirement goals.
This means not only accounting for inflation but also adjusting for any income cuts or additional expenses you might have. Think about what you are going to spend your money on before and during retirement.
This may be the most difficult part of the process because you have to predict your financial future to the best of your abilities. You should account for any expenses connected with:
- Work (travels, etc.)
- Medical bills
- Monthly food costs
Moreover, there will be changes to your budget which are simply out of your control, such as:
- Change in interest rates (more expensive mortgage payments)
- Change in tax rates
- Unforeseen events
Therefore, it will undoubtedly be difficult to create even an estimate. Nonetheless, still try and create one with the data you do have/the factors which are under your control and then give yourself some leeway, depending on your final sum.
✨ Free Resource: Check out this retirement budget planner by Vanguard. It will guide you on setting your retirement budget!
Deciding Which Rental Properties To Acquire
Next, it is important to think about what kind of rental properties you would like to invest in. Here, consider factors such as:
- Type of property (residential, commercial, etc.)
- Rental income
Ideally, you would want to invest in a property that has the highest return on investment.
It is a good idea to compare the costs and rental rates of properties all over the US, and try and figure out the most profitable area. Also, decide what level of involvement that you want to have with your rental properties.
? Life Hack: Most likely, you don’t want to be managing the properties yourself so check out different turnkey property management companies that are located in the vicinity of your rentals.
Keep in mind that rental rates will fluctuate depending on the season of the year (supply and demand of rental properties within the area and other variables).
When estimating your rental income, use the annual average rent rate of properties with a similar value rather than the current rate (as that might be influenced by the season, fluctuating demand, and other factors).
Figuring out and considering these factors before buying a rental property will put you as a landlord at a significant advantage. Spending time on deciding what kind of rental properties you want and where is highly advised.
Is This Calculation Fully Accurate?
Short Answer, no. None of the numbers within the formula will be 100% accurate. Your estimation of retirement expenses might be slightly off or your calculated cash-on-cash return could be off. Market conditions might change while or after you purchase your property.
As such, we hope that this article serves as a framework to move forward towards your goals.
A solid estimation will help you develop a good strategy and take some of the unknown out of your journey. In this sense, you will at least know the minimum number of properties you will have to acquire in order to retire, which is still a good start.
And while on your retirement journey you may experience hiccups and unexpected circumstances which may require you to change or tweak your strategy, we hope the best for you!
Remember to Protect Your Investment
If you have acquired rental properties it is wise to make sure that you are covered against any unforeseen accidents or disasters that could occur on your property. The last thing you want is your rental property burning down or a tenant suing you because they tripped on a broken step.
We suggest getting landlord insurance for your retirement rentals. After all, you have worked your whole life to enjoy retirement. You deserve the peace of mind.
Thinking About Other Sources of Income
This is a little side note, as the article is mainly focused on how many rental properties you need to create sufficient income to retire just from renting alone. However, if you do have other sources of income, at least for now, it is important to take them into account.
If you are still planning on working for some years before shifting your income solely to rental properties. Then these years of income can actually decrease the amount of wealth you will need to invest into your rental properties in order to be able to retire.
You will be able to save additional income which can help you retire with fewer rental properties. As such, if you want to, you can consider other sources of income like:
- Your main job
- Stock dividends
- Interests from bonds
- Personal loans
- And any other income streams.
? Keep In Mind: Nonetheless, rental properties alone can be a source of steady and satisfactory income.
How Long Will It Take Me to Retire?
Everyone knows that when planning for the future, you have to expect uncertainty. Circumstances that are simply out of your control might occur.
This question is almost impossible to answer. It not only depends on how your rental investment will go, whether it will prove itself to be profitable. But also on your current income and circumstances. If you are planning to stay in your job and use rental income as a way of passive income additional to your main source. Then it might take you a far shorter time.
Further, it also depends on how much of the income you save and whether you are splurging it on yourself now or merely trying to save the most in order to retire early. Due to this, we recommend that rather than focusing on your end goal, it is better to track your progress along the way.
Set yourself small milestones on your journey to retirement and track your progress. You can then change your strategy and see where your strengths and weaknesses are and what needs to be done in the future.
Tips For Property Management
As Chris Lee with Landlord Gurus points “Managing a rental does not always feel like passive income. It can be hard work at times, and some find it stressful to find and manage tenants, and deal with maintenance issues and problems. However, there are ways for landlords to manage this using software or a hybrid approach.“
There is no end to work to managing an investment property portfolio if you are doing it on your own. We suggest that you find help. Chris Lee offers some practical tips:
There are a variety of software products available that can help landlords manage their property, even from out of state. Property management software simplifies and automates the daily responsibilities of landlords, from advertising, tenant screening, bookkeeping, and rent collection.
Tenants can also pay their rent right from their phone and you can receive it within minutes. Some even have local, vetted maintenance professionals on hand to help with on-site problems.
Additionally, we have seen a shift in property management companies that now offer more of a hybrid approach. This might entail hiring a manager for some tasks, while the owner performs others themselves.
Landlords can decide which areas of property management they have time for while delegating tasks that are better suited for a local manager. This allows owners to control costs and maintain control of their property.