The Math of Early Retirement With Real Estate

“Simplicity, simplicity, simplicity! I say, let your affairs be as two or three, and not a hundred or a thousand; instead of a million count half a dozen, and keep your accounts on your thumb nail.” —Henry David Thoreau, Walden

Despite what you may hear from “successful” investors who build big, complex empires of hundreds or thousands of rental units, you can accomplish all of your financial independence dreams with a small, simple portfolio of real estate investments. It turns out that bigger isn’t always better.

Of course, there’s nothing wrong with going big in real estate if that’s what you want. But it’s not necessary to retire early and do what matters in your life.

You can gain an enormous amount of freedom with a much simpler real estate portfolio than you might imagine.

So, let’s get specific about how much wealth you actually need. The early retirement math using real estate is actually quite simple.

No Real Estate Retirement Calculators Needed

Retirement calculators are helpful in situations where most of your assets are in stocks and bonds. You must balance your future personal expenses against dividends, growth rates, withdrawal rates, withdrawal timing, and more.

I personally like the retirement calculators at CanIRetireYet.com and FinancialMentor.com.

But luckily, the real estate early retirement math is a lot simpler. In fact, it’s so simple you could do it on the back of a napkin (or if you’re a non-conformist like Thoreau, on your thumbnail).

The math has three variables:

Your expenses in early retirement (E)
Your wealth invested in real estate (W)
The conservative income yield or cash-on-cash return on that wealth (r)

The basic formula with these three variables is this:

W × r = E

or

E ÷ r = W

For example, let’s assume you need a minimum of $70,000 a year of ongoing investment income to cover your expenses (this is also known as your financial independence number). Let’s also assume you can find properties with a 10 percent cash-on-cash yield.

This means you need wealth (aka equity) of $700,000 in real estate.

Here’s the formula:

$70,000 ÷ 10% = W

$700,000 = W

If that math doesn’t work for your situation, you can change each of those three variables as needed.

For example, if your financial independence number is $100,000 per year, you may need to invest $1 million instead of $700,000.

$100,000 ÷ 10% = W

$1,000,000 = W

Or if your financial independence number is $100,000, but you want to be more conservative with your cash-on-cash yield, you may need to build more wealth.

So if you only receive a 6 percent yield, you will need to invest $1,666,667.

$100,000 ÷ 6% = W

$1,666,667 = W

Simple math, isn’t it?

But let’s look at an example to translate it to real life. This example assumes an investor owns 10 free-and-clear (no debt) rental properties.

10 Debt-Free Properties and a Comfortable Early Retirement

In this scenario, an investor owns 10 rental properties. She then uses them to retire early.

But every example has assumptions. And you need to understand those assumptions so that you can apply the principles and adapt them to your own unique situation.

The assumptions for the rental properties in this example are as follows:

Rental Property Assumptions

Property Type: Single-family houses or small multi-unit apartments
Market Location:
- “Middle America” (i.e., the South, Midwest, and other parts of the U.S. where rent-to-value ratios are reasonable)
- A medium-sized city with a growing population and good long-term economic prospects
- A median-priced neighborhood (not the lowest, not the highest)
Total Cost of Each Property (Purchase, Closing Costs, Repairs): $120,000
Total Rental Income: $1,200/month
Operating Expenses: -$550/month
Net Operating Income: $650/month
Mortgage Balance: $0 (all debts have been paid off)
Mortgage Payments: $0

Now, another big assumption is that this is the end of a period of wealth-building or growth. The investor did not begin with this portfolio of debt-free, income-producing properties. She had to build it over time.

She may have grown her wealth with something like a rental debt snowball plan. Or she may have done like my friend Rich Carey, who bought 20 properties for all cash while on a military salary.

If you’re interested, you’ll get much more detail about these and other wealth building strategies in my book Retire Early With Real Estate.

Living Beautifully on $78,000 per Year

Here are the financial results of the investor’s real estate portfolio.

What has this investor done for herself? She’s basically created her own early retirement pension plan.

By investing $1,200,000 over time (10 houses x $120,000), she will receive a consistent stream of $78,000 in rental income indefinitely into the future.

And if she bought in the right locations, the rental income will likely keep up with inflation over time so that she can still pay for the same lifestyle in the future.

But most importantly, her simple portfolio has bought back her time.

In my personal situation, my business partner and I have other people handling most of the day-to-day management of our 90 rental units. This translates to a schedule where we together spend two to three hours per week on our rental portfolio.

With only 10 properties like in this example, her investment of time could be even less. So, this investor has enough money and plenty of time to do what matters to her.

Sounds like an ideal financial independence to me! And she did it without owning hundreds of units in a complicated real estate business. But you may understandably have some questions and objections to this specific example. Let me address a few common ones here.

Questions, Objections, and “Yes, but …”

Of course, there are reasonable questions and objections you might bring up about this particular situation.

For example, are there possible benefits to keeping some debt instead of paying it all off?

Less debt reduces your risk, simplifies your portfolio (and life), and increases your cash flow. But it also has an opportunity cost. You may miss out on investments with a higher return on investment, and you have less of an inflation hedge.

I personally know some successful real estate early retirees with no real estate debt and others who still have a lot. My business partner and I are somewhere in between. We’ve decided to pay off some properties and keep safe debt on others.

So, there are arguments for either extreme. It’s up to you to find a place where you’re comfortable.

I also know that for some of you, an income of $78,000 per year will be more than enough—while others won’t be able to live comfortably for less than $250,000 per year.

Related: Retirement Accelerator: 7 Steps to Reach Financial Independence in 5-10 Years

That’s why you should always study principles and not get stuck on specific examples.

The principle here is that the math of an early retirement is simple. And applying that principle means plugging YOUR situation into the formula above.

How much income will YOU need to cover your expenses (E)?
What kind of return will YOU be able to generate (r)?
How much wealth will YOU need to build (W)?

So, spend a little time figuring out your goals and situation. Then get to work building a portfolio that meets your needs!

And before you leave this topic, don’t forget about the reason you’re building wealth in the first place.

Imagine a Life Where Work Is Optional

Here’s an important question for you:

If you could spend only 2-3 hours per week and generate $78,000/year in income (or however much you need), what would you do with the rest of your time?

In other words, what matters to you?

It’s an exciting question. And as I see it, it’s really the main point of everything we do financially.

Real estate investing is an amazing tool. And especially for many of us here on BiggerPockets, it’s also a lot of fun!

But tools are meant for building. And in our case, we’re building an ideal life that’s fulfilling and that makes us happy.

So, get excited about the idea of living a life where work is optional. Imagine the activities you’ll do, the people you’ll spend more time with, and the dreams you’ll fulfill.

Then get to work sharpening your real estate tools and building a life you can be proud of.

Have you run the simple math for your situation? How much wealth (or how many properties) do you need? And what will you do with your time when work is optional?

Let’s chat in the comment section below.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.