Last week I wrote about how many rental properties you need to retire. I’m following that post up with details on how many rental properties you need to make $100k.
These may sound like similar posts, and they are. But last week’s is a general overview of what the big drivers will be that help you on your rental retirement.
This week is all about looking at those specific drivers with real examples.
But why $100k?
I’ve found this is the number most often cited when people talk about wanting to get to financial freedom or retirement.
Again, this seems like a big hill to climb and most folks start doing the math and realize it’s not going to happen.
And it won’t. Not overnight at least.
When we start doing the math, adding up our seemingly measly $150 net monthly cash flow, it feels like we’ll NEVER be making $100k with our rental properties.
Once again, I’m here to provide you some inspiration with some real examples of how my own journey has unfolded.
You Don’t Need 56 Rentals To Make $100k
Today, you’re generally able to find cash flowing rentals that will produce between $100 and $200 per month in net cash flow.
Let’s average that at $150.
That means you would need 56 rental properties to make $100k a year today.
But that’s not at all how many you’ll actually need. There are other factors at play that will drastically increase this $150 per month in net cash flow.
Let’s look at these factors in detail and how they have impacted my own rental portfolio. In doing so, we’ll be able to better understand how many rentals you’ll actually need to make $10k a month in net cash flow.
$100k With Rental Properties Starts With Annual Rent Increases
Rental increases are by far the largest contributor to increasing your future net cash flow.
And the thing is, they’re basically guaranteed. You just need to make sure you, as a landlord, are raising your rents each year.
On average, rents increase at about 3.2% per year. But in highly appreciating markets like Detroit, they are increasing faster.
Here’s a look at a couple of my properties over the years.
The Great Greydale Rent Is Up 33% In 5 Years
In 2019, when I purchased my first Detroit rental, the tenant was paying just $750 per month. This was a bit below market and I immediately raised it to $900.
But now, 5 years later, that same tenant is paying $1,200 and it’s still below market!
Going from $900 to $1,200 in 5 years is a 33% increase or a 5.92% Compounded Annual Growth Rate (CAGR), nearly double the national average.
It’s even more shocking when you realize I could likely be getting $1,400 – $1,500 per month for this same house today.
And I’m not cherry picking from my portfolio.
Hey, real quick… the only thing you’ll love more than this post is my newsletter 👇🏼
Algonac Bungalow Rent Increasing At 6.66% Per Year
My Algonac Bungalow was originally rented for $850 per month. Four years later and we’re now renting to the same tenant at $1,100.
That’s a 29% total increase or 6.66% CAGR.
And yes, this one is also under market rate rent. We could likely get between $1,200 and $1,300 today.
Recognizing that rents will go higher is easy to admit and nod along with.
But when you take the time to do a bit of math and start to truly see how impactful a modest annual increase becomes over time, well… things start getting interesting.
And you start feeling a lot more motivated too!
I highly advise everyone to raise rents on an annual basis… on good tenants, on bad ones, and on mediocre ones.
If you aren’t doing this, the only thing you’re doing is a massive disservice to yourself and financial future. It doesn’t need to be a ton, but it’s important to train tenants to expect rent increases.
If you don’t you’re shooting yourself in the foot and robbing future you of the compounding benefits of these small raises.
Refinancing Your Way Toward $100k With Rental Properties
I haven’t personally been able to do much refinancing yet.
Most of my purchases and loans were done in 2019 – 2021, so I’m sitting on interest rates around the 3.5% mark.
I know, I know…
But I do have one duplex that I didn’t finish up until late 2023 which means I didn’t get a loan until early 2024.
This was perhaps the worst possible time to be getting a mortgage.
I own this property with a friend in an LLC which means I also had the pleasure of doing a DSCR loan. Those tend to be at higher interest rates than you’d get with conventional financing.
Here’s my loan today:
Yep, a nice round 8.0% loan.
The principal and interest on this loan comes out to $1,062.12 per month.
And when you include property taxes and insurance we’re paying a total of $1,187.47 (our property taxes are crazy low!).
Luckily, this is a duplex and each unit is rented for $1,200 per month.
We also did a full down-to-the-studs renovation on both units so we won’t have any major capex or repair items for a long time.
