{"id":101481,"date":"2020-02-21T09:00:17","date_gmt":"2020-02-21T16:00:17","guid":{"rendered":"https:\/\/www.biggerpockets.com\/renewsblog\/?p=101481"},"modified":"2024-02-13T18:36:32","modified_gmt":"2024-02-14T01:36:32","slug":"the-simple-math-of-early-retirement-with-real-estate","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/the-simple-math-of-early-retirement-with-real-estate","title":{"rendered":"The Simple Math of Early Retirement With Real Estate [With Real-Life Example!]"},"content":{"rendered":"
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\u201cSimplicity, 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.\u201d \u2014Henry David Thoreau, Walden<\/em><\/p>\n<\/blockquote>\n

Despite what you may hear from \u201csuccessful\u201d 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<\/a>.<\/p>\n

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.<\/p>\n

You can gain an enormous amount of freedom with a much simpler real estate portfolio than you might imagine.<\/p>\n

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

No Real Estate Retirement Calculators Needed<\/h2>\n

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.<\/p>\n

I personally like the retirement calculators at CanIRetireYet.com<\/a> and FinancialMentor.com<\/a>.<\/p>\n

But luckily, the real estate early retirement math is a lot simpler. In fact, it\u2019s so simple you could do it on the back of a napkin (or if you’re a non-conformist like Thoreau, on your thumbnail).<\/p>\n

The math has three variables:<\/p>\n

    \n
  1. Your expenses in early retirement (E) <\/span><\/li>\n
  2. Your wealth invested in real estate (W) <\/span><\/li>\n
  3. The conservative income yield or cash-on-cash return on that wealth (r) <\/span><\/li>\n<\/ol>\n

    The basic formula with these three variables is this:<\/span><\/p>\n

    W \u00d7 r = E <\/strong><\/p>\n

    or<\/p>\n

    E \u00f7 r = W <\/strong><\/p><\/blockquote>\n

    For example, let\u2019s 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\u2019s also assume you can find properties with a 10 percent cash-on-cash yield.<\/p>\n

    This means you need wealth (aka equity) of $700,000 in real estate.<\/p>\n

    Here\u2019s the formula:<\/p>\n

    $70,000 \u00f7 10% = W<\/strong><\/p>\n

    $700,000 = W<\/strong><\/p><\/blockquote>\n

    If that math doesn\u2019t work for your situation, you can change each of those three variables as needed.<\/p>\n

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

    $100,000 \u00f7 10% = W<\/strong><\/p>\n

    $1,000,000 = W<\/strong><\/p><\/blockquote>\n

    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.<\/p>\n

    So if you only receive a 6 percent yield, you will need to invest $1,666,667.<\/p>\n

    $100,000 \u00f7 6% = W <\/strong><\/p>\n

    $1,666,667 = W <\/strong><\/p><\/blockquote>\n

    Simple math, isn\u2019t it?<\/p>\n

    But let\u2019s look at an example to translate it to real life. This example assumes an investor owns 10 free-and-clear (no debt) rental properties.<\/p>\n

    \"great-deal\"
    \n
    \nRelated:<\/strong>     Does the 4% Retirement Spending Rule Still Hold Up\u2014And Where Do Rentals Fit in?<\/a><\/em><\/p>\n

    10 Debt-Free Properties and a Comfortable Early Retirement<\/h2>\n

    In this scenario, an investor owns 10 rental properties. She then uses them to retire early.<\/p>\n

    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.<\/p>\n

    The assumptions for the rental properties in this example are as follows:<\/p>\n

    Rental Property Assumptions<\/h3>\n