Every week, almost inevitably, someone will ask me how many rental properties they’d need to retire.
It’s a simple question to answer on the surface, but there’s a lot of complexity lurking below.
The reality is, the how many rentals you need to retire today is likely far different than the number of rentals you’ll end up needing.
But people get bogged down in thinking about the now and have a hard time conceptualizing the future.
And that’s a big problem.
Because as soon as you start doing the mental math on what an early retirement with rental properties looks like, it can be extremely overwhelming and demotivating.
So my goal with this post is to help reshape how you think about the number of rentals you’ll need to retire.
That’s what I do every time I’m on the phone with a prospective client that asks this question.
By the end, I’m sure you’ll feel that retiring on rentals is very doable and you’ll hopefully be motivated to get going sooner than later.
Most People Think They Need Too Many Rentals To Retire
When I speak to people, the number that’s most commonly thrown out as a desirable monthly income is $10,000.
Maybe you want more… perhaps less.
Regardless, it’s a simple equation to derive how many rental properties you will need to achieve that income.
For starters, most properties you purchase today will tend to generate between $100 – $200 per month in net cash flow.
That means money in your pocket after all expenses.
And if you don’t know how to drill down to that number you should read my post about running numbers for a rental property.
So if we assume, on average, you could acquire properties that will generate you $150 per door per month you simply divide your desired monthly income by $150.
I know what you’re thinking.
F*CK!!
It’s a big number. Too big.
In fact, it’s completely discouraging and seemingly impossible. And this is where most people just give up and say, “Well, this is never going to work!”.
But, some people (like, perhaps you) either haven’t done this math or sorta kinda did it but maybe pretended it wasn’t real or thought perhaps they might be missing something.
And that’s where I have some good news.
Because doing this quick, rough math is definitely missing a few key somethings.
Retiring On Rentals Is Easier Than You Initially Think
As humans, we often struggle to appreciate what the future can hold. We fixate on today whether that be our problems, finances, struggles, health, or general lifestyle.
In fact, there’s a term for this. It’s called present bias.
We’re so biased to thinking about the present that we give little thought to the future. And it turns out, that given a bit of time and effort, a lot can change!
But if we don’t shift our obsession over the present to a more future looking one, ironically, we rarely end up with the future we so desire.
I know, cool lecture, right?
My point is there are a few levers that will grossly decrease our 67 rentals needed for retirement.
Let’s look at what those are.
Lever #1: Rents Tend To Increase Every Year
Inflation is real, and it’s almost certainly never going to stop.
That means the inputs to build housing are almost certainly going higher over time.
Labor, materials, property taxes, insurance… all of these things keep going up.
So of course, the cost of housing will also move higher.
Most everyone I speak to grasps this instantly. I don’t even need to explain the logic behind it.
On average, rental rates increase something like 3.2% per year.
That sounds small, but if you start doing the math on how it compounds year after year, it becomes quite significant.
And that’s the average.
If you’re investing in a highly appreciating real estate market like Detroit, you’re likely going to experience more aggressive rent inflation.
Even a market that’s increasing at 4.0% on average is a huge step up. It doesn’t sound like a big deal, but that represents a 25% faster increase than the 3.2% average.
As this compounds year after year I promise you’re going to feel it.
Lever #2: Refinancing Can Increase Cash Flow
While rent increases are the most guaranteed and most powerful contributors to net cash flow, refinancing can also really move the needle.
I hear a lot about how interest rates are high today and it’s so difficult to find cash flow.
In fact, a lot of investors simply don’t know what to do or where to look for cash flow today. So they sit and do nothing.
This is a massive mistake.
The people that are finding deals that work today are going to be in an insanely good position later down the road.
Refinancing from a 7.5% interest rate to a 5.0% interest rate will be a huge contributor to an investor’s net cash flow.
Sure, it may take a few years to see rates like that again… it may take 5 or more years. But during that time you’re also experiencing increased rents.
In other words, it’s just a matter of time before we see another opportunity to refinance at lower rates.
If you’re investing today, capturing rent increases while you wait, and then smashing your payments lower with a refinance you’re hitting a double whammy that drops straight to your bottom line.
Lever #3: Appealing Property Taxes Could Improve Rental Cash Flow
Most people hardly look at their property tax bill before paying it.
But understanding your property taxes, how they’re calculated, and how the increase can be a massive advantage.
This is especially true in states that have property tax increase limits like Michigan.
I am a huge advocate of appealing your property taxes with the objective of getting them lowered. I’ve been extremely successful doing this over the years and have a great blog post on how to lower property taxes.
In fact, every time I purchased a rental property in Detroit I’d appeal the property taxes the following year.
This has saved me a TON of money and contributed to my net cash flow in a big way.
While this lever isn’t as guaranteed as rent increases or refinancing to a lower rate, it’s an awesome compounder if you’re successful.
And it costs you nothing but a bit of time to do it!
Retiring On Rental Properties Is Absolutely Doable
When you consider all of the above factors, it’s easy to see how a $150 per month cash flow property might become $500 a month in even a short timeframe like 5 years.
That’s what happened to literally all of my Detroit rentals. And this is what almost every new investor fails to account for.
They look at cash flow today, failing to account for how drastically that can change in the future. As a result, they get tripped up fixating on the present and many don’t even get started at all
That sucks.
Real estate investing is a long-term game.
The earlier you get started, the sooner you’re able to let time do its magic and start growing your net cash flow.
So yes, definitely understand that today, right now, you’d need 67 doors to retire from rentals. But also understand that the true number will be a fraction of that.
Your goal should be finding decent deals, getting in the game, hitting base hits and doubles, and staying in the game.
You’ll look back and be glad you did.
Next week I’m going to give you some real examples from my own rental portfolio and how these three levers have had a massive impact on my net cash flow over the last 5 years.
See you then!