How Many Rentals Do You Need to Retire

have you ever thought about using rental properties to retire or maybe to retire early well if you have you've probably asked yourself a question how many rentals would actually take to retire so in this video I'm going to share some simple math to help you figure that out with some real examples and then I'm going to give you a five-step process so that you can figure out exactly what your number is or how many rentals you need to retire we're getting started right now hi I'm Chad Carson you can also call me coach Carson welcome to another video this is your first time here and you want to learn more about real estate investing achieving financial independence and doing more of what matters be sure to subscribe and click the bell to be notified so you won't miss anything today's topic is something that my family and I do know something about because when I was 37 years old that's a couple years ago we retired early and took a trip for 17 months to live in Ecuador and lived off rental income so this is something we've been building up to for the 17 years since I started investing in real estate and I was also able to write the book retire early with real estate where I got to interview 24 other people who have used real estate to build financial independence and retire early so I want to share with you what I've learned and I'm gonna pull out the whiteboard and do a little drawing for you to get started okay to start off and before we get into the specific number of rental properties I want to talk about the bigger picture of retirement and how much wealth you actually need typically if you were thinking about retirement or early retirement you might find online your handy retirement calculator which are really cool and handy and I'm gonna provide a couple links to retirement calculators I like in the description below but I told you the math was going to be simple in this video and so there are no retirement calculators needed in this example using real estate and there's just three things that you're going to need to think about and go into this basic formula that I'm going to share with you to think of to figure out how much wealth you need to retire early and the first one is II which is going to be the expenses in retirement so your estimated amount of money you're gonna spend personally to retire the second is going to be R which is basically just the cash return on your real estate so this could be I'll show you some examples this could be the cash on cash return you get or it could be like a cap rate if you own your property free and clear I'll talk a little bit more about that but just know for now this is if you invest some money in real estate how much cash do you get back on a yearly basis as a percentage or the ratio that's what R is going to be and then the third variable is w which is wealth or the amount of equity you have to invest in real estate so I'm going to show you how each of those relate to each other in a real simple way so you can figure out kind of a rough number this and to be exact but a rough number on how much money how much wealth you need to retire so the basic formula looks like this take the personal expenses or e and you divide that by the cash return you can get with your real estate investment that you estimate you can get and I'll give you an example to show you what that might be and when you divide B divided by R you get W or the amount of well do you need let me give you an example to show you how that might work so let's say that you determined that you needed $70,000 per year roughly to cover all of your personal expenses in retirement so that's your number you also by studying some other investors in your area looking around you feel confident you can get a 10% return on the equity that you have invested in your properties you can also think about equities and down payment eventually though that grows into larger equities you build wealth and the property goes up in value so I'm going to use the term equity but let's assume you can get a 10 percent return on your equity if you could you would divide seventy thousand divided by ten percent and you want to pause this and do this on your calculator just to prove that this this number works out ten percents got an easier number to do seventy thousand divided by ten percent equals seven hundred thousand dollars let's pause just for a second with this example to understand what that means that means if you wanted your real estate to produce seventy thousand dollars per year and this is pre-tax before you pay any taxes that's a whole nother video that I'll get into attacks tax implications free tax you want a seventy thousand dollars and your properties can produce ten percent you would need to have equity of seven hundred thousand dollars so this is a good place to start as I mentioned earlier this doesn't have to be exact if you're starting your journey or you're just starting getting ready to grow you're not looking for like the exact number down to like the dollar and two decimal places what you're looking for is a rough number so that we get into the next step which is figure out how many properties you need overall to get that amount of wealth so let's say you look at that number and you said you know what seventy thousand bucks is not gonna work for me maybe my number is one hundred thousand dollars so you can do the math you could do the same formula one hundred thousand bided by ten percent and that would just be a different number a different amount of wealth that would equal 1 million dollars do you see how that formula works you can plug things in you can change your expenses you can even change the the R in the formula maybe you said you know what 10 percents really aggressive for me I don't think I can get that kind of cash return on my equity over the long run and maybe you're right I would probably use a little bit lower number myself let's say you wanted to use a 6% number you're going to plug that number and instead you want to have the same amount of personal expenses in retirement $100,000 so a hundred thousand divided by six percent instead of 1 million that's 1 million six hundred and sixty six thousand like that's six hundred sixty seven dollars the point is the smaller their return you can get from your real estate the more wealth you have to build the more money you want