Properties Do You Really Need To Retire Rich?
As investors, we’ve been conditioned to believe
that we should acquire as many rental properties
as we can. Then hold them for 25 years until the
mortgage is paid off and retire on the cash
flow. So, how many do you really need for this
plan to work…20, 50, 100?
The question itself can be daunting. Don’t get
me wrong. Buying rental property and letting the
tenants pay off the mortgage is time tested and
proven to work. The concept itself is very
simple. However, devoting your entire life to
buying as many properties as humanly possible
with no end in sight is likely going to produce
unhealthy results in your social life, family
life and personal health. Let’s be realistic
here. After all, who wants to deal with 100
tenants for 25 long years?
How do we realistically ensure a solid
retirement and know when enough is enough? My
perspective is this. Buy long term hold
properties as soon as you can with a realistic
target of how many you actually need. In order
to determine how many you need, simply determine
how much income you’ll need in retirement. It’s
not an exact science and you have to make some
general assumptions in order to make your
Assumption #1 - In 25 years your principal
residence should be mortgage free therefore you
won’t have that payment anymore.
Assumption #2 - Children have typically left the
nest after 25 years so you won’t have that
Assumption #3 – No kids equals a smaller
personal residence with smaller maintenance and
smaller utility bills.
Assumption #4 – Expenses will increase over time
and so will rents. A $1,900 property tax bill
could be $4,000 in 25 years. Today’s rent of
$1,900 could also be $4,000 in 25 years. It’s
all relative. So, we’ll use today’s dollar
amounts for our calculations.
Let assume that your total family household
expenses including a mortgage or rent are
currently around $5,000/mo or $60,000/yr.
Without a mortgage, kids or a large home, that
number could be closer to $3,000/mo or
$36,000/yr. How do we replace $3,000/mo or
$36,000/yr in retirement with real estate?
Here’s a simple, quick and easy calculation to
use. First, add up the total gross rents on all
your rental properties. Then deduct 30%-35%% of
the gross income for ongoing expenses that will
still need to be paid even after the mortgages
are paid off and the property is free and clear.
These include property taxes, insurance, repairs
and maintenance, and property management. That
leaves 65%-70% of the total gross income left
over which has been going towards mortgage
financing payments. Since the mortgage will be
paid off in 25 years, you will no longer have
the financing expense leaving 65%-70% of the
total gross income in positive cash flow every
month. If the 65%-70% is equal to or greater
than your current income, then you don’t need
any more long term rentals or tenants. You’ll be
fine in retirement.
Assuming that each of your rental properties
produces gross rents of $2,000/mo and the
tenants pay all the utilities, then 65% of
$2,000 equals $1,300/mo or $15,600/yr. In order
to replace $36,000 you will need exactly 2.3
rental properties that currently produce
$2,000/mo in gross rents. Yes – you read that
right – you only need 2.3 rental properties to
Formula: Retirement Income ($36,000) Divided
by Cashflow ($15,600) = 2.3 Properties
If you want to be safer and assume that you will
still have a mortgage, kids and a large home in
retirement or you want to travel more and
require $60,000/yr, then you will need 3.8
rental properties earning $2,000/mo in gross
rent. Every rental property beyond these numbers
Formula: Retirement Income ($60,000) Divided
by Cashflow ($15,600) = 3.8 Properties
So before you go on a major buying spree to
acquire your empire, first consider how many
rental properties you really need. 3.8
properties is a much easier goal to achieve than
struggling to acquire 100 properties or more.
Once you have acquired your 3.8 properties then
consider re-setting your goals higher, if you
want. Don’t get overwhelmed and fall into the
trap that you need to build an empire of 100
properties or more in order to secure your
retirement. Figure out your own number first.
Then get out there, buy the first one and
accomplish 24% of your retirement goal
What will you do with all your free time if you
no longer need 100 properties or more? Simple -
enjoy a balanced life and sleep well at night
knowing that you’ll be fine in retirement.
For those who may get bored waiting while your
tenants are busy paying off your mortgages, you
may want to consider combining mid term
investment strategies for large sums of cash
while you wait. Stay tuned next month as I’ll
discuss my personal favorites. Until then, all