It seems like a straight forward question. How many rental properties do you need to retire? However, it is very much a subjective question. And while it seems like an obvious question that investors should asked, it is too often overlooked.
How many rental properties do you need to retire?
This is really pretty simple equation.
How much money do you need to be financially free? Put another way, what are your expenses? Without knowing the answer to these questions, we can’t answer our question.
In my case, Selenid and I estimate that our monthly expenses in retirement will be around $20,833 ($250,000 annually). We figure this out using the system described here.
So, very simply, we would need enough properties to cash flow $20,833 per month to retire.
Therefore, I could invest in one property that cash flows $20,833 per month or 2,000 properties that each cash flow $10 per month. Either way works.
But let’s get realistic…
Selenid and I invest in cash flowing real estate according to these principles.
We have a system that works and we stick to it. We shoot for a cash-on-cash return of at least 10% for every property. However, since we have a bunch of properties already, we know from experience that each unit of ours cash flows an average of $600 monthly.
This is a conservative estimate based on our experience and how we manage our properties. Which is quite efficiently. Everyone’s estimated number will be different based on how they invest – active or passively, how the properties are managed – self or with a management company, and myriad other factors. But be conservative when you estimate.
So, with an average cash flow of $650/unit, Selenid and I would estimate to need 32 units to reach our cash flow goals and have enough rental properties to retire.
We currently have 16 units and cash flow around $10,000 monthly. So the math adds up. We are about half way there.
However this isn’t entirely accurate
Therefore our retirement is not contingent only on our real estate investments. So we actually will need less rental properties to retire.
Let’s just say that our goal is to save $2.5 million in stocks and bonds according to our asset allocation. This will allow us to safely withdraw approximately $100,000 annually. And here is how I came up with that estimate…
Now, instead of relaying on our real estate investments to cash flow enough for all of our retirement expenses ($250,000 annually), we just need it to cover 60% of those expenses. This comes out to roughly $12,500 per month of cash flow. Suddenly, we are pretty close to having enough rental properties to retire with our current 16 units!
Of course, these calculations will be different for everybody
I know some doctors who will reach or have reached financial freedom investing only in real estate.
Watch Jordan’s Masterclass Webinar on The 12 Steps to Financial Freedom for Physicians here!
And of course, many (I would say the majority) of doctors who reach financial freedom will do so by investing in stock and bond equities.
So I am not so dogmatic as to say that doctors need to invest in real estate to reach financial freedom. I’ve examined that question before and concluded the answer is a definite “no.”
The point is that you can pretty easily calculate how many rental properties you would need to retire before you even get started.
However, if this is the case, why do so few investors actually determine this number?
I have to admit. Selenid and I did not do this math as decisively as we should have ahead of time when we got started. You can see in our written financial plan that we called for investing in enough real estate to cash flow $200,000 in 5 years.
We could get close to that cash flow number as we are now in year 3 of our real estate journey. However, I’m not sure if we will get to that number.
Because we don’t need to. We just went through the numbers and we don’t need to cash flow quite that much based on our goals and hybrid approach. Now I am a huge fan of over-estimating and shooting for the moon, setting big goals for ourselves.
However I do also think it is important to keep things in perspective. I can’t say for sure but I fear that some physician and non-physician real estate investors get caught up in the game and keep playing even when they can stop.
Remember, the whole goal here is to reach financial freedom and live your life on your own terms. Unless your own terms includes maintaining an active income via real estate (which it might and that is fine!), you need to know where to stop. It’s almost, but not quite, as important as knowing how to start.
As I sit writing this, I recognize that a post I thought would be filled with hard math and definitive conclusions has become slightly philosophical. Maybe even a bit meandering.
But I think that is the nature of all of this. Investing is not a rational endeavor. Anyone who thinks it is will certainly be even more susceptible to the behavioral biases that impact us all.
So, drawing everything together, I think I have two main conclusions:
- With real estate or anything else, set big goals but also remain aware of when you can stop
- Doing this with real estate investing is pretty straightforward. Use cash-on-cash estimates (see below for more details about this metric) to determine your expected monthly cash flow/unit. Then combine this with your desired monthly cash flow from real estate to determine how many rental properties you would need to retire
Here are some more great posts for anyone looking to learn more about real estate investing to get started or optimize your current investing plan!
- How to Screen & Analyze Investment Properties the Right Way
- The Real Estate Flywheel Effect for Successful Physician Investors
- 5 Steps for Doctors to Start Investing in Real Estate
What do you think? How many rental properties do we need to retire? How does our goal setting impact our awareness of when to “stop”? Let me know in the comments below!