How to Retire Early from Real Estate Investing?

How much investment property do you need to own to produce enough rental income to replace your job’s income?

Ever thought about this before? Cost of living is part of life and the income that supports your cost of living can come from many different sources, not just a job.

When you own a property and lease it out to a tenant, they in return pay you monthly income for living on your property. They are renting the property from you and you earn income from it.

As you acquire multiple properties over time, your income will grow and you will build substantial wealth allowing you to retire.

What’s the End Goal the Money Provides You?

First we need to ask you a simple question.

What are you going to do with your money?

Once you know the answer to this, you can start doing the exercise below to calculate your retirement needs.

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What Will You Do With Your Money?

As you build wealth in life, you need to know what you are going to do with it. Why accumulate all of this money?

Hopefully, you’ll take care of yourself, your family, and then have money to help others as well and giving to charity. I think you’ll find much happiness in giving.

Your main reason for having money is to cover your basic cost of living. This is step one. Then you can add in all of the additional expenses you desire in your lifestyle as well as add in how much you’ll reinvest to continue growing your wealth each year.

Check out the following 4 step process to determining your cost of living needs. You’ll also determine how much this will cost you in terms of real estate in order to produce the investment income to cover your cost of living needs.

Step 1: Determine my expected cost of living

What is it going to cost me and my family per year to live and function freely as we choose?

When I built my game plan, I had to take into account what house I want to live in one day, what cars we may be driving, how much we may spend on food and eating out, how much we will travel, what sports games we will go to, what golf course memberships will cost, other forms of entertainment, clothes, healthcare, insurance, etc.

Then I added it all up to see what my ideal happy lifestyle would cost me and my family per year. This is how much I would need to earn from investments and other forms of passive income to quit my full time or part time jobs.

net worth analysis worksheet

Step 2: Calculate the Real Estate Investments needed to equal this

Let’s say you expect to spend $100,000 per year to live comfortably and live your dream lifestyle. Now you need to determine how you’ll earn this much from real estate investing.

For example, if a rental property rents for $1,000 per month and you expect 50% of the rent to cover debt repayments and expenses, then you’ll have 50% left over to pocket. This leaves you $500 per month in cash flow for one rental unit which equates to $6,000 per year.

Therefore, you’d need to own 17 units or more to achieve $8,500 in cash flow per month which exceeds your expected spending of $8,333 per month. This $8,500 in cash flow per month for 12 months equates to $102,000 and affords you your $100,000 per year lifestyle (without getting technical about taxes).

Disclaimer: 50% was just an example above. You should do a thorough cash flow analysis on a rental property to determine what your expected cash flow will be after paying all expenses. Every property will be different but you get a good idea using the math above that 17 properties will average out to the needed retirement income for this example situation.

Step 3: Figure out the cost of one unit as well as X amount that is needed

Every city is different in real estate. In the Midwest (Michigan, Indiana, Ohio) you can find properties selling for $30,000 to $60,000 that are decent size and will rent for $800+ per month depending on number of bedrooms.

In New York and San Francisco, $60,000 won’t get you anything. Rents are $4,000 per month and a lot of the housing prices average $1 million and up.

If buying a $100,000 house in your city yields $1,400 per month in rental income and $700 in net cash flow, then you’ll need about 12 units to achieve the $100,000 per year cash flow mark.

Multiply your $100,000 house by 12 units and this would result in a rough estimation of $1.2 million needed to acquire 12 different $100,000 properties.

Step 4: Determine if you’ll use leverage to help you get there or all cash

If you decide to use bank financing or any other method of financing to help assist you in your purchases, then you’ll be able to control more real estate than you typically would with just your own limited capital.

Access to other people’s money will be key to your success.

You’ll be able to save up for a down payment rather than saving up to buy the full purchase price with cash since the bank will be supporting you and covering the rest after your down payment.

In our example, we assume you may need roughly $1.2 million dollars to earn $100,000 per year in net cash flow.

This would be an 8.33% return annually on your assets which is conservative. If you can earn 10%, you’ll need just $1 million and if you can earn 12% you’ll need just $830,000.

So how do you control $1.2 million in real estate?

Typically, banks will lend 70% loan to value. This means they’ll put up 70% of the cost of the purchase and you put up the other 30%.

In our example, you would need to have $360,000 to put down on $1.2 million in real estate and take on bank financing of $840,000.

Related: How to Buy Real Estate with Other People’s Money

Part 2: Setting Goals

In the next article of this two part series, you’ll set goals. (Click here to read it)

Having goals will help hold you accountable and promote action on your part so you aren’t stagnant and lost as to where you are going in life. Goals give you something to strive for.

Before moving on to read the next section, run the calculation we discussed to determine what your dream lifestyle cost of living will be and how much real estate you need to acquire to provide the investment income to support this lifestyle.

Pause reading…

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Okay have you ran the calculations? Great let’s talk about setting goals.

Click here to read part 2 of this series

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