How Many Rentals Do You Need To Retire Comfortably?

How Many Rentals Do You Need To Retire Comfortably?

Are you a real estate investor who wants to know when to retire? Our post explains how many rentals do you need to retire comfortably?

KEY TAKEAWAYS

• Find out how many rentals you may need to retire comfortably.
• Learn the advantages of creating a real estate investment portfolio.
• See how investing in single-family rentals historically earns greater returns than the S&P 500 stocks.
• Learn about Cash flow, appreciation, leverage; and tax benefits with rental investments.
• Learn how cost basis and depreciation work to reduce taxes.
• See how two formulas calculate how many rental properties you need to retire comfortably.

 

How Many Rentals Do You Need For A Comfortable Retirement?

 

Most real estate investors want to know how many rentals they need before retiring and loving comfortably. Yet, there is no magic number or formula because everyone’s lifestyle differs. Do you want to retire as a Millionaire? If so, how many millions will it take?

However, you can devise a plan where expanding your rental portfolio supplements your income enough. Possibly, even replacing your current income during retirement.

Learn how to build your retirement rentals portfolio enough to retire comfortably.

 

Why Should You Build a Rental Properties Portfolio to Retire?

 

Why choose real estate investments over stocks, a retirement savings plan, or a pension? Maybe your Social Security benefits and living a frugal life are enough? How about a combination of some of these retirement incomes?

The choice is yours. However, make it now before you near retirement.

Back to the question, why do people rely on rental properties to retire? Several reasons jump out. Like, real estate investing has a better history of returns than traditional stocks.

Investopedia in a June 26, 2022 article points out these important facts:

1. “The average cost of a single-family home increased 17.5% between Mar. 1992 and the end of 2022.” ;  
2. “The S&P 500 returned 6.02% annualized during the same time.”; and
3. “Despite their potential to generate sizeable returns, stocks have no tangible value; on the other hand, real estate is a valuable, tangible asset and profit generator.”

What does this mean?

Between March 1992 to the end of 2022, real estate single-family home investments increased by 17.5%. During the same time, S&P 500 stocks only gained 6.02%. Thus, single-family home investments outperformed stocks by 11.48%.

Also, stocks have no “tangible value’ because they are paper certificates. On the other hand, real estate always has tangible value and can generate profits (if developed).

Thus, investing in single-family homes makes sense for your retirement security.

 

How Many Rental Properties Does It Take To Retire?

 

This depends on certain facts.

• Cash flow;
• Appreciation;
• Leverage; and
• Tax benefits.

Let’s explore each one.

 

Cash Flow

Rental property investors love the cash flow every month. The pre-tax cash income is known as a “Cash-on-cash return”.  The following formula shows:

Cash-on-Cash Return = Annual Pre-Tax Flow ÷ Total Cash Investment

For example, You pay $100,000 for a rental property. You earn a pre-tax annual cash flow of $10,000, the Cash-on-Cash Return equals 10%. The formula looks like

$10,000 pre-tax cash flow ÷ $100,000 = 0.10 or 10%.

After your tenant pays the rent, you pay for operating expenses, taxes, and repairs as your profit.

Note: Operating expenses and repairs may vary every year, but the rent remains constant unless a vacancy occurs.

 

Appreciation

As shown above, home prices historically increase in the U.S. Yet, due to rising mortgage interest rates, inflation, and other economic conditions you must wait for the “Right Time” to sell,

This is why savvy housing investors “Buy-and-Hold” rental properties for their retirement. Holding on to the long-term will take you through the different real estate cycles

 

Leverage

Unless you pay all cash, leveraging allows you to buy a property with a small down payment.

Most conventional loans require a 25% down payment to finance the purchase of rental properties. Exceptions exist which we explained in our blog posts:

“How Novices Buy Small Multifamily Properties”; and

“The Essential Guide to Multifamily Financing”.

 

 

Tax Benefits

 

The two most significant tax deductions available to real estate housing investors are depreciation and cost basis. Let’s explore these two deductions.

Depreciation

Investing in real estate properties with structures offers the tax benefit called “Depreciation”. It allows you to deduct the assumed deterioration of the structures over 27.5 years. That’s a rate of 3.63% each year.

Also, depreciation allows for the deduction of the improvements made on the structures over a 27.5 years period.

Land remains constant while structures deteriorate over time. Another way to put it, take the property’s original sales price and subtract it from the land value.

Cost Basis

In essence, the “cost basis” of the property minus the land value is calculated when you sell the property. The cost basis increases every time you pay for capital improvements on the property.

For example, You buy the property for $100,000 and make improvements over the years costing $20,000. The new cost basis (called “adjusted cost basis”) now becomes $120,000. If you sell the property for $500,000, your profit decreases from $400,000 down to $380,000. Thus, you pay fewer capital gains taxes.

 

Other major tax benefits include:

• Property taxes;
• Financing interest;
• Property insurance;
• Maintenance and repairs costs; and
• Property management fees.

Minor tax deductions include:

• Advertising for new tenants;
• Accounting and legal fees;
• Office space;
• Business travel; and
• Business equipment (like computers, copy machines, business cards, stationery, etc.).

 

How Many Rental Properties Do You Need for a Comfortable Retirement?

 

Now that you learned the tax benefits of investing in income-producing real estate that stocks don’t offer, it’s time to answer the main question.

How much money will you need to comfortably support yourself during retirement?

Here’s a calculation formula to help you decide.

Income = Money Invested x Cash Return

Since everyone plans for a different lifestyle upon retirement, a simple calculation formula depends on these facts:

Income – How much income will you need to live comfortably when you retire? This is like a crystal ball predicting years ahead when you don’t know what the economy will look like. You can play it safe and reach for the sky like $1 million per year. Yet, that’s probably too much to expect unless you lease luxury homes.

Money Invested – What can you afford? How much financing can you get? How much cash do you have now to invest?

Cash Return – How much rental income saved (or re-invested) can you accumulate when you retire? How much rental income after you retire is enough to live comfortably?

Do you see the different amounts depending on how you answer these questions?

 

 

Here’s another formula to help you predict the future:

Monthly Amount Needed for Retirement ÷ Cash Flow (from rental properties) = Number of rental properties

Note: Cash flow equals Income minus Expenses

For example, you determine that a monthly rentals income of $12,000 (along with your other income (like pension, stocks, social security, etc.) can make you live comfortably. So, how many rentals will you need? Let’s assume you can average $1,500 per rental.

$12,000 ÷ $1,500 (per rental) = 8 properties

There you have it. It’s up to you to decide how much rental income you need when you retire. Use the above formula to decide how many rental properties you need.

 

How Many Rentals Do You Need To Retire Comfortably? – Conclusion

 

You see the challenge of answering a question like, how many rentals do you need to retire comfortably?  It’s not an exact science.

Yet, we came up with a formula to help you to calculate how much rental income you need. However, this is based on your lifestyle and supplemental income and what inflation and future rental prices are.

First, determine Income with this formula:

Income = Money invested x Cash return

Then, use this formula to determine how many rental properties you will need:

Monthly Amount Needed for Retirement ÷ Cash Flow (from rental properties) = Number of rental properties

 

Want to Invest in San Diego Rental Properties?

WeLease Property Management Company helps landlords owning all types of rental properties in San Diego County with all their property management needs. No matter if they are condos, single-family homes, multi-family units, or large apartment complexes.

Contact us before you invest in San Diego area rental properties, We can introduce you to experienced qualified Realtors to help you find all types of rental properties.

 

Steven Rich, MBA – Guest Blogger