How Many Rental Properties Do You Need to Retire?

No matter if you’re a new real estate investor or own multiple properties, you’ve likely thought about using your properties to help fund your retirement. Perhaps you’re looking for ways to set yourself up for early retirement or want to retire without losing income flows.

So naturally you wonder: how many rental properties will I need? 

Is it even a good idea to bank my retirement on rental properties? 

The answer to those questions depends on a few factors and can range from person-to-person. In this blog post, we’ll discuss some of the elements you need to consider when making this decision, and provide you with some tips and calculations to set your rental retirement strategy up right.

Let’s tackle the biggest question first:

Is rental real estate investing a good retirement strategy?

The answer to that question is a little more complicated than a simple yes or no. On the one hand, rental properties can provide you with regular income and tax benefits in retirement, but on the other there are also risks such as market fluctuations and lack of liquidity. That’s why it’s important to weigh the pros and cons of this investment strategy and do some calculations based on your unique situation.

Advantages

Passive income

Arguably the most appealing aspect of real estate investing is the potential for passive income. When properly planned, rental properties can provide you with a steady stream of income. Unlike traditional retirement strategies that are focused on withdrawal rates, rental properties could provide you with a consistent flow of income on a month to month basis. Furthermore, if you hire a management firm to handle your properties for you, you may be able to reap the benefits of passive income with minimal maintenance or headache.

Tax benefits

While most people look toward specific tax-sheltered retirement accounts in order to reap tax benefits, real estate income comes with its own set of tax benefits, as well as fewer qualifications compared to many other retirement accounts. For example there is no minimum withdrawal age or a cap on yearly investments with real estate income. You can also deduct property related expenses like mortgage interest, property insurance, management fees, taxes, and more. This means as an investor you can often report a “paper loss” on your rental income while still collecting income month to month.

Rise in equity and worth over time

The great thing about real estate retirement plans is that you can start as soon as you like and continue to build your net worth over time. Even though you have additional costs and expenses for each property, you’re ultimately using the rental income to pay down the mortgage while your properties increase in value over time. For you, this is a win-win scenario. Once the mortgage is paid off you now have a clean and clear property to continue generating income from and eventually pass down to the next generation.

Disadvantages

Just as there are with any investment plan, there are several drawbacks to real estate investing to keep in mind. The cash investment needed, the lack of liquidity in properties, and the natural unpredictability of the market are a few things that can be disadvantages to this retirement plan. Let’s take a look at each.

Minimum Cash Investment Required

As with most things in life, when it comes to real estate you get what you pay for. The average down payment on a rental property is 20%, so if you’re looking to purchase a few properties this could add up quickly. This upfront cash investment can be difficult for people who don’t already have a chunk of cash saved up, and can mean shutting a lot of people out of real estate investing in general.

Lack of Liquidity

One of the biggest drawbacks to rental properties is their lack of liquidity. This means that it can be difficult to quickly sell a property if you need the cash for another investment or emergency situation. If you’re counting on your rental income to fund your retirement, this could be a major issue if something unexpected comes up and you need to cash out your investments.

Market Fluctuations

The market is an ever-changing beast, and as an investor it’s important to be aware of the risks associated with sudden changes in the market. When it comes to real estate, these fluctuations can mean big losses if you’re not prepared. For example, in 2007 the market crashed and many people who had invested in real estate lost a lot of money. While it’s impossible to predict when or how the market will move, as an investor it’s important to be aware of these risks and have a solid plan in place for them.

Now that you ‘re aware of some of the pros and cons of using rental properties for retirement, let’s look at how to calculate just how many properties you’d need to make rental income retirement a reality.

The formula and how to apply it to your situation

There’s no one-size-fits-all answer to this question, as the number of properties you’ll need for retirement will vary depending on a variety of factors like your location, the current market conditions, and how much money you’re looking to make each month. However, there is a general formula that can help you get an idea of how many properties you’ll need.

First you’ll need to consider your retirement expenses. Decide if you want to keep your current lifestyle, make deductions, or increase your spending capabilities. Once you have a number in mind to cover everything you’ll need you can then follow this simple formula:

Monthly amount you need for retirement ÷ Cash flow from each rental property = number of rental properties needed

*Cash flow = Income – Expenses

For example, if you’re looking to generate a monthly income of $2000 from your rental properties, and the average rent for a property in your area is $1000, you would need two properties. But remember, this formula doesn’t account for elements that can affect your income but are out of your control. Such as:

  • Fluctuations in interest rates  
  • Emergencies and unforeseen circumstances/events
  • Change in tax rates

Types of properties to invest in

Now that you understand the basics of how to calculate the number of rental properties you’ll need for retirement, it’s important to know what types of properties will give you the best return on your investment. There are multiple rental property options available including:

  • Vacation rentals
  • Apartment complex
  • Single family homes
  • Multifamily units (duplex, triplex etc.)
  • Condos and townhomes
  • Foreclosures

Each of these options has its own set of pros and cons, so it’s important to do your research before you decide which type of property to invest in.

While rental properties can be a great way to generate consistent income for retirement, vacation rentals (think Airbnb or VRBO) can also provide you with a nice income and the ability to continue using your property for personal use whenever you need or want to.

The important thing to remember is that no matter what type of rental property you choose there are elements you want to look for, like:

Location – Properties in desirable areas will generally have a higher rent, while those in less desirable areas will have a lower rent.

Type of property – A duplex or triplex will generally generate more income than a single-family home, as you’ll be able to charge more per unit.

Condition of the property – If you’re looking to fix up and flip a property, make sure it’s in a desirable area and that the repairs needed aren’t too extensive.

Rental market saturation – Make sure there is room for another rental property in your area before investing, as over-saturation can lead to lower rent prices and less income overall.

Now that you know what to look for when choosing a rental property, let’s take a look at a few examples of properties that might be a good investment.

  • Example One – A duplex in a desirable area with low repairs needed
  • Example Two – A single-family home in an up and coming neighborhood with moderate repairs needed
  • Example Three – A condo in a metropolitan area that is popular with tourists

As you can see, there are a variety of factors to consider when choosing a property to invest in, and no one-size-fits-all answer. However, Rental properties can be great investments for retirement as long as you understand the basics of real estate investing, have the ability to manage your properties like a business, and are strategic with your investment decisions. Remember, real estate investing is not a get-rich-quick scheme or a guaranteed success – it takes time, effort, and knowledge to be successful. But with the right tools and resources, you can create a solid retirement plan that includes rental properties.

 

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