trying to retire in 10 years fully from real estate

[Madi Shanahan]

I currently make 150K a year after taxes, I have no house, no bills, great credit. I’m going to buy my first 3-4 unit property within the next 3 months, but I was wondering what strategy you’d recommend for me to retire as fast as possible? How many units would I need to retire? Anyone that’s familiar with the Chicago land area and how I can completely replace my job income? 

[Steve K.]

Pretty tough math right now to replace $150k in annual income through rentals, at least if you plan to use leverage (which is the main advantage of real estate over other investment vehicles IMO). I’m not sure about your local market but it is very hard to find cashflow “off the shelf” in most markets currently using the typical 20% down/ 80% leverage (accounting for all expenses accurately that is). This is due to where interest rates are at combined with where market pricing is at. You may have to pay cash or start with negative cashflow properties in good locations that you can expect will provide positive cashflow by the time you plan to retire.

You’ll have to do your own math of course, please don’t consider these hard numbers in any way, but to demonstrate how the math would work lets say you can find properties that through rent increases between now and 10 years from now will provide $500/month cash flow in 10 years. Due to inflation you’ll want to be making more like $225k in 10 years probably, which will likely be roughly equivalent to $150k in today’s dollars assuming historical average inflation continues. Using these (very ballpark) assumptions, you will need about 38 units to retire. I’m not sure what the average cost per unit in your market is (check with a local multifamily/ commercial broker or research this yourself). I’m going to guess maybe $140k/unit? If this is accurate you would need $5.3M if paying cash or $1M if putting 20% down to get to your retirement goal. Again these are not hard numbers but probably within the ballpark. You will of course need to float any properties that you purchase with negative cashflow until they start to spin off positive cashflow so account for that in addition to the down payment/ purchase costs. It takes money to make money in any investment and real estate can be extra capital intensive at times when things go wrong like needing a new roof or new mechanicals, tenant issues etc. So be sure to keep cash on hand for black swan events. 

House hacking a new multifamily property every year or so would help you get to your goal with less capital outlay, as you can put as little as 3.5% down on an owner-occupied building, and your interest rate will be about 1% lower than non owner-occ.

I’d look into more active real estate strategies especially value-add and mid term furnished rentals, to reach your goal quicker, and I’d also recommend getting your RE license and working directly in the industry to make extra income, learn the business faster, make more connections, gain access to better deals etc. Good luck!