How Much Real Estate Do You Need to Have a Steady, Livable Income?

How many rentals do you need?

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"The definition of rich is having passive income that's greater than your burn"- Scott Galloway.

I'm a big fan of the Financial Independence Retire Early (FIRE) movement. FIRE echoes the Scott Galloway quote above. FIRE focuses on extreme expense cutting and investing to retire early. This is where I deviate from FIRE. You can miss me with extreme frugality. I'm not crazy about eating canned beans for the rest of my life to keep my burn rate low. It is nice to ball out some times.

There is a retirement withdrawal strategy adopted by FIRE called the 4% rule. The 4% rule says you can safely withdraw 4% of your initial retirement portfolio balance every year, without running out of money. Let's say you want to be able to spend $10k per month without working. With the 4% rule, you would need $3 million to spend $10k per month without running out of money. $3 million is a big number. It would take forever with a W2 job to hit that. Even with real estate investing on the side. I used to be stressed about the big net worth number needed for the 4% rule. Now I realize the more important number to focus on is the $10k per month. You can generate $10k per month in passive income with much less than $3 million.

How much money do you need to stop working?

It depends on how much rental income you need to live a baller life. If you are buying existing, fully rented properties, it is a matter of calculating your cash on cash return. Cash on cash return calculates the income earned on the cash invested into the property. If you want to make $10k per month ($120k per yr), and you can get 10% COC, you would need $1.2 million to invest. At 5% COC, you would need $2.4 million. 10% COC is not that crazy to get. My properties are right around 10% COC. $1.2 million in cash is a much more manageable amount to save than $3 million. Even with a W2 job. Plenty of articles online explain how a W2 employee can hit $1.2 million in 10 yrs following a relatively risk adverse path. If you are buying solid rental properties while working the W2, there is a good chance appreciation gets you there quicker than 10 yrs.

Wall Street Oasis has a great forum. A user named Fred Fredburger shows how he gets much more than 10% COC on his properties:

"For me, before the rate hikes (when rates were ~4%), I could generate $7k/month with about $400k-$500k by doing value add deals. I would buy run down triplexes that were big enough to have 3-4 bedrooms per unit for ~$1mm (80% LTV, with 100% of the construction loan financed by the bank), ~$200k construction loan to renovate (we self-perform as the GC though), and each unit rents for ~$1000/BR, so if lets say 11 beds total, then that's $11k/month. Monthly mortgage payments on a $1mm loan is ~$4800/month @ 4%, RE taxes ~$900/month, water/sewer ~$25/BR ($275/month), insurance ~$300/month, repairs ~$200/month, electricity/gas passed through to the tenants. If you PM the property yourself, then you net ~$4500/month ($11k-$4800-$900-275-$300), if you hire a PM then that's about 5% of the total rent so $550, which brings you down to netting ~$4k/month. And this amount would basically be almost all tax free due to DePrEciAtIoN. It is a lot tougher to generate this today because rates have doubled, but RE values havent really moved much. If i were to do this same strategy today, I net only about ~$2000-$2500/month, so I would have to do about 3-4 of these to achieve $7k/month."

John Schaub, author of Building Wealth One House at a Time, has another interesting outlook. He says owning 10 free and clear homes will put you close to retirement. If you own and collect rent on 10 free and clear houses, you should be doing okay.

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