to have in retirement the more wealth you need to build so those are the three variables and if you're trying to figure out this whole point of this video is figure out how many rentals you need to retire we want to start with this point just to understand the big picture of hey I've got two hundred thousand dollars saved saved up in my my overall well if I need a million dollars alright I kind of know where I need to go and know what the gap is so that's the first step let's look at a few more examples of how this might apply to rental properties specifically and translate this to a little bit more real-life real estate before I go any further I want to ask you a question and take a pause for a second if everything is making sense so far everything I've explained is registering and you like it let me know in the comments below say hey got it coach sounds good coach let me know or if you have a question and there's something I didn't clarify or you want me to go a little farther and explain a little bit more leave a comment love to hear from you below and be happy to respond to you as well let's move on I told you it would get to an example where we apply some of this to a real rental portfolio so I'm gonna give you two different examples but this first one is going to be what's called a free and clear portfolio assume that let's say you bought you bought and eventually paid off the debt on ten rental properties so this could be single-family houses these could be apartments you know ten apartment units whatever the case might be just assume there's ten units and I why I mentioned that number in a second on why it'll be easier to manage a smaller number of rentals so first part 10 Reynolds now this isn't gonna be where you start necessarily if you have no rental properties at the moment maybe you have to build up to this maybe you have to acquire them if you maybe have to get them paid off and how do you get those properties paid off that's a pretty good question one of my favorite strategies is something called the debt snowball the rental debt snowball maybe you've heard of that with your personal finances like with a credit card you could do the same thing with rental properties I'm gonna do a video on that in the future but for now look in the description below I've got a link to a blog post article and a podcast episode where I went in depth on how you do a rental nest know ball to go from having property with debt to getting it paid off that's sort of an aside here but listen assume in my example that each one of these rental properties cost one hundred and twenty thousand dollars so one hundred twenty thousand per property I know what some of you are thinking you're my friends in San Francisco or Seattle or you know Canada and Toronto or something you're saying you know I'm you couldn't find a Shack or you know just a lot for one hundred twenty thousand bucks I realized that the numbers all over the place that the reality is that you are in a higher price market you might be able to buy fewer properties but I have friends in Washington who have one property that produces as much income as five or six of my properties and in South Carolina where I am so the numbers are going to bury but the principle is what I want you to play along with me for a second so assume you had $120,000 per property you had ten rentals so the total cost of that ten times 120 thousand is the amount of wealth you have to invest to get those properties paid off is 1.2 million and I just got that by multiplying ten times one hundred and twenty thousand with me so far you have no debt on these properties so that the value of the properties are what you paid for them we're gonna assume those are the same in this scenario what you paid for them and the amount of equity you have which goes back to remember our formula before W the amount of wealth you have to have in this case you have to have 1.2 million dollars to get them out of rental income we're talking about here in a second so that is the W from the formula before so let's go look at the income though on this property and what that actually does for you in retirement so let's assume that this property rents for $1200 per month so it meets the 1% rule any you heard about 1% rule and that's something else I'm going to talk about in future videos but also have it a link in the description to another article explaining that kind of basic formula for running the math on rental properties so you have $1,200 per month and rent let's assume you had $500 in expenses this pays for things like taxes insurance maintenance capital expenses like eventually got to replace the roof might have to pay for management so those numbers vary a lot of course but I'm just going to assume in this example that's $500,000 per month so the net number this is called your net operating income is $700 per month that's what's left over after you deduct all of your expenses from the rent that you collect the net operating income if you look at the link above I've got a video that I did on net operating income it's one of the most important numbers to understand the rental properties so that number it's not something you're real familiar with formula be sure to go check that video out so you have seven hundred hours per property per month but on a yearly basis we kind of get this on a yearly basis to understand what how much money we can have in retirement that's 8400 that's just 700 times 12 so think about it this way each one of these little businesses this little property that you own and you paid off produces a net pre-tax number we're going to get in taxes again but eight thousand four hundred dollars per year but you have ten properties so ten times eight thousand four hundred is eighty four thousand dollars per year all right so we'll pause there for a second think about the formula we went over earlier eighty four thousand in this example is the e in that formula that's how much as how much you can cover your expenses your personal expenses from these rental properties so eighty four thousand divided by I mean eighty four thousand per year and you had that one point two million dollars of wealth and we're going to do that so I did the math ahead of time you're welcome to pause and calculate it if you want to calculate what that is eighty-four thousand divided by one point two million is a seven percent so the R