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You may have seen read of our previous articles showcasing real estate’s benefits and how effective it is compared to traditional retirement plans. So, now that we know the background on real estate and are convinced we want to invest in it, how can we form more concrete goals for our investing career? For instance, how much income producing real estate does someone have to buy to be able to retire?
In today’s world, retirement age is thought of to be somewhere around 65 years old.
No matter how old you are now, when you become 64 ½, how much money would you expect to make each year in salary? For most people, it would be a nice accomplishment to bring in $120,000/yr or $10,000/month. That’s a healthy living at 64 ½.
Now, when you turn 65 in 6 months time, will you want to retire? If you said yes, then how would you be able to maintain the same lifestyle you were living at 64 with $10,000/month? Will you have a pension? Will you withdraw money from your 401k or IRA? Any of these traditional plans to rely on may not be so reliable anymore. Pensions are going the way of the dodo bird and 401ks and IRAs are soon to follow suit. Why? Because they don’t provide any INCOME! You’ve spent your whole life saving for retirement with the utmost discipline. Now, you’ll have to deal with seeing that big number in your 401k or IRA shrink each month! That’s a tough pill to swallow! The only way to have a successful retirement is to invest in income producing assets like real estate.
So, if we did things the right way and invested in real estate, how many rental properties would we need to make $10,000/month in passive income to replace the active income from our previous W-2 job?
A typical turn-key single family property from the Rent to Retirement inventory usually cash flows around $400/month. To find out how many properties we would need to equal $10,000/month in income, we take $10,000/$400 which equals 25 properties. If we were to find slightly better deals and we were able to get $500/month in cash flow, we would find that we only need 20 properties to retire and receive $10,000/month in passive income.
How would we achieve 20 cash flowing properties? That’s a ton of real estate right? Well, how do you eat an elephant? One bite at a time! To accumulate 20 cash flowing properties, you could buy 2 properties per year for 10 years. At a cost of $100,000 per property, the down payments for these properties would be between $20,000 – $25,000 if we are looking at a typical investment property on renttoretirement.com. With a down payment of $20,000 per property and cash flow at $500/month, your return on investment would be 30%! If you started at 30 and were able to accumulate 20 properties that all cash flowed $500/month by age 40, what would you be doing waiting until age 65 to retire!?! You are making $10,000/month in passive income and as far as I’m concerned, you are now financially free.
Just for fun, let’s say you really pinched pennies, saved up your money, and bought 4 properties per year for 10 years with each property cash flowing $500/month. By the end of year 10, you’d be making $20,000/month in passive rental income or $240,000/yr! Now that’s an income you can retire on. During that 10 years, your properties would also be benefiting from equity buildup that we discussed in our “5 Benefits of Real Estate Investing” article. It is possible to redeploy your equity buildup instead of letting it sit in the properties you own. You could sell one of your properties and use a 1031 exchange (paying no taxes) and redeploy your equity into down payments for 2 or 3 different properties which would triple your income.
By doing this you are not putting in any additional capital, you are simply reinvesting your income & equity that you’ve grown over time.
So if you turned that initial $20k buying one home into 3 homes in 3 or 4 years, what would your cash flow & ROI be on that initial $20k? What about if you took those 3 or 4 homes & did another 1031 exchange to make that into 9 homes with still that initial $20k invested? What would your cash flow be if you invested $100k in year one to buy 5 homes, and turned that into 15 homes in year 4, and then turned that into 45 homes in year 8? What if you bought 5 homes every year for 10 years & did a 1031 on each of those after 3 years of owning each? Are you seeing how quickly we can get to a critical mass of investment properties that would allow us to retire? It’s not all about saving up for down payment after down payment.
As icing on the cake, we can also use cost segregation studies which we will explain in a future article to reduce the amount of taxable income each year which will allow you to redeploy capital even faster.
This may come at a surprise to some of you who are just now learning about the ins and outs of real estate. It’s truly a wonderful asset that has so much flexibility compared to the traditional retirement accounts everyone talks so highly of. One of the reasons real estate continues to be such a great investment is because people don’t put the time in to learn about how it works or how to invest. But not you! You’re here, changing that narrative, and bettering yourself exponentially compared to your friends.
As real estate billionaire Sam Zell says, “When everyone is going right, look left.”