How Many Rental Properties Do You Need to Retire?

Planning for retirement is a daunting process even for the savviest of investors. Needing to plan for years of expenses and finances without regular income and exiting the workforce is extremely stressful. However, proper planning and smart investment can lead to a successful and comfortable retirement so you can focus on travel, family, and other activities that bring you joy.

Many investors purchase rental properties to supplement their retirement funds with reliable income to ensure they keep their desired lifestyle. Real estate investments can provide financial independence and long-term security after retirement. But how many rental properties do you need, to retire comfortably? That varies depending on your lifestyle, location, portfolio, and expenses. Understanding your retirement needs and other factors influencing property count will help you properly plan for your future.

Understanding Your Retirement Plan

Before looking at how many rental properties you’ll want or need to supply extra retirement income, you need to thoroughly understand your retirement plan to see how much income you’ll need. 

First, consider your income. How much have you saved in a 401(k) or other retirement account? Do you have other investments that provide sizable, steady returns? While in retirement, you can also get social security income. You can start claiming as early as 62 years old, but your benefit will increase the longer you wait. If you can wait to start claiming until you’re 70 years old, then you’ll maximize the amount you receive in social security income. 

Next, you’ll need to consider your expenses and individual goals. Will you be moving or downsizing and if so, will your living expenses increase or decrease? How much will you need for food, recreation, travel and transport, and other regular expenses? And other than day-to-day expenses, consider your retirement vision. If you want to have sufficient funds to travel frequently or finance new hobbies, you’ll need to include that in your retirement plan as well.

Considering your income and expenses in retirement will help you understand how much more you’ll need in income to live your desired lifestyle. Also, look at your investment funds to see how much you can spare to purchase properties, 

Including Rental Properties in Your Retirement Plan

If you need more income after reviewing your retirement plan, then rental properties can be a good strategy. Rental properties can be a good way to produce regular income you can rely on, as well as add a tangible asset to your portfolio.

Rental properties can bring several benefits to your retirement plan. They provide steady returns that you can add to your retirement income. If you hire a property manager, then you can be hands-off with the day-to-day operations. In addition to rental income, the property may also be appreciated, which will help grow your portfolio. Real estate can also diversify your portfolio from traditional stocks and bonds, which will help mitigate risk.

How Many Rental Properties Do You Need To Retire?

Rental properties can be a great addition to a retirement portfolio, but there’s not a one-size-fits-all answer when investors ask how many rental properties to retire successfully. To determine the amount of properties you’ll need, you should consider the standard rental income in your area, how much income you’ll need to sustain your lifestyle, and the income you receive from other sources. 

Let’s say you need $10,000 a month in retirement. This will cover your living costs, essentials, recreation, and travel. You also receive $3,822 in social security income by retiring at full retirement age. You also get $3,000 from a 401(k). This leaves you with a deficit of $3,178 that you may want to make up in rental income. 

You’ll need to look at the average rental income for the type of property you can purchase. Then you’ll need to deduct maintenance and management expenses to determine how many properties you’ll need to make up that income. This will vary amongst location and property types.

Rental Property Retirement Formula

Retirement planning is hard enough, but this rental property retirement formula makes it easy to determine how many properties you may need in your retirement profile. This formula will calculate how much income you need in retirement by considering your income, money invested, and cash-on-cash return. During retirement, you need a quick return on investment. Cash-on-cash return determines the cash return you’ll receive compared to the cash you invested. Investments with high cash-on-cash return rates are often strong investments to include in your retirement plan since they help reach your retirement goals faster.

Calculate Your Current Monthly Expenses

The first step is to list your current monthly expenses. These may include:

• Housing costs and utilities.
• Food and other essentials.
• Transportation and car payments.
• Medical and health care expenses.
• Insurance premiums.
• Recreation, entertainment, and travel.
• Clothing.

You should also incorporate any future expenses, especially large savings goals, such as travel plans, buying a new car or home, or saving for a family member’s college fund. Add these expenses together. This gives you a rough estimate of your expenses during retirement. You’ll need enough income to match or exceed this amount to live comfortably once you’re out of the workforce.

Calculate Your Current Monthly Income

Next, calculate your current monthly income from all sources. This will include your salary, as well as other income sources, such as freelance work or side hustles, investment dividends, rental properties, or businesses. Any income that you receive on a regular, monthly basis will be included in this list. Then, add it together. If you expect your expenses and lifestyle to remain the same once you retire, then this is the amount of income you’ll need in retirement.

Calculate Income from Other Sources

Now you’ll want to think ahead to your sources of income once you retire. This could include a social security pension, employer pensions, income from a 401(k) or other retirement account, interest from bonds, stock annuities, and any other income you may receive. If you are going to include dividends from stocks or other income from investments, you’ll want to ensure your portfolio is balanced and consult with your financial adviser first to ensure they are dependable enough to include. This income can help replace the amount you’ll lose from your salary when you retire. 

Factor in Contingencies

Financial planning can’t be reduced to regular income and expenses. There are several contingencies and unexpected expenses that may occur at any time. If you don’t plan for unplanned expenses, you may not have the means to cover them if and when they arise. 

It’s crucial to have an emergency fund, especially in retirement. An emergency savings account should have at least three to six months’ worth of living expenses set aside, but more is always better. This will help if an unexpected medical expense arises or if one of your sources of income falls short. 