in this in this case is seven percent I wanted to again pause at this example just to show you a couple things why could this be beneficial to you why would you want to own 10 rental properties get them paid off first of all if you cover your expenses there's a lot of other retirement portfolios a lot of other ways of owning wealth living off them that don't necessarily pay you a 7% return I know a lot of in a lot of my friends in the financial independence community for example use a number like the four percent rule and they say if I have a million dollars I can take out four percent of that forty thousand dollars per year and feel reasonably comfortable that is my portfolio is not going to run out in the next 30 40 years that's typically what people use but with rental properties one of the most interesting compelling parts about having at least part of your portfolio be rentals is that you can buy properties that produce a higher income return compared to some of the other investments you can make that's not that saying there's not negatives as positive negatives to everything but if you can own rental properties and live off a smaller amount of wealth that produces income you might be able to get to your retirement number faster that's why I want to show you this example the numbers are compelling also I'm gonna give you another example where I use some debt and some leverage but I want to I do want to mention and start with this that when you get to retirement having a free and clear portfolio or at least I mean part of your properties paid off it'd be a very low-risk way to move forward low risk in that you have a lot of different scenarios covered so you have a massive deflation let's say that all of a sudden your rental properties be given the Great Depression number two for example and who knows exactly what's gonna happen in the future I'm certainly not good at predicting that but let's say the wrench dropped to $800 per month well that's not gonna be positive for you you're gonna have to live off a lesson money but you're also not gonna have a mortgage payment that's fixed no matter what your rent is that could basically drive you into bankruptcy and losing all your properties so it covers you in some of those kind of big risky situations like a relation area environment if the properties go up in value if they go this goes up at two million dollars you still benefit from appreciation from inflation in the overall market and so you have a lot of flexibility final thing I'll say about this portfolio is very simple ten rental properties if you don't want nrel properties you might think man that's a lot of properties I'm not sure manage that I can tell you is someone who has got ten times more than that if you get some systems together if you hire property management in particular that could be a very very part-time job so the big picture is you could have eighty four thousand dollars for your coming in you can be very part-time I'm talking like thirty minutes per week an hour per week to do a little bit of bookkeeping and kind of make sure you talk to your property manager and get the rest of time spent traveling doing whatever else matters to you so interesting scenario let me know in the comments below if this is something you would be interested in this scenario and now let's move to another example okay so let's look at another example and I'm gonna go through this a little faster because I think you sort of understand the overall picture of what I'm trying to share with you and I'll talk about some positives negatives of this example of how many rentals you need to retire so this is a leveraged portfolio so in the last example there was no debt so it was a free and clear portfolio and an example there's gonna be 28 units and let's just assume you bought an apartment complex an apartment building at 28 units I want to keep the numbers very similar just to kind of prove a point here but let's say the cost just like the other example is $120,000 per unit and so if you have 28 units times 120,000 I'll do the math for you there the total cost there's three million three hundred sixty thousand dollars and so you didn't have that much money so you had to use some leverage to buy that you'd use some debt to buy it so you put thirty thousand dollars down per unit or over twenty eight units that's eight hundred and forty thousand dollars in the last example we had to have 1.2 million one of the benefits here you're already saying is that for this example we had eight hundred and forty thousand dollars and maybe that still too much for you maybe that's a really big number and you can divide this number out you can divide it in a quarter maybe you're doing a lot less than this for now maybe you're growing into it for now assume that you had to get to eight hundred forty thousand bucks then you also had to borrow some money so you put thirty thousand dollars down you got a 90 thousand dollar debt on on per unit or over the entire complex at two million just over two million 2.5 million so two million five hundred twenty thousand bucks so that gets you the property ball let's look at what the income looks like because that's the whole point here so just like in the other example each unit rinse for twelve hundred dollars per month also like the other example that's five hundred dollars in expense taxes insurance maintenance those types of things and so your net operating income is $700 per month but here's the difference you have a mortgage payment and I've run the numbers just to gotta get a regular mortgage payment on that it would be let's just say it's $450 per unit on the amount of money it has to go out of your pocket to pay the mortgage every month so you get 700 ollars coming in after paying other expenses but then you have to pay $450 so you have 250 dollars per month in cash flow per unit but we have 28 units so 250 times 28 is $7,000 per month which is conveniently the same number we had and the other example because we wanted to meet that same personal expense number so 7,000 per month is also 84 thousand dollars per year step back for a moment and look at how we got to where we are so we got 84 thousand dollars per year which was our goal doubts are our e and our you know formula we've been talking about and you had to invest eight hundred forty thousand dollars to do that that is the W so you maybe you started