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How To Find Your Perfect Retirement Investment Property

Published on Monday - January 02, 2017

Rental properties aren’t just a great way to inject your short-term finances with much-needed cash, but they can also offer a path to building long-term financial wealth through streams of passive income.

It’s worth noting, however, that most would-be rental property investors have a few questions: When developing a retirement investment property strategy to build wealth for the golden years, how many rental properties will I need? Better yet, how do I know exactly how much income I’ll need for retirement? And how can I be sure that I’ve made the proper calculations to ensure I’m protected when retirement age comes?

Here’s a quick step-by-step approach showing you the ins and outs of creating a retirement investment property strategy, and making sure you’re more than ready when the time to enjoy the golden years comes.

Retirement Investment Property 101

Prepare for retirement

What is a retirement investment property?

As the name suggests, retirement investment properties are assets in which you derive tangible, passive income — through consistent rental payments from tenants — from real estate you own. Though most people think of rental properties as exclusively single-family dwellings, rental properties that serve as retirement investments can take many different forms: single-family, multifamily, office, retail, etc.

What makes rental properties one of the best retirement investments available is their predictability. When occupied, a retirement investment property provides a steady, reliable source of income you can depend on. Perhaps the most attractive selling point of a retirement investment property, however, is its ability to create a continually profitable asset using somebody else’s money, namely using your tenant’s income to pay off the mortgage of a property.

This isn’t to say acquiring retirement investment properties is an overnight strategy, but by adding one property after another to your retirement portfolio, you can slowly build a lucrative nest egg (without having to pay for nest materials yourself).

Begin With the End in Mind

So how do you determine how many rental properties you need? Well, this will depend on how much income you require over the course of your retirement.

This is figured by establishing three key elements:

  • How many years of retirement you need to account for (a life expectancy of 85 years is a good benchmark)
  • How much cash you’ll require each year (80 percent of your current income level is recommended)
  • How much cash you currently have saved

For example, if you you currently make $100,000 and plan to work until you’re 65 — and have $50,000 saved — your equation would look something like this:

  • 20 years of retirement
  • MULTIPLIED by $80,000/year (80 percent of your current income)
  • MINUS $50,000 (money saved)
  • Which EQUALS 1.5 million dollars needed for retirement

Yikes! Well, certainly that pension fund or Social Security will help knock down that monumental number a bit. Or will it?

A Most Inconvenient Truth

The topic of Social Security is a controversial — and politically-charged — one. All we’ll say on the subject is Social Security should be a supplement to your retirement income, not the primary source of your retirement income.

As the Motley Fool addressed in a recent column, “Social Security is quickly burning through its reserves and scheduled only be able to cover 77 percent of promised benefits beginning in 2034.”

This wouldn’t be so bad if it wasn’t for the fact that, as the Motley Fool reported, 36 percent of American adults over 65 weren’t completely dependent on Social Security. And another 63 percent are dependent (but not reliant) on Social Security, relatives, friends or charity at age 65.

So, how do you combat the possibility that Social Security may not exist in the future? Well, one good strategy is to create a portfolio of retirement investment properties.

Finding Your Magic Number

Discovering how many rental properties you’ll need to retire just requires a bit of simple arithmetic.

  • Take the amount you need to retire (number of retirement years MULTIPLIED by your desired yearly income MINUS money saved)
  •  DIVIDE that number by the estimated monthly income from each rental unit

Now, of course, this final number will depend on a variety of factors: location of your rental properties, condition of the properties, vacancy rates, etc. But a good rule-of-thumb number is to expect — after you pay off the mortgage of the rental property and deduct taxes, repairs and property management fees — approximately $400-$500 per tenant, from each rental unit.

So, if we take this number and put it into our formula it would look something like this:

  • 1.5 million dollars (Amount we need for retirement minus money saved)
  • DIVIDED by the number of years in retirement (20)
  • DIVIDED by 12 (Months in a year)
  • DIVIDED by $400 (Average rental income per unit)

In doing so, we come up with a much more attainable number of 15.625 (we can round up to 16 just to be on the safe side.) This means your retirement investment property goal is 16 rental units at $400/month.

And this doesn’t necessarily mean 16 rental properties, but rather 16 rental units (meaning we could have a commercial property or apartment complex with multiple properties that help us reach our retirement goals).

Turning a Dream Into a Goal

Using real estate as the basis for retirement income and bringing cash flow to your golden years is not an overnight strategy. Doing so requires dedication, knowledge, time and capital to acquire the real estate needed to establish a healthy retirement investment property portfolio.

But by picking up pen and paper — and doing a bit of number-crunching — you’ll find that mythical goal of learning how to invest for retirement with real estate becomes less like wishful-thinking and more like concrete reality.

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