#58: How Many Rental Properties Do You Need to Retire?

Foreign. Welcome to the Passive Income MD Podcast, where we talk about creating your ideal life through multiple streams of income. I'm your host, Peter Kim. If you enjoy hearing about this stuff, make sure to hit subscribe so I can bring it to you every week. Now let's get on with the show. Hey, everyone. This week we're going to talk about real estate, real estate investing, and the big R. And the big R that I'm talking about is retirement. Now, I know so many of you have thought about it. I know that many of you have started planning for it already, but how many of you actually have a solid plan to get there? And for many of you that are investing in real estate or you're probably investing in stocks as well, like, how do you know when you hit that point and what it'll take to get there? I mean, for most of us, when we decided to be physicians, for example, or we decided whatever profession you are in, you had a concrete goal and you knew the steps it would take to get there. And it was simple because you either got into medical school, you graduated and got that diploma, or you didn't. I think with retirement, it can be a little bit more nebulous because you know, your target may change over time. Um, you feel like life has so much uncertainty ahead of you, so that number may be in flux. But I try to keep it simple. We're gonna talk today about a question that I get quite a bit, and it's how many rental properties do you need? Or does someone need to retire? Now, I'm just gonna start by saying there's no magic formula. There's no perfect formula for how many rental properties you'll need. Just like there's no magic formula for, like, how much you have in terms of your nest egg and stocks. Many of you might have heard of the 4% rule, and many of you have used that as gospel when it comes to retirement. Basically, what the 4% rule when it comes to stocks says that when your portfolio hits a certain point where you can draw 4% off of your portfolio every year and live off that amount, then you are financially independent. Or another way to think about it to do that calculation is to take 25 times your expenses, like yearly expenses. And if you have that much in your portfolio, you're pretty much good to go. And the thought is that you'll be. You could retire at that point and have enough to draw on for the rest of your life. You know, that's definitely not a foolproof plan either. I mean, you know, I would say majority of the scenarios that they've gone through, it's worked out quite well. But there are scenarios where it hasn't worked out quite well. And I think with rental properties also, having just a certain number may or may not go well. It depends. I mean, there's definitely so many different factors and. And there are assumptions to make, but I think we could at least explore the idea, at least at a very basic level. And just so you know, when I'm talking about this, I'm making some assumptions. In fact, I'm making a lot of assumptions that when you talk about rental properties as your sole vehicle to retire on, it's that you don't have any other retirement portfolios or Social Security, which probably won't be there for many of us when it comes time for us to retire, or even other sources of income, like, you know, rich children to help you out, or businesses down the line. But let's just keep it to rental properties. So when I think about this, you know, this question, I try to keep it pretty simple, and it's helped me to at least think about this in a way that I can definitely make it very concrete. And so this is how I think about it. You got to go through these steps. You need to, number one, figure out how much you need in retirement to cover your monthly expenses. And beyond that, you want to figure out how to have a little bit extra so you can enjoy life a little bit. We don't want to just have our expenses. We want to travel. We actually want to live life well when we retire. If you're like me, right, you don't want to just sit there. You want to thrive, you want to travel the world, you want to spoil your family, you want to try new experiences and do different things. And so you need to figure out how much that is exactly. And I would recommend write it down. You know, you can probably take a look at your monthly expenses now, make some guesses, think about travel and these kind of things, and come up with a number. Then number two, what you need to do is figure out how much monthly cash flow you would get from a typical rental property. Now, if you use those two numbers that you get, number one, you know how much you need in retirement to cover your monthly expenses and enjoy life a little bit. And number two, how much monthly cash flow you get from a typical rental unit or property, Then all you need to do is take the monthly amount that you need, you divide it by the cash flow per rental property, and then you get the number of Rental properties you need. That's it. It's a pretty simple calculation. It's something that you can probably just figure out on your own. Just so you know what cash flow is. It's the net of income minus expenses when it comes to rental properties. The income which usually includes rent, right? Any other sort of additional income that you might get, you know, your laundry rooms, garages