with a smaller amount it grew to eight hundred forty thousand and eventually got this property and so what's the our how much what's your return on that that equity you had to invest in that it's just a 10 person 10% return so it's a higher cash return and which is very possible if you use some leverage and you buy the right properties you can't just buy any property you gotta look around and get one that makes sense but in the commercial world of buying multi units that would not be an unreasonable number alright so and this so there's positive the negative to everything I'm not you know so thinking that you have to do one and you have to do another you have to pay your properties or you have to use leverage if you get a bigger pocket some other forms I hang out in then people argue about this all day long but there's pluses and minus to everything and one of the pluses to this is that over time you might build even more wealth so as these properties this is worth you know three point three six million total maybe that goes up to four or five million and because you're using leverage your equity builds and grows faster and faster so that 10% return isn't the only return you're getting you might get a much higher return and your wealth grows and then you can sell the property and buy another one and keep growing that wealth in that income to more than eighty four thousand so leverage allows you to grow even faster and magnifies your returns on the other hand leverage also magnifies potential risk so what if like the other example rents crater and it's really dropped which hasn't happened a long time but it's happened in certain towns look at Detroit over the last 3040 years look at other areas where somebody went a big factory went out of business you know it can happen we don't always see it had it happened a long time but it could happen so you have to think about that as a potential risk so the property rents decreased you have about two and fifty thousand two hundred fifty dollars per month in cushion per unit which is good what happens if those rents went down you might be risking either not making an income or not being able to make your mortgage payments if it got bad enough some other risk are also having debt like this often you have to get a commercial debt you have to refinance five to seven years from now and that's not always a guarantee either if you had to refinance in 2008-2009 during the middle of the Great Recession would have been very difficult so those are some challenges those are some risk you also have just the the hassle of having more units and having to maintain them although that can be countered a little bit with property management with systems you get all your all your units at one location it's a little bit easier to take care of that's one reason multi-unit apartments are attractive so overall I wanted to give you two examples how many rentals you might need to retire there's all sorts of variations of course 10 units 28 units but hopefully both of those will demonstrate how this process works so I've shared with you the formula to figure out how much wealth you need to retire without having to use a retirement calculator and I've shared with two examples that show you specifically how many rentals you might need in those examples to retire early as well the last thing I want to share with you is a five-step process that you can use and apply to figure out how many rentals you need to retire and the first step is to just figure out how much you spend right now so what's your personal budget for you or for your family I have a friend Jaden Roth who has a website get rich slowly and it's been one of the first personal finance websites that that I found and it's really good and he has a an article that I'll link to in the show scription it talks about figuring out your personal expenses for retirement one of the most important numbers are the best number to go with is whatever you're spending right now I'm gonna talk about step two how that might change some but is if you don't know where you're starting from if you don't know how much you're spending it's kind of hard to project into the future I have a couple recommendations for that number one I have a free spreadsheet that you can get if you go get my real estate investing toolkit which is linked below and there's in the description you can get some spreadsheets for free and you can use them on Google Docs or use them on a microscopic so it is plug yet all of your personal expenses if you've never done that before it might be a really enlightening exercise to do to know exactly how much is going out so you can start estimating how much you need to have coming in from your investment you can also use apps or online software a couple that come to mind Netcom is one that my family is used for for a good good while and we're also playing around with another one that is a paid version but it has a little bit more bells and whistles called you need a budget com so I have both of those linked below but the point is whatever you do whether it's a piece of paper a spreadsheet or some of these apps figure out how much you're spending right now step number two of figuring out how many rentals you need to retire is to adjust your personal expenses for retirement so this is if you're 20 years from retirement and you're trying to project it out the future it's gonna be a very rough estimate the main thing I will say is that don't automatically assume that your expenses are going to be a lot larger in retirement it is true that things like medical insurance is one I think of medical costs that's one of those cost that goes way up and it's conceived to continue going up it's kind of hard to figure out what those are but there's also other expenses that might not be as high once you get into a later period of your life and depend on your age for example if you pay your house off and you and that's free and clear you don't have a payment if you have already put your kids through college if that's something you're working on or if you make less money and you're in a lower tax bracket you might pay a lot less in taxes and you might not be saving as much for retirement once you're retired you're not putting all that money into a 401k so it's kind of that that's one of the reasons step number one is to figure out where all your money is going do it a nice