What a great question, Passive Income MD. How many doors should one have in a rental property portfolio in order to have enough passive (or somewhat passive depending on how you do it) to provide for all of your retirement needs?
Now that I have enough money to call myself financially independent and then some, I’ve thought more about diversification.
It would be nice to have some income-producing assets that don’t rely on the stock market to further “smooth the ride” beyond what my small bond allocation does.
Thus far, I’ve mainly relied on crowdfunded real estate to do that (see my crowdfunded real estate resource page or PIMD’s top real estate crowdfunding sites), but I could see us owning rental properties in the future. In fact, we’re planning to offer part of our future home as a short-term vacation rental.
As is customary with these Saturday Selections, this post originally appeared at Passive Income MD.
How Many Rental Properties Do You Need to Retire Early?
Those of you who know me personally know that I’m a big fan of real estate investing. In fact, I think it’s one of the best ways for physicians to achieve financial freedom.
The passive income provided by such investments can continue flowing for your entire life, and in fact, the best investments can actually be generational–extending well beyond your own lifetime. However, the biggest benefit of real estate investing is that it can start providing cash flow immediately, and you can begin replacing some of your income right away.
Is There A Foolproof Plan?
I’ll go ahead and say this at the outset: there is no perfect, magic formula for how many rental properties you need in order to retire, just like there’s no perfect, magic formula for how large your stock portfolio needs to be in order to retire.
Yes, there’s the popular 4% rule, but in no way is that a guarantee either. There are just too many factors to consider. At the end of the day, all you can do is make a well-educated guess, use real current numbers, and look at both history and statistics.
In all of this, I’m making the assumption that you have absolutely no other source of income including retirement portfolios, Social Security, and rich children to support you.
So How Many Rental Properties Do You Need?
Personally, I like to follow the acronym K.I.S.S. –Keep it Simple, Stupid. This helps me come up with a very simple, completely attainable goal.
As far as answering the question of the day – How many rental properties do you need to retire? – here’s how I go about it:
- Monthly amount needed for retirement ÷ Cash flow per rental property = Number of rental properties you need
- Cash flow = Income – Expenses
For our purposes, income is mainly from rent paid for by your tenants. Expenses include the mortgage, interest, taxes, maintenance, vacancy, and a whole host of other things.
An Example of Retiring with Rental Income
With all that in mind, let’s use an example. Imagine there’s a man looking to find out how many rental properties he needs in order to retire. We’ll call him Ronald Drump. In order to Make Retirement Great Again, he needs $8,000 per month to safely retire and have everything covered.
$8,000 ÷ $200 (per rental unit) = 40 units
There you have it: a nice, concrete number to shoot for. If you buy a 10-unit building that provides $200/unit in cash flow, that’s $2000 for the building. You only need three more similar buildings to reach your $8,000 goal. Passive income now covers all of your expenses.
Now, I know what some of you smart folks are thinking. You’re thinking that this is ridiculously simplistic –- and you’re right. I didn’t mention anything about rent increases, leverage, tax benefits, increasing expenses, etc.
But I can assure you that if you follow the rough formula and do end up with something like 40 units under your belt, you’ll have done something right. You’ll be very close to (or more likely way past) where you need to be to retire, and like our hypothetical Mr. Drump, you’ll be well on your way to Making Retirement Great Again.
[PoF: If you like this idea of retiring with rental income, see Coach Carson’s article on the same topic for further reading.]
The Chase Sapphire Preferred is an excellent first (or only) rewards card. $50 annual hotel credit for bookings via the Chase UR tavel portal & 5x points for all travel via the portal. 3x points on dining, 2x on other travel. Flexible rewards good for cash, travel, or transfer to travel partners, great travel protection & new Peloton, Lyft & DoorDash perks! $95 Annual Fee
The Chase Sapphire Reserve offers great travel perks including Priority Pass lounge access, a credit for Global Entry or TSA Pre✓ and a $300 annual travel credit. When using Chase Ultimate Rewards travel portal, get 10x points on hotels and car rental & 5x points on flights. 3x points on other travel & dining. Elevated Peloton, Lyft and DoorDash benefits. $550 Annual Fee
Easy? Agree or not? Have your own thoughts, let me know…