This article is part of our guide on self-directed IRA multifamily real estate investing, available here.
How many rental properties do you need to retire? This is a question that every investor asks themselves at some point. The answer can vary from person to person, but it should be an essential consideration for anyone investing in real estate. In this blog post, we will discuss how many rental properties you should own before you retire and which rentals to buy and avoid!
There is no magic formula for how many rental properties you need by the time you retire. When deciding how many properties you need to retire, you must first ask yourself how much money you’ll need and how often. To put it in other words, do you want to sell a property yearly to support your lifestyle, or would you rather live off of the monthly cash flow that rental properties produce? Everyone’s retirement goals and spending habits are different, which makes these questions something that can only be answered individually.
Types of Rental Property You Can Buy
It’s important to note that not all rental properties are created equally. Generally speaking, rental properties can be broken down into two types. They are either appreciation rentals or cash-flowing rentals. Both properties have income from tenants that pay rent and all of the property’s ongoing expenses, but the key difference is how much each one costs.
Rental Properties for Appreciation
Typically appreciation rentals will cost you more money because they are in ultra-desirable areas, which is why they usually won’t cash flow much, if at all. Still, they will have a VERY high chance of rapidly continuing to increase in value over time which is why they’re worth more. These properties don’t produce a positive monthly cash flow because the expenses are too high. After paying for ordinary operating expenses like property taxes, insurance, vacancy loss, maintenance, and your mortgage(which is probably high in a higher-priced area), you’re left with a more or less break-even situation if you’re lucky. In some cases, it can cost you to carry the property even though it’s rented out to a tenant.
Cash Flowing Rental Properties For Rental Income
Cash flow rental properties usually cost less money to acquire because they’re not in as desirable areas. Still, these rental properties will likely provide far more passive income through monthly cash flow to those who own them. The main reason is that the expenses (specifically the mortgage) will be much lower. Although these properties are more cash flow based, they still do appreciate, but it is usually at a much slower rate.
An excellent rental property does both. Every real estate investor should be looking to acquire rental properties that cash flow and have a strong chance of appreciating.
The number of rentals you need before retiring is entirely up to you, but many real estate investors find it easier to own only a few rental properties that are larger with multiple units than to own many rental houses that only contain a single unit. This is because investment properties with more units are more stable and reliable, making your portfolio more efficient to manage.
The Problem With Having a Portfolio of Houses
Imagine how difficult it would be to manage 50 mortgages in 50 unique locations. Even if you had the same property manager for all 50 properties, the property manager would have difficulty showing the units, making repairs, or fulfilling even a simple request like checking the remaining life of all the air conditioners or roofs. The cost for the more complex management will be passed on to you as the owner, which is why it’s better to own all your rental properties in the exact location.
Why Multifamily Assets Are the Best Retirement Investment
Most people investing in real estate seek financial freedom but then get caught up in managing all of their real estate investments. The best way to simplify this process is to swap out the houses for a 50-unit property and have everything you need to worry about concentrated in a single location. You also would only have to deal with one mortgage and one property management company which will make retirement much easier and less stressful. Commercial real estate, specifically multifamily real estate investments, are the solution to this problem and are the best investment anyone looking to retire can make.
Why Multifamily is Inflationproof
Inflation, one of the biggest fears among people retiring, is also a friend of the real estate investor. Inflation is when the prices for things go up over time. In recent years inflation has been moving much faster than average. When your living expenses slowly increase over the years, residential rental income should grow at roughly the same rate. This means that your real estate will continually be able to keep up with your quality of life.
The fantastic thing about multifamily real estate is that as the rental property income increases with inflation, the asset value grows on a multiple of that rental income. This means that even if you’re spending all of your positive cash flow in your retirement years, your entire portfolio is growing too. In addition to the portfolio growth, the amortization on your loans will help you build even more equity.
The income you need to retire completely depends on your needs and spending habits during your retirement years. If we were to use 10k per month as a goal, we could work out the math to figure out how much real estate you would need to own to ensure you can hit that target.
Finding Out How Much Income Your Apartment Needs to Make
As a general rule of thumb, about 40-50% of an apartment’s gross income will be the cost of its expenses. This means that if you wanted to net 10k per month, you would need to own a property that has the potential to bring in over 18k per month. A property like this would have a net income of approximately 120k per year. Assuming you were to buy one at a 6% CAP rate, it would cost you about 2 million dollars to retire.