that you rent out, this kind of thing. And then so you subtract out the expenses, management fees, maintenance, vacancy, and, you know, obviously your loans and everything like that. And so whatever's left over at the end of the day, that is your cash flow. Now let's, let's do an example of this so we can figure out how this exactly works. Let's say you decided when you get to the point of retirement, you need about $8,000 per month to safely retire and have everything covered. It doesn't work quite as well, you know, maybe on the coast, but maybe your house is paid off already. So you just need 8,000 per month to safely retire and you're good. Now, you've been buying up some rental properties over time, and you notice that over your portfolio, you happen to average about $200 per month in cash flow per rental unit. And so the question is then, how many properties do you need to retire? So just so you know, $200 a unit, like if you have no kind of scale when it comes to that or no gauge, it's actually very doable. In fact, I think it's a typical conservative amount. I mean, I tend to see in my properties somewhere closer to 250 to 300 and even higher on some of the properties that I've had for a while that have been fully optimized, I'd say. So let's say it is $200 a unit. Let's say you again, you said you needed $8,000 a month. You take 8,000, you divide it by 200, which is, you know, the cash flow per rental unit. And that comes up with 40 units. And that's it. That is your number. That's how many rental properties you should shoot for to hit your number. Now it's a nice concrete number. Now how do you get 40 units? It might sound like a lot, but as you know, you can buy more than one unit at a time. You can buy an apartment building. And I know again, that might seem like a lot. Uh, but maybe you start with a duplex, then a fourplex, then you start, you know, jumping up to a 10 or 12 unit building. That allows you to get to your unit goal pretty quickly. And it's amazing how quickly that can begin to add up. When you start doing 2 and 4 and 8 and 10 unit buildings, those units start to grow and stack, and then the cash flow from a lot of those units allows you to go out and purchase other units as well. Now, you can, of course, supplement this by doing a lot of passive investing as well, where it can bring in cash flow on the side from you, not even owning those rental properties. But for the purposes of this podcast, in this episode, again, we're just talking about owning our own rental properties. So I know people are hearing this and they're thinking, you know, some people are thinking this is just way too ridiculously simple. And in many ways, you're right. I mean, there's so many other things to think about. Right? I mean, there are leverage, there's tax benefits. And you're right, I didn't mention anything about rental increases over time, cash flow increases, vacancies, pandemics, you know, tax benefits and things like that. Yeah, there's so many other factors to think about, but this is a very conservative and a very easy way to think about how to, you know, calculate that number for you. Some people call this your freedom number. I mean, I've heard it spoken like that before. Your freedom rental property number is X number of units. But this is a good way for you to actually start crystallizing what it'll take for you to get there. So if you think, all right, if I want to get there in 10 years, then I need to get 40 units under my belt in 10 years. So that means in five years you need to get about 20 units. Right. Half of that, then maybe if that's in. In five years, in 20 units, then each year you probably need four units under your belt to do that. And then that seems a lot more realistic. Could I do a quadplex, right, A four plex every single year? Is it possible? It might be. So I'd love for you to take that exercise. If this is a question that you have thought about, do the exercise. Whether it's 8,000, 10,000, $20,000 a month. It's all what you're looking for. Take that. Start thinking about how many rental properties you need. Work backwards from the near, you know, the number of years that you want to retire at and start playing with that and just see what it looks like in front of you and set that as your goal. And I promise you, whether you achieve that exact number or not, as you start on that journey. You're gonna get closer and closer to your goals. And trust me, you're gonna have done something right if you hit that number and you'll be very close to where you need to be. In any case, let me know. Let me know what your number is. You know, if you have a chance, post it in our Facebook group PassiveIncome Docs. Or let us know on the podcast Show Notes. If you on our blog, I'd love to hear from you what those numbers are and have a great week everyone. Take care. Bye. Enjoy the show. Let me know by dropping a review in the podcast app you're listening to us in. And if you haven't already, make sure to hit subscribe. Are you part of our community yet? Join thousands of physicians who are also on this journey to creating their ideal lives through multiple streams of income. You can join us on our Facebook group Passive Income Docs and you can always learn more at our website passiveincomemd.com thanks again for allowing me to be a part of your journey. See you next time.