The Simple Math of Early Retirement With Real Estate [With Real-Life Example!]

by | BiggerPockets.com

“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 (click on free app on right side) 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:

  1. Your expenses in early retirement (E)
  2. Your wealth invested in real estate (W)
  3. 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.

great-deal

Related: Does the 4% Retirement Spending Rule Still Hold Up—And Where Do Rentals Fit in?

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 (available now for preorder).

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 2-3 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 comments section below.

About Author

Chad Carson

Chad Carson invests in Clemson, South Carolina. He also writes at coachcarson.com about using real estate investing to retire early & do what matters. For practical advice each week — join his free newsletter at coachcarson.com/newsletter.

23 Comments

    • Mark J Donahue

      Love how it sounds on paper, but here in IL just ouside Chicago 120k will buy you a 60 year old home in rough area. Unfortunately the older home Maintaince will eat you alive and appreciation is minimal. Please correct me if I am wrong….

      • Chad Carson

        Remember that it’s about the principles and not the numbers themselves. If you have to buy $300,000 properties to do the same thing, that’s ok. We are in an up cycle so prices are higher than before all over the country, but people are still finding deals in every area.

        So, once you have a big picture goal (like in this article), then start finding people locally who are making it work and study how they do it so you can apply their lessons.

        • susan bates

          Do I have a list of realtors/ companies who u can work with out if state( ie want to invest in midwest or south but live in northwest / CA etc high priced markets ) and whom would then manage your off site property for reasonable amount?

      • Tony Provenzano

        Mark,
        There are a lot of cities with high prices (even higher than Chicago). If your net worth is to small for your area … Look outside your area. I sell in Oklahoma to investors from California. They are always amazed at what Oklahoma offers for a low prices. The investors stick with 3 bed 2 bath brick homes built since 2000 and only in the top two school districts. These homes average around 175K. and there are plenty of places similar to this maybe even lower. So broaden your horizon and look for an area that “fits” your budget. THX

        • Mark J Donahue

          Hi Tony thanks for the feedback. I do have 2 6 unit buildings in the city of Chicago that I do very well on but was looking into single family homes not only for rental income but appreciation. Can you share some insights on what rent on the properties you speak of as well as real estate taxes

    • Chad Carson

      Welcome to the fun real estate game, Nicholas! As a newbie, these big picture strategies are important to get you going in the right direction. But in the end, just getting that first deal (and perhaps working on credit or alternative financing sources) is your #1 project.

  1. Lee Ripma

    I think the formula doesn’t take into account doing value add on properties, it just assumes you are buying cash flow and paying down a mortgage. There is a better way to reuse that same capital to build up the portfolio buy adding value and refinancing.

    • Chad Carson

      Hi Lee, you can use value add, BRRRR, or any other core real estate strategy with this formula. It would just be the method of how you acquired the 10 properties in the first place before paying them off.

      The theme of 25+ successful early retirees I interviewed in the book were to use a variety of tools to accomplish the goal. But they all still pointed their various real estate strategies toward the end goal (I.e. what matters) and paying for it with income from properties.

      • Matt Mainini

        Chad, it sounds like you’re writing a book about early retirement by interviewing those who have done it, and breaking-down the themes and tips that you’ve researched, likely in addition to your own story. The main page for the book does not interest me as much as what you’ve written here in your comment. I would love to read a book about 25+ early retirees and what strategies they’ve done, independently and as a summary of themes. I hope that’s what you’re writing, rather than a “do it like this ONE way” approach. Either way props on doing all the sharing of information. Thanks!

  2. Mark K.

    Chad,

    I hope you enjoyed your time in Ecuador. I lived in Panama for about 2 1/2 years and 3 years in Puerto Rico, both while in the Navy. I really loved Panama and have been back several times since then.

    I have your latest book on order. I can’t wait to get it in to read it. I’ve been in touch with Rich as well.

    I currently have 6 doors, 3 SFR and 1 triplex. I have mortgages on all 4 properties. I’m currently trying to decide do I want to move forward and buy more properties. Or, do I want to try to pay off my cheapest mortgage before buying more.

    I’m leaning toward paying a lot extra on the cheapest mortgage to pay it off sooner, and to also work toward getting another SFR or two within the next 6-9 months.

    I hope to meet you one day.

    • Chad Carson

      Hey Mark,
      sounds like awesome experiences in Panama and Puerto Rico. I’d love to visit both places. Ecuador was amazing for our entire family.

