How many properties do you need to retire?

I meet a lot of investors who say that their primary reason for investing in real estate is to build passive income so they can retire someday. But when asked what income they need or how many properties they need to retire, most investors don’t have a clearly defined goal. After seeing this pattern in a number of investors, we set out to answer the question “How many properties do you need to retire?” I think you’ll find the answer, and surprising! Let’s start by looking at today’s market. We hear a lot of investors saying things like: “I can’t find a deal” “There are no properties on the market” “Everything is over-priced” “There’s no way an investor can make money in this market.”

We pulled out some recent transactions that we’ve closed for investors and analyzed them to see if they were good deals. To make this applicable to the average investor, we looked for deals that came straight from the MLS - no wholesalers, no door knocking, no direct mail campaigns, nothing fancy; just a regular property that was listed on the MLS for anyone to purchase. This home was a 3 bed/2 bath/1 car garage, 1250 sq ft. that we closed on for a client of ours in May of 2015. The property was found on the MLS. It had been on the market for 30 days before our client put in under contract. Price = $169,000 Property needed $3,000 in repairs Taxes = $886 per year Insurance = $900 per year Rent is $1,550 per month Investor put 20% down on a 15 year fixed rate loan at 4.125% Knowing all of these numbers we plugged the info in to our property analyzer spreadsheet and here’s what we found out. Total cost to purchase the property, closing costs, repairs = $42,047 Monthly cash-flow after accounting for expenses, vacancies, mortgage payments = $215 per month Cash-on-Cash Rate of Return = 6% Cap Rate = 8.7%

Now I know the first thing that a lot of investors will do is look at this and say: “$215 a month cash-flow??? I wouldn’t get out of bed for $215 a month!!!” But it’s important to look at the details. This investor opted for a 15 year loan, so instead of doing a traditional 30 year loan and generating “instant gratification” cash-flow of $568 per month, our investor looked at the long-term and determined that principal reduction and owning the property free and clear was more important than making an extra money right now. There’s no right or wrong answer, it’s whatever you decide as an investor. I think we can all agree that a 6% cash-on-cash return isn’t that great, but an 8.7% Cap Rate is solid for a decent property in a nice area in many markets, so let’s look at our analysis to see where this property goes in the long-term. Again using our cash-flow analyzer we took the analysis out to year 16 using the following assumptions: 5% annual rent increase 6% annual appreciation (80 year average for the entire U.S.) Expenses increasing at 3% annually Vacancy factor of 3% annually We feel that these estimates are pretty standard for most markets over the long-term but with the cash-flow analyzer you can adjust these variables yourself to come up with your own scenarios. What did we find in year 16? The principal balance on the loan is no $0 since the investor selected a 15 year term. You own it free and clear! Net cash-flow on the property is now $26,428 per year or $2,202 per month. Property value is now $288,000 and there are no liens on the property.

 On an original investment of $42,047 we are returning $26,000+ per year on an asset that is now worth 10 times our initial cash investment. That is a strong cash-on-cash return (greater than 60% annually). We’d say that this is a fantastic deal and the best part…. we didn’t do anything special to find this property. It was on the MLS for the taking, nothing tricky, nothing fancy, just a regular house with regular tenants. Back to our original question… How many of theses properties do we need to retire? The answer to that depends on how much money you need on a monthly basis of course. If you only need $2,200 per month then you might only need 1 property. But if you need $5,000, $7,000, $10,000 or more to retire comfortably, then you’ll need to have more than 1 property. Let’s say that you need an income of $80,000 per year or $6,600 per month, you would need to have 3 properties just like this one and at the end of your 15 year term; you would have your cash-flows setup and you would be ready to retire and relax.