How Many Rental Properties To Retire Early: Easy Math

It’s no secret that real estate investing in rental properties is a serious money-maker when done right. Most people start out in real estate investing as a side hustle, and quickly realize that it can be way more than that — it can be their ticket to long-term retirement freedom (and can even help them retire early). But when it comes to retirement, there are a lot of factors to consider:

• How much money do you need to have saved up?
• What will your monthly income be from retirement accounts (IRA’s, TSP’s, 401k’s, Gold IRA’s, Crypto IRA’s, etc.)
• What do you want to be able to do during retirement?
• How long might you live for?

One important question that those of us on the path to financial independence ask is, “How many rental properties do I need to retire?”

The fact of the matter is that it’s impossible to predict this exactly because it will depend upon how well your rental properties perform (which will determine how much rental income & cash flow you generate), what your retirement goals are, and what the future of real estate is at the time you retire, etc.

So there’s no magic formula but with that said, this article will walk you through some math and considerations involved in this decision so that you can make the best choice for yourself!

Let’s get into it.

How Many Rental Properties Do You Need To Retire?

This really comes down to how good of deals you find for your rental properties (and how well you manage your personal finances).

In real estate investing, it’s all about your purchase price compared to the market, and the quality of your tenants.

The better the deals are that you find and the higher the quality of your tenants (meaning less repairs and vacancy), the fewer rental properties you will need to retire.

On the other hand, if you’re finding subpar deals or have problem tenants, then you’ll likely need more rental properties to make up for it since it will undercut your cash flow.

It’s important to remember that there are a lot of variables at play here, so it’s impossible to give a definitive answer.

That being said, let’s take a look at how you can calculate how many rental properties you need to retire based on different assumptions.

The Math: How Many Rental Properties Do You Need?

There is one main way to approach this question mathematically.

And that is to calculate how much rental income you’ll need to cover your monthly expenses in retirement and divide by your expected cash flow.

To do this, you’ll want to take your total monthly expenses and subtract any Social Security or retirement benefits (pension, 401k, IRA, etc.) you expect to receive.

Then, you’ll need to account for the fact that your rental properties will have ongoing maintenance & repair costs, vacancy rates, and property management fees (if you’re not self-managing).

For simplicity’s sake, let’s assume that after all expenses, you cash flow about $200/month (this will obviously be higher or lower depending on how good of a deal you find and many other considerations.

So if your total monthly expenses are $4000, and you expect to receive $1000 in Social Security benefits, and $1000 from your retirement accounts, you’ll need $2000 in rental income each month to cover the difference.

To get an annual figure, you would simply multiply this by 12 ($2000 x 12 = $24,000).

*If you want to be more conservative, you can factor in a longer retirement timeframe or a higher vacancy rate/expenses percentage.*

So let’s say you need $24,000 in rental income (gross after mortgage payments and expenses) each year to supplement your Social Security & other investments.

Assuming for example that you cash flow an average of $200 month on your rental property, then you would need 10 rental properties to take care of your $2000/month.

The math is simple:

• $200 cash flow x 10 properties = $2000

The thing with rental properties is that your cash flow should increase over time for each property as you pay off the mortgages.

So if you plan to pay off your entire mortgage by the time you retire, the math is even easier.

If you’re cash flowing $1000 per month on a paid off mortgage (after taxes & insurance & repairs), then you only need 2 properties.

• $1000 cash flow x 2 properties = $2000

Of course, this is a very simplified example and there are other factors to consider.

But it gives you an idea of how to approach the question from a mathematical standpoint.

Now let’s look at some other things you need to take into consideration before making the decision to retire on rental properties.

Considerations Before Retiring on Rental Properties

As we mentioned before, there are a lot of variables that go into planning how many rental properties to retire.

• Expected real estate investment monthly cash flow
• Expected & unexpected real estate property repairs
• Remodeling your investment properties over time
• Increasing retirement expenses (living expenses generally increase over time with inflation)
• Decreasing retirement expenses (if you foresee them going down as a result of moving to a lower cost of living area for example)
• How much income you need at a bare minimum, and how much you desire to have
• How many rentals you can mentally & emotionally handle
• Are you an experienced real estate investor or willing to become one to ensure you get better deals?
• What type of real estate investments they are (commercial, residential, apartments, land, storage units, etc.) and how those markets might change over time

It’s not just a simple math equation in reality.