      Thanks for ordering the book!

      There are arguments both ways for keeping or paying it off. But if it’s a small mortgage and you can still swing some other purchases, seems to make sense to me. It’s nice to sometimes make conservative, risk-reducing decisions along with growth decisions. It’s a smart way to build wealth long run.

      Good luck and hope to meet you as well!

  3. Bob Ebaugh

    Having followed this basic strategy ourselves, 10 properties, 15 doors, very little leverage = early retirement. Works.

    We have only a single mortgage on one property, that is about 7% of the total portfolio. About 3/4 of the properties are in our Solo 401K Plan. We built the portfolio from existing IRA/401K balances and after tax savings in about 12 months at near the bottom of the last downturn in 2013. Some comments on the experience (opinions, not necessarily facts):

    1) It helps to not like the traditional securities markets. We don’t. The best return we ever got long term (15+ years) was about 5%. Why? Bad timing. My crystal ball is very cloudy trying to predict stock market trends, but in 2013 it was really clear real estate was beat down, creating a great investment opportunity. Today is not 2013, I still like real estate, it’s just going to be harder to find the right opportunities. Perhaps forcing you to pick the right locations that might not be in your backyard.

    2) Using the Solo 401K to hold the property makes distributing the early retirement more challenging until you get to 59 1/2. I never found a good way around this problem if we wanted to operate the properties for Cashflow under the 401K umbrella. This might make a Self directed IRA a better option for some. Or proper planning in advance and Roth conversions.

    3) If using our crazy healthcare system prior to Medicare, then it limits your retirement income (or at least incurs a tax penalty). All of this is today…who knows tomorrow, but there is a $17-18,000 penalty for distributing 1 dollar more than 400% of the poverty level incomes if you are on an Obamacare/ACA Plan. This goes away at 65, but if your gonna retire earlier, and don’t have options beyond the ACA marketplace, keep it in mind. Spendable retirement dollars impacted sooner with 401K distributions, but even if all property is owned with post tax dollars, the tax cliff is still out there, but easier to avoid.

    4) Don’t underestimate CAPEX on the rentals. We did a little. We’ve been saved by $750 rents are now more like $1050-1100 on turnovers and still creeping up for long term tenants. But we’ve replaced probably 2x the number of new roofs and air conditioners over the last 4 years than I expected going in.

    5) More leverage = higher returns and more income, but also = more properties, which = more work. The purpose of the exercise is to retire, not start a new full time job. For discussion, if you can borrow at 5%, and your all cash cap rate is 7%, you make 7% on your cash invested and 2% on the part owned by the bank. So 5 all cash, 100,000 houses net you $35,000 per month. 10 50/50 houses net you $45,000. Ok it’s more…but it’s also 2x the work. Oh…and if you blow the projections and cap rate isn’t what you expect, you could get hurt, or that extra 10K is the first to evaporate. YMMV.

    6) Nothing we can do now…but all of our rentals are in the same 3-4 sq mile area. That’s good until a hurricane pops through. Ours are all high and dry, and fully insured, but the long term “market risk” both for rentals and eventual sales isn’t very diverse. Our primary exposure is hurricanes, but other places it could be earthquakes, floods, or even that nearby military base closure or a large group of factories downsizing. I kind of wish we had at least diversified into 2 different markets.

    Hope these thoughts are helpful to someone.

  4. MJ Meneley

    Great article…this aligns very closely with my plan. I currently have two rentals and am in the process of purchasing my third. My first rental is getting close to being paid off so I was able to use a HELOC on it to get a down payment for the next one. No plans to grow an empire, but slowly but surely acquiring properties and paying them off. It is very exciting to see those mortgages go down, especially when they are being paid for by rent! Looking forward to the snowball that will happen when I get the first mortgage paid off and start seeing much more net cash flow to put toward the others.

  5. Tracy Selfridge

    Love the simplicity of this Chad (Go Tigers btw). I think for a lot of folks and for myself included, the key is making the “W” in your equation. People with not a lot of money to invest need to figure out a way to make more money per time. And there are several ways. Things like building a low cost startup business with systems and processes that allow low amounts of time to manage it. Get promotions at your current employer. Find sales jobs in which one can make more money(which is my approach, just passed my SC real estate exam today!). The key is finding a way to make more money for your time in this stage. Because you need the “W” to invest, otherwise you have nothing to invest! So folks that are just starting out with not a lot of money or experience, find a way to make more money for your time.

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