How Many 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 calculations.

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 expense either.

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 retire!

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 is gravy.

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 instantly.

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 the best.

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