How Many Rental Properties Do I Need to Retire?

3 Apr

I’ve been contemplating our long-term financial goals, prompting some reading about early retirement and financial independence. I find many of the concepts inspiring – including “The Shockingly Simple Math Behind Early Retirement” by Mr. Money Mustache.

ddd

(photo by Steven Depolo)

Financial independence means different things to different people. The “extreme” retirement movement focuses on above-average savings and below-average expenses, allowing some to retire in their 30s. Personally, we want to travel and have some splurges in our retirement – including a higher standard of living than what we’re experiencing today.

What’s Our Financial End Game?
Being a dreary Monday morning, I decided to calculate the minimum number of paid-off properties we’d need to acquire before that was a legitimate possibility.

I started with averages from our existing properties to create these assumptions:

  • $160,000 purchase price per property
  • $40,000 down payment per property (25%)
  • Financed with 30-year fixed loans at 4.5% interest
  • $400/mo. in positive cash flow per property

Your inputs will vary depending on geographic location and investment strategy. We really don’t know if we can expect similar performance from future properties. Did we get lucky? Will interest rates rise? For now, we’ll use these numbers as a baseline to compare our progress against.

An online mortgage calculator tells us a $120,000 loan will have a $608 principal and interest payment. So once the mortgage is paid off, this amount can be added to existing cash flow for a total of $1,008 income per month per property – net of rental expenses but not income tax.

Next, we can see how property count affects retirement income:

# Properties Monthly Income Annual Income
1 $1,008 $12,096
2 $2,016 $24,192
3 $3,024 $36,288
4 $4,032 $48,384
5 $5,040 $60,480
6 $6,048 $72,576
7 $7,056 $84,672
8 $8,064 $96,768
9 $9,072 $108,864

Our Conclusion
This exercise intentionally ignores our retirement accounts. We maximize our Roth IRAs contributions, but could hypothetically be financially independent before reaching the age for qualified distributions (59 1/2) and social security (62-70).

Given that, our initial gut check is that we need at least 5-6 paid off properties before we can even consider celebrating. Those contemplating retirement often have the temptation to work “just one more year” so I would not be surprised if we feel the need for “just one more property” too. :)


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3 Responses to “How Many Rental Properties Do I Need to Retire?”

  1. mike May 27, 2014 at 9:00 am #

    I don’t see anything about property taxes in this. That will take a good sized bite out of the equation.

Trackbacks/Pingbacks

  1. Finance Rental Properties or Buy Outright? | Rental Realities - May 2, 2014

    […] Let’s say we’re an ambitious investor with $4,000/month in disposable income. The goal is to eventually live off our rental income, which means a minimum of $5,000 net a month or 5 paid-off properties. […]

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