detailed analysis go look through your current expenses and see which ones are reasonable that they'll be same in retirement other ones might be higher and you have to do kind of a rough rough guess and it wouldn't be the end of the world if you did project a little bit higher so give yourself a cushion you figure making a lot of money now and you're saving you might not want to err on the on the wrong side on the low side so it's okay to let's say your expenses are seventy eighty thousand bucks maybe you want to project to a hundred thousand dollars per year just to give yourself a cushion so if that's what you want to do that'd be what you do right now in this step so step number three after you've estimated your expenses from the first two steps is you're going to estimate any other sources of income that you might have coming in other than real estate so think about if you're going to be getting a kitchen if you're at the age where you can start getting Social Security pension from the federal government if you are getting stock dividends if you're getting other sources of income from other places the point here is that you have a total amount of money that you need to cover your expenses in retirement and so you deduct from that total any other sources you have so whatever's left over that gap is what you're then going to have to use to fill it with your real estate income so step number three add up all the other sources of income you might have in retirement alright step number four is to create a basic profile of what a rental property will look like for you so remember in my examples I gave you kinda rough cost per unit I gave you a rough I'm out of rent per unit net operating income so you want to at least just put pencil to paper and say alright how much is it going to reasonably cost me to buy a rental in that portfolio that I'm gonna be building they're gonna be $100,000 per property $300,000 per property but with a rate look like well I get you know the 1% rule one percent of their rent and what will those expenses be like you just want to get kind of a rough idea because again we're doing the math or doing some rough math here and you want to know what those numbers are you also might want to start thinking about this isn't this kind of getting ahead a couple of steps on where those properties will be what type of properties they are do you want to be a multi-unit property you want to be a single-family property but you know if that's a little bit beyond where you are at this point if you just want to run the math just put down some basic numbers and you can borrow some of mine if your complete beginner and you just want to run some rough numbers borrow some of mine from the examples at least put those down step number four step number five to put all of the other steps together so remember the formula we started this video with you needed to figure out three factors you need to know e so your personal expenses and retirement and you needed to estimate R so how much the cash return and you're gonna get on your rental properties so in the previous four steps you hopefully figured those out and so now the idea is how much wealth do you need given those the expenses you want to cover in retirement and given what your properties what kind of return you can get on your properties for example let's say that your e your expenses in retirement is $80,000 per year and let's say that you thought you could get a 10% return on the amount of money do you invest into real estate so $80,000 divided by ten percent equals $800,000 of wealth or equity that you need to invest in real estate remember that's how that formula works let's also assume that when you looked at the number of amount of rental properties that you had $100,000 rental property in your area maybe that's not realistic where you live maybe you need to change that number but if it was you would need 8 properties of $800,000 invested and if you own those free and clear that's my assumption here 800,000 divided by $100,000 per property means you'd have about 8 properties which is the whole point here we're trying to figure out roughly how many properties you need to buy that's the basic process here you can play around with it you can use the formula you can use these five steps I hope they've been helpful for you I want to remind you just what the whole point of this is the very beginning while we're doing this while you're trying to figure it out is if you're setting out to build well to grow your portfolio and especially to live off a rental income it's good to know roughly how many properties you need you need to have before you go out and buy properties before you go out and start plowing ahead you want to have that idea that goal to shoot for so I hope this has been helpful for you hope it gives you a process to do that and I and ultimately I hope it gives you more confidence to go take all the next steps all the things you have to do to go buy those properties to acquire them to get them financed to manage them to get them paid off have a lot of other videos come in the future they cover all of those things but for now let's figure out how many rentals you need to and let me know in the comments below how many you need in your particular situation you found this video helpful please click the like button below it lets me know unless other people know this is a useful video worth watching I also have a lot more videos and ideas coming in the near future I'm gonna start publishing more regularly so click that subscribe button and the bell next to it to be notified and not miss anything when it comes out each week so I look forward to staying in touch with you thanks for watching the video and I'll see you next time on coach Carson TV real estate and financial independence

Channel: Coach Carson

Views: 99,211

Keywords: biggerpockets, how to retire early from real estate investing, how to retire in 3 years with real estate, real estate investing, real estate investing for beginners, rent houses, rental houses, rental property income, rental property millionaire, rental property retirement, retire a multi millionaire, retire early tips, retire on rental income, retire with real estate, retire with rental properties, retirement, real estate, passive income, real estate investment

Id: A_uxNcEITlA

Length: 27min 14sec (1634 seconds)

Published: Fri Sep 06 2019