You also need to take into account things like your age, health, location, the current and future real estate market, etc.

But hopefully these give you a good starting point to thinking through this weighty decision.

FAQ’s

What are the tax benefits of rental properties?

While the answer to this question can vary depending on your location, there are generally tax benefits associated with owning rental properties.

These can include deductions for mortgage interest, property taxes, and repair & maintenance costs.

It’s always a good idea to speak with a tax professional to get a better understanding of how owning rental properties will impact your tax liability.

What is cash on cash return?

Cash on cash return is a metric used to measure the profitability of rental properties based on the rental property income.

It’s calculated by taking the annual pre-tax cash income of a property and dividing it by the total amount of money invested in the property (down payment + closing costs + any major renovations).

For example, if you put $20,000 into the property when you bought it, and it cash flows $2000 per year then your cash on cash return would be 10%.

Do I need a property management company?

Property managers are a lifesaver for many real estate investors, but not every investor uses or wants them.

This is a question that can only be answered on a case by case basis.

There are pros and cons to both self-managing your rental properties and hiring a professional property management company.

If you value your time freedom more than you want to maximize profits, then hiring a property management company is a great investment in freeing up your time.

However if you are just starting out or prefer to be hands-on with the management, you can save a good amount by managing the property yourself.

Typically a property manager will charge 8-12% of the rents collected just for managing the property, so you’ll have to weigh out whether or not that expense is worth it to you or not.

You’ll need to consider the factors that are most important to you and make the decision that’s best for your situation.

How much debt should I take on each rental property?

This is a tricky question and there’s no one answer that fits everyone.

You’ll need to carefully consider how much debt you can afford to take on while still being able to comfortably make your mortgage payments each month.

You also need to factor in the interest rate you’re getting on the loan and how that will impact your long term profitability.

It’s generally a good idea to have at least 80% equity in your rental properties, so a 20% down payment minimum is ideal to start with.

This will help make sure you have enough breathing room in your budget in case anything unexpected comes up, and will also keep you from having to pay PMI (Private Mortgage Insurance).

How many properties do most landlords own?

There’s no definitive answer to this question, as every landlord’s situation is different.

Some landlords own just one or two properties, while others may own dozens or even hundreds.

It really depends on how much time and energy you want to put into being a landlord, and how much risk you’re comfortable taking on.

And some real estate investors prefer to start moving into apartments or storage units once they start getting a lot of individual houses, as they find it easier to manage fewer locations (and often find the returns are better).

How many rental properties is too many?

Again, this is a question that depends on each person’s individual situation.

Some landlords may feel like they’re in over their head with just two or three properties, while others may feel comfortable managing a dozen or more.

It really comes down to how much time you’re willing to put into being a landlord and how you set up your rental property business.

The more efficiently you can set it up and the more that you delegate tasks to others, the more properties you can take on.

Are rental properties a good investment for retirement?

Rental properties can be a great investment for retirement, but there are a few things you need to consider first.

You’ll need to make sure you have enough income from your rentals to cover all of your expenses in retirement, including mortgage payments, taxes, insurance, and repairs & maintenance costs.

It’s also important to factor in how long you plan on owning the rental property, as you’ll need to make sure it will still be a profitable investment when you’re ready to retire.

If done correctly, investing in rental properties can provide a great passive income stream that can help fund your retirement.

CONCLUSION

There’s no one right answer when it comes to how many rental properties you need to retire.

It depends on a variety of factors, including your income goals, risk tolerance, and how much time you’re willing to put into being a landlord.

However if you’re strategic about it and factor in all the important considerations, investing in rental properties can be a great way to provide passive income during retirement.

Do you have any questions about how many rental properties you need to retire?

Let us know in the comments below!

*This blog post is for informational purposes only and should not be construed as financial or legal advice. Please consult a financial or legal professional before making any decisions effecting your finances.