In other words, our cash flow is actually extremely strong today. One of the unit’s rent essentially goes to paying our PITI and we’re left with $1,200.
Even if we take half of that to stash away for reserves we’re still doing $300 per door net cash flow each month.
How Refinancing & Rent Increases Will Impact Our Net Cash Flow
But imagine if, down the line, we’re able to refinance this loan at 5%.
Our original loan balance was $144,750 but five years from now it will be $137,757. So a rate-and-term refinance at 5% would bring our principal and interest payment down to $740 per month.
That would improve our net cash flow by over $300 or $150 per door!
Add to this a modest 3% annual rent increase over those five years and we’ll be renting each unit for $1,390 per month.
That’s an additional $380 in cash flow between the two units.
Between the refinance and the rent increases, the property’s cash flow would increase $702 per month for a total of over $1,300 or $650 per door.
That’s more than double today’s current $300 per door net cash flow!
That’s phenomenal. And hopefully you’re starting to see the compounding benefits of these two levers.
Obviously, if you’re already sitting at very low fixed rate mortgages this isn’t going to help you much. This is my situation on the vast majority of my properties.
But if you are able to find deals that have cash flow at higher interest rates you’re in luck! You are going to be sitting pretty some day in the future when you get the chance to refinance.
Rent increases and refinances are the two big levers for increasing cash flow, but there’s one more I really like as well.
Appealing Property Taxes To Get Closer To $100k
Appealing property taxes is by far my favorite way to increase net cash flow. It takes a little bit of effort but, if successful, this will continue to contribute to your rental profits forever.
Some states (like Michigan) have caps on how much property taxes can increase each year.
So if you can successfully appeal your tax basis to a lower amount, it will pay you dividends as long as you own the property.
Property Tax Win On The Great Greydale
In 2019, when I bought The Great Greydale, my taxable value was going to be adjusted to $22,900. That represents a monthly property tax payment of $165 in Detroit.
And that would have been fine but I wanted to see if I could do better.
In 2020, I appealed my property taxes for the first time ever and I was extremely pleased with the outcome.
After my March Board of Review Hearing I was able to get them to agree to a new assessed value of $13,300. This was actually less than the previous owner had been paying!
And it reduced my monthly tax payment to just $97 per month.
That’s $68 per month, or $816 per year that falls right to my net cash flow. That would be the same as increasing the rent 9% on the initial $750 it was rented for.
Here’s how my initial deal underwriting looked like, how it changed after the first year, and what it looks like today:
In under a year I was able to increase my net cash flow by 113%. This came through the combination of a rental increase and a win on my property tax appeal.
In just 5 years my net cash flow on this property has increased 227% since the initial purchase. Obviously, this will slow down going forward, as I’m largely reliant on rent increases now.
But net cash flow is up 53% since the first year of ownership.
That means that it all came from rent growth. As a result, net cash flow has increased at an impressive CAGR of 11.2% for those four years.
If that continues, I’d expect net monthly cash flow to be $884 in another five years.
So through a 10-year journey we very well might go from an initial $159 per month in net cash flow to $884, or over a 5.5x increase.
Pretty amazing, especially when you consider I’m benefitting from appreciation and mortgage pay down along the way.
How Many Rentals To Make $100k Is Different For Everyone
Obviously, everyone’s journey to $100k a year in rental income is going to be unique.
I’ve given you some real world data from my own rental properties I’ve owned in Detroit. But understand your numbers will be different.
I’ve managed to hit this milestone with just 12-doors and in under 5 years.
But I also took a very aggressive route to building my portfolio and I’m extremely risk tolerant. Please do not compare your journey to mine or anyone else’s.
Variations across markets will also be present.
For example, if you own a home that rents for $3,000 per month and you increase the rent 4%, that’s a much larger nominal change than a 4% increase on a $1,200 per month rental!
The important thing is to understand your three drivers: rent increases, refinancing, and property taxes.
If you’re able to get two of those three, you’ll do quite well. If you can somehow nail all three of them you’ll be crushing it!
At the end of the day, the most important thing is to just get started, and then make sure you’re optimizing where you can.
If you don’t do that, you’re never going to get to a point where you’re making $100k a year with rental properties.
So get going, and let me know if I can help!