When calculating how much rental income you’ll need to live on, factor in emergency savings and other contingencies. You may need to factor savings into your expenses depending on the size of your emergency fund.

Calculate Your Desired Monthly Expenses for Retirement

Finally, you’ll want to calculate your desired monthly expenses for retirement. You should use your current expenses to determine this number. Some expenses may decrease, like if you’re going to sell your home and move into a less-expensive condo. Others may increase, such as if you decide you want to spend more time traveling. 

Retirement expenses may look a little different from your current expenses, which is why it’s important to consider what will change and what will remain the same in retirement. Once you calculate your desired expenses, you should compare them to your projected retirement income. If your expenses outweigh your income, then that amount may be your target rental income.

Factors to Consider When Choosing Rental Properties for Your Retirement

Not all rental properties will generate the same amount of income or require the same amount of management. Before purchasing any rental property, you’ll want to ensure it’s an investment that aligns with your needs and goals. To do so, you’ll need to think through the location, demand, required repairs, and management.

Location of the Property

First, you’ll need to consider the area where you’d like to purchase a rental property. Location is key since it’ll determine demand and the amount of income you can earn from it. Rentals in popular places such as tourist hot spots, near colleges and universities, and desirable suburban areas tend to have a higher demand for rentals. This will make it easier to find a tenant and will likely also allow you to charge higher rent than a less desirable location. 

To identify a good location for a rental property, look at market trends in areas you may be interested in owning property. Look at the average rent for similar properties and how long they tend to stay on the market. Higher rent and short times on the market will indicate an area is desirable and profitable. You should also consider how the homes in that area have increased or decreased in value over the past few years.

Tenant Demand of the Property

Next, you’ll want to consider the tenant demand. This goes hand-in-hand with location since desirable locations typically have higher tenant demand. However, you’ll also want to look at vacancy rates in the area of your potential property and tenant demographics. This can indicate how long properties stay vacant and how easy it is to find reliable tenants, while demographics will show the average salary of residents in your potential location and their age. For example, college towns and locations that are attractive to young professionals tend to have a higher tenant demand.

When determining the tenant demand of an area, you should look at other rental properties in the area. If the neighborhoods are saturated with vacant rentals, then it may be harder for you to find a tenant willing to pay a decent rent. You’ll want to ensure that there aren’t more properties than tenants.

Repairs and Maintenance of the Property

You won’t be able to pocket every dollar paid in rent as income. Rental properties may need some repairs before they can be listed. And, as a landlord, you’ll be responsible for covering routine maintenance. Therefore, some of the rent will need to be set aside in a fund dedicated to repairs and maintenance, so you’re not left paying out of pocket if something in the property breaks.

Smart investors often make a plan on how much money to allocate toward repairs before even listing the property. If you need help determining how much of the rent you should be saving, you can consult a trusted financial adviser or real estate professional. They can offer guidance on how much you can expect to pay in repairs annually and devise a plan to make sure you and your property are covered.

Management of the Property

Being a landlord can be a demanding job. Often, people in retirement don’t want to spend their time listing properties, communicating with tenants, overseeing maintenance, and all the other day-to-day responsibilities of managing rental properties. If you’d prefer to stay hands-off with your properties, you’ll need to hire a property manager. 

A property manager can oversee the daily operations of one or more properties. They’ll ensure rent is collected every month, arrange and oversee maintenance and repairs, handle legal compliance, and stay in contact with your tenants to ensure their needs are met. They take a great deal of work out of the property owner’s hands, allowing them to enjoy retirement to the fullest. If you’re planning on hiring a property manager, you’ll need to plan on their pay coming out of your rental income. 

If you plan on managing your properties, you’ll need to be knowledgeable about the legal aspects of being a landlord, market trends, and network with professionals who can help you list your property and identify tenants. Connecting with experienced landlords and other real estate professionals is a great way to learn.

Pros and Cons of Real Estate Retirement Planning

Incorporating real estate into retirement planning has many benefits, but may not be the right strategy for every retiree. Owning rental properties during retirement does provide another passive income stream that can cover necessary expenses and allow for a more comfortable lifestyle. There’s also the potential that the property will increase in value, allowing the owner to sell it a few years later for a profit. Real estate provides investors with control and flexibility in their portfolio and a chance to supplement their income.

However, there are risks associated with this strategy. The real estate market can fluctuate without warning and not every retirement portfolio will be able to accommodate the market volatility. Properties are also an illiquid investment, meaning it can take a long time to sell a property and gain back the capital invested. Plus, management responsibilities will fall on the owner if a reliable property manager isn’t found. 

Owning a rental property in a desirable location with a reliable tenant can lead to a steady income. But there’s always the chance that a tenant can’t pay or the market experiences a downturn. An investor will need to have a well-balanced, diverse portfolio to mitigate this risk.

Passive Retirement Income 

Losing salary income can be stressful for many investors approaching retirement. That’s why many future retirees choose to add rental properties to their retirement plans. With a well-balanced portfolio and thorough research, rental properties can be a great way to supplement your retirement income. How many rental properties you need to retire will vary depending on your financial situation, as well as the location of the properties. Taking a close look at your retirement income and expenses, as well as the tenant demand and average rent prices of properties in your desired location can help you determine how much rental income you’ll need. A trusted financial adviser can offer more personalized advice and help determine if rental properties are a good fit for your portfolio!

Frequently Asked Questions