However, if you use the power of leverage, you could reduce that to a bit more than a million dollars and buy a 4 million dollar property. At the same cap rate of 6%, this property should bring in a net income of 240k per year (20k per month). You can get a mortgage for about 2.8 million and pay roughly 10k monthly, which means you’d be collecting 10k monthly. The leveraged property will yield higher returns for its owner because the growth potential is about double.
How many rental properties should you own - (Income is What Matters )
Some multifamily properties can produce 20k a month, with about 40 units renting for $500 per month. Another rental property may only have ten units and generate the same rental income if the units rent for 2k per month. What’s important is how much income is generated and how diverse that income is. More units are always better than less, but as you increase in unit count, the benefits of more units begin to diminish.
What Do You Want Out Of Real Estate When Considering Retirement
Once this concept is understood, it is clear that the question of “how many rental homes do I need to retire?” isn’t a perfect one. The amount of rental properties owned is not as significant as the quality of the properties and the equity and cash flow that each one generates. If someone were to own a luxury home valued at 10 million with no mortgage and rent it out for 50k a month, they could retire. However, someone holding three houses valued at 40k each, with tenants paying $400 a month, would likely not be able to retire.
A better question would be, “How much passive income do you need to retire?”. This question makes more sense because it would be pretty stressful to sell a property every so often to pay for living expenses. It makes much more sense to live off of pure rental income from your rental real estate with no plans to sell. This is because real estate rent increases slowly over time.
Rent to Retire: The Best Way To Invest in Rental Properties For Retirement
As we’ve discussed in this blog post, how many rental properties any given real estate investor owns doesn’t matter nearly as much as the investment’s quality and future growth potential.
Real Estate Syndications are the best way to invest in real estate to grow your retirement income while offsetting your retirement expenses. With only a small down payment, you can become a limited partner in large multifamily property and receive monthly distributions. A Real Estate Syndication is a great way to get started in rental real estate for retirement.
What Is A Real Estate Syndication
Syndication is when many people get together to buy property. It’s usually set up by a GP or a group of GPs, which stands for General Partner. GPs find multifamily investment opportunities, negotiate the purchase terms, arrange a first mortgage on the property, create the business plan, collect money from the Limited Partners(or LPs), and close on the transaction on behalf of all the partners. Limited partners have no liability other than their initial investment.
GPs Responsibility Post Closing
After closing, it is the responsibility of the GPs to actively manage the asset and create value, usually in the form of renovations. The GPs are highly experienced investors who know the ins and outs of the business. The LPs should feel confident that their money is being put to work to maximize the LP’s return on investment or ROI.
Syndications Are Excellent for Retirement
Syndications allow the average person to invest in multimillion-dollar apartments that have professional property management in place. This ensures you will have a cash-flowing property and growing equity each month. The best part is that it’s 100% passive. This means that you aren’t involved and any of the tenant issues, repairs, and maintenance, paying any bills or dealing with any lenders.
Frequently Asked Questions About Rent to Retire
This question can’t fully be answered without knowing more about your specific financial situation and goals. However, generally speaking, you would want to have a passive income that is equal to or greater than your monthly expenses. We all have different needs and spending habits that need to be considered.
The “2% rule” is a guideline used by real estate investors to determine how much positive cash flow they’ll get from their rental property. To have a strong positive cash flow investors will want to know that their rental income will be at least 2% of their purchase price or purchase and rehab if rehab is needed to collect rent. To use the two percent rule, simply multiply your total cost to buy or buy and renovate(if rehab is needed) by 0.02. This will give you the minimum amount of rent you need to bring in each month to satisfy the rule.
There is no definitive answer to this question. Multiple rentals can provide cash flow and stability, but they also require more time and effort to manage. Consider your goals, financial situation, and available time when deciding how many rental properties are right for you.
How Many Rental Properties Do You Need To Retire - Conclusion
As you can see in real estate investing, no set number will guarantee your retirement. However, real estate syndications are an excellent way to invest in rental properties for retirement. With a small down payment and monthly distributions, you can become a limited partner in quality multifamily investments. This will provide you with passive income and the potential for long-term growth. If you’re looking to expand your knowledge base, you can join our free mini-course to learn how you can get started in investing in multifamily apartment communities for retirement.
📈 Increase in Value After 15 Months – 80%
📈 Increase in Value After 21 Months – 119%
📈 Return of Investors Capital on Refinance – 62.5%