How many investment properties do I need to retire?
If you are a regular reader of From Cents To Retirement, you buy it that rental properties are a great way to fund a retirement. In my opinion, there are great advantages to rental properties, in comparison to other investments and I will go through them once again in this post. However, there are very low hanging fruit arguments: rental properties produce predictable income that is naturally indexed to inflation, have many tax advantages and allow for easy leveraged.
If you want to retire off of rental properties, you should have, in my opinion, a strategy and a philosophy. These are different things. A strategy is a plan that will tell you where to go next. A philosophy to invest in real estate is a set of rules that you’ll apply always, regardless where you are at that moment. My strategy is so complex that I actually wrote a book about it.
In this article, I will share how you should calculate how many rental properties you need to retire off of. I designed this article so that you ask yourself a bunch of questions that will give you very solid indicators on how many properties you will need. It is not a magic formula, though. It is more of a comprehensive view on the topic that will help you arrive at a number, type, and location of a rental portfolio.
How many investment properties do I need to retire?
“How many investment properties do I need to retire?” is probably in the TOP3 of questions I get, when it comes to retiring with real estate. After all, I set the goal to retire by the time I hit around 30 cash flowing units (meaning 20 more than what I have now). To be honest, I love this question, because we don’t need the same number of properties to retire… Plus, I actually found out that, working with clients abroad, this question can be easily answered if we understand some points about early retirement and real estate first.
Before we dive into the actual calculation of how many properties you will need, let’s review some real estate points before.
Why are rental properties a better way to retire than other investments?
The thing about investing in the stock market is lack of control. I love real estate because I can negotiate 1:1 and bring the cost of properties down. In fact, I love to shop around for properties and submit 30-50 offers in a matter of days. I submit these many offers because I go with very low offers – sometimes 20% of the listing price. And if I find a motivated seller, who had his/her property on the market of ages, I may walk away with a great deal. In the stock market, you can’t do this. Sure, you can find undervalued stocks but you can’t really buy a stock below market value.
Plus, you have very low flexibility with stocks. You buy them and you hope the companies you invested in do well. But you can’t run them. In real estate, you can negotiate the acquisition cost aggressively and monetize the property as you want. You can choose the renovation you want (and you can trade-off between renovation costs and income) and decide what and when to repair things (unless we’re talking about urgent things that needed to be repaired right away). The stock market is so far from this that many investors claim that if you’re going for the long term, it doesn’t really matter when exactly you buy in. Most investors think that the best thing to do is to buy a few index funds (such as a trident portfolio) and call it a day.
Retirement calculators
There are many retirement calculators that suggest you the number of properties you need to retire off of a rental property portfolio. I think that retirement calculators can be helpful but I don’t agree that they fit most people, as they are biased and usually designed towards a specific scenario. For instance, how would the same calculator work, not knowing if I live in the US, Portugal or Cambodia? Many people would say this is already factored in in the income I need to get to retire, but that completely ignores facts like the local tax code, how hard it is to leverage in those markets and how much that market will grow in the future.
I believe that the best way to determine your magical number of properties is actually my answering the questions below…
What is your goal?
My own goal is to become financially free by the time I turn 33. At least that was the goal when I started From Cents To Retirement, 2 years ago. Now, it is more like being able to retire by the time I turn 30 years old.
Your goal may be 60 years old. Or 25. It doesn’t matter, just set up the goal. The sooner you retire, the more sustainable your portfolio will have to be, but the more work it may require – at least in my perspective. Real Estate is never as passive as dividend stocks, for example. You’ll have to deal with tenants in one way or another – even if you hire a property manager. They may solve most of the property issues without needing your intervention, but you’ll have to be involved to some extent. Usually, the younger you are, the more willing you are to get involved.
So, set your goal in terms of age, income needed to retire and the level at which you’re willing to get involved in the investments.
Where do you live – and where do you want to retire?
This question is essential in two ways: first, it will help you determine how much you will need throughout your retirement. Second, it will clearly tell you whether you should invest.
As for the needed income to retire, you’ll have to come up with a reasonable figure that enables you to live well in the area you want to retire in. The good news is, you already know the area very well, and can easily determine what the perfect figure would be. Maybe it is your current salary (that would perfectly do the trick for me).
Although you want to invest in real estate that is physically close to you (unless you go with turn-key properties), you need to make sure that the markets near you are indeed profitable.
So, the bottom line is, arrive at a number – regardless you want to retire in your current location or abroad.
How much can you cash in, with the properties you’ve identified?
At this point you know where you want to invest, so you should also know how much money each property yields. This is because you’re familiar with the market, and you can quickly say how much property is supposed to cost and yield. My advice is to study the market inside out when you get to this point. Make the following questions:
- Will there be enough rental demand over the next years?
- What type of tenants will the market primarily be made of (e.g. students, nurses, families)?
- Are there enough (and sufficiently competent) property management companies?
- Are there enough contractors? Can you determine whether they are competent and affordable?
Once you answer these, the math becomes simple. Consider taxes, maintenance costs (usually 15% in the long run), vacancy costs (I use 10%) and property management fees. Then, arrive at a number of properties that enables you to retire off of (as you already know how much money you need to retire). Be conservative, as much as you can. But be realistic and don’t lie to yourself.
My own example…
My first goal is to hit a net worth of about €670k-€680k, which, considering a 2% inflation rate, should have the same purchasing power of €755,000 in 6 years from now.
In today’s euros, I estimate that such a portfolio will generate a net salary of about €29,000/yr (this takes an average net yield of 7% and 28% tax into account). Just so you know how conservative I am: I will break this down into 4% for my salary (which is €16,500/yr – if you think this is low read my post about retiring in Portugal and geographic arbitrage), 2% to cover inflation and 1% for portfolio growth.
I estimate that about 70% of that income will come from rental properties. As each property usually nets about €200/mo net in my region (considering a 28% tax, property management fees, etc), I would need about 9 properties to make it happen (9*200*12 = €21,600 ~= 70% * €29,000). This math assumes 0 liabilities, which is clearly not the case in my portfolio. If I take liabilities into account, then this ramps up to about 20 cash-flowing properties, the double of what I currently have.
Next year I should have a total of 20 properties, but my debt will be as high as never before, as I plan to use some acquisition lines of credit, mortgaging RP#3 to that end. This may mean that my debt will be higher than €200,000. A necessary way to grow…
How much do you know about real estate investing?
If you are a reader of From Cents To Retirement, you are probably an expert in real estate. However, I think that if you want to retire off of a rental portfolio, you must really know what you are doing. In particular, I think that these pointers will help you a lot, especially if you are serious about setting up a real estate business:
Simply take these tips and tricks into account when determining the number of properties you need to retire off of and starting a real estate business.
Conclusion
In my opinion, there is no magic formula that allows you to safely say how many properties you need to retire. We are all different, living in different places, needing different income to live off, and we all have different tolerance to risk and willingness to be active in our investments. However, there are a lot of questions you can make that will give you a rough idea of how many properties you’ll need. At the end of the day, it boils down to setting an income figure you want to receive every month and a plan to create as many properties as needed to create that income. Simply go through the questions and observations I’ve made in this post to determine how many.
Any comments? Let me know down below.
Your biggest fan,
Ben
