Key Takeaways:

– Retirement requires rental income to maintain current standard of living

– Calculation of number of properties needed to replace current income

– Inflation and rent growth rates affect future rental income and buying power

– Investing in locations with rent growth higher than inflation can maintain standard of living

– Down payment on properties depends on appreciation and low prices

– Cash-out refinance can be used to acquire more properties

– Slow rent growth and appreciation require all investment dollars to come from savings

– Rapid rent growth and appreciation offset inflation and allow for use of cash-out refinancing

– Importance of finding an investor-friendly agent for real estate investing success

– Note: Opinions expressed by author, not representative of BiggerPockets.

BiggerPockets:

Before discussing how to calculate the number of properties needed to replace your current income, understand that retirement is not a one-time event. Retirement requires rental income that will enable you to maintain your current standard of living for the rest of your life.

## How Many Properties Do You Need?

If there is no inflation, the number of properties you need to replace your current income is easy to calculate. For example, if your current income is $9,000 per month and each rental property nets $300 per month, you need 30 properties ($9,000/$300 = 30 properties).

However, the reality is that there will be inflation. For the following example, I will assume that the average inflation will be 5% and the rent growth rate will be 2%. Under these conditions, how will your future rental income compare to the buying power of $9,000 today?

I will calculate the present value (inflation-adjusted) buying power in years five, 10, and 15 using this formula:

*FV = PV x (1 + r)^n / (1 + R)^n*

Where:

**R:**Annual inflation rate %**r:**Annual appreciation or rent growth %**N:**The number of years into the future**PV:**The rent or price today**FV:**The future value in today’s dollar value

Calculating the future buying power:

**After five years:***$9,000 x (1 + 2%)^5 / (1 + 5%)^5 ? $7,786.***After 10 years:***$9,000 x (1 + 2%)^10 / (1 + 5%)^10 ? $6,735.***After 15 years:***$9,000 x (1 + 2%)^15 / (1 + 5%)^15 ? $5,826.*

Since rents don’t keep up with inflation, your purchasing power will decrease over time, forcing you back into the job market.

But what if you invest in a location where rents increase faster than inflation? For example, suppose you buy in a city where rents rise 7% and inflation is 5%. How will future rental income compare to the buying power of $9,000 today?

**After five years:***$9,000 x (1 + 7%)^5 / (1 + 5%)^5 ? $9,890***After 10 years:***$9,000 x (1 + 7%)^10 / (1 + 5%)^10 ? $10,869***After 15 years:***$9,000 x (1 + 7%)^15 / (1 + 5%)^15 ? $11,944*

Because rents increase faster than inflation, you’ll have the additional income required to cover rising costs in the future. This will enable you to maintain your current standard of living.

The next question to address is: How much cash from your savings will be needed for the down payment on 30 properties?

### It Depends on Appreciation

Suppose you buy property in a city with low prices. Prices are low because of limited demand over several previous years. I will assume that each property costs $200,000, and you will have a 25% down payment.

The cash from your savings for the down payments on 30 properties will be:

*30 properties x ($200,000 x 25%)/Property = $1,500,000*

Accumulating $1.5 million in after-tax savings will be challenging for most. However, there is a way to acquire 30 properties at only a fraction of the capital.

Suppose you buy in a city with significant, sustained population growth, which resulted in rapid appreciation. In the following example, I will assume an average appreciation rate of 7% and that each property costs $400,000 due to higher demand.

Assuming a 25% down payment, the cash from your savings for the first property will be:

*$400,000 x 25% = $100,000*

Because the value of the property is rapidly increasing, you can use a cash-out refinance for the down payment on your next property. For example, assume the appreciation rate is 7%, you will use a 75% cash-out refinance, and the current mortgage payoff is $300,000. How many years will it take to have net proceeds of $100,000?

The formula I will use is:

*Net Cash = PV x (1 + r)^n – mortgage payoff*

**After year 1:**$400,000 x (1 + 7%)^1 x 75% – $300,000 ? $21,000**After year 2:**$400,000 x (1 + 7%)^2 x 75% – $300,000 ? $43,470**After year 3:**$400,000 x (1 + 7%)^3 x 75% – $300,000 ? $67,513**After year 4:**$400,000 x (1 + 7%)^4 x 75% – $300,000 ? $93,239**After year 5:**$400,000 x (1 + 7%)^5 x 75% – $300,000 ? $120,766

So, after about five years, the net proceeds will be enough for the down payment on the next property. Growing your portfolio using a cash-out refinance greatly reduces the amount you pull from your savings.

## Final Thoughts

If you buy in a city with slow rent growth and appreciation:

- Properties will cost less.
- Your inflation-adjusted income will continuously decline due to rents not keeping pace with inflation, and you will be forced to get a job or keep buying more properties.
- All investment dollars must come from your savings.

If you buy in a city with rapid rent growth and appreciation:

- Properties will cost more.
- Increasing rents will offset the effects of inflation, enabling you to maintain your standard of living.
- You can use cash-out refinancing to acquire additional properties, requiring far less capital from your savings.

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**Note By BiggerPockets:** These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

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Property Chomp’s Take:

Retirement is often seen as a one-time event, but in reality, it requires a steady stream of rental income to sustain your current standard of living for the rest of your life. So, how many properties do you actually need to replace your current income? Let’s break it down.

First, let’s assume there is no inflation. If your current income is $9,000 per month and each rental property brings in $300 per month, then you would need 30 properties to generate the same income ($9,000/$300 = 30 properties).

However, the reality is that there will be inflation. Let’s assume an average inflation rate of 5% and a rent growth rate of 2%. Under these conditions, how does your future rental income compare to the buying power of $9,000 today?

To calculate the future buying power, we can use the formula: FV = PV x (1 + r)^n / (1 + R)^n

Where:

R: Annual inflation rate %

r: Annual appreciation or rent growth %

N: Number of years into the future

PV: Rent or price today

FV: Future value in today’s dollar value

After five years: $9,000 x (1 + 2%)^5 / (1 + 5%)^5 = $7,786

After ten years: $9,000 x (1 + 2%)^10 / (1 + 5%)^10 = $6,735

After fifteen years: $9,000 x (1 + 2%)^15 / (1 + 5%)^15 = $5,826

As you can see, due to rents not keeping up with inflation, your purchasing power will decrease over time, potentially forcing you back into the job market.

But what if you invest in a location where rents increase faster than inflation? Let’s say you buy in a city where rents rise by 7% while inflation is 5%. How does future rental income compare to the buying power of $9,000 today?

After five years: $9,000 x (1 + 7%)^5 / (1 + 5%)^5 = $9,890

After ten years: $9,000 x (1 + 7%)^10 / (1 + 5%)^10 = $10,869

After fifteen years: $9,000 x (1 + 7%)^15 / (1 + 5%)^15 = $11,944

In this scenario, where rents increase faster than inflation, you would have the additional income needed to cover rising costs in the future, allowing you to maintain your current standard of living.

Now, let’s address the question of how much cash from your savings will be needed for the down payment on 30 properties. This will depend on appreciation.

Suppose you buy property in a city with low prices due to limited demand over several previous years. Assuming each property costs $200,000 and you have a 25% down payment, the cash from your savings for the down payments on 30 properties would be: 30 properties x ($200,000 x 25%) = $1,500,000

Accumulating $1.5 million in after-tax savings can be challenging for most individuals. However, there is a way to acquire 30 properties at only a fraction of the capital.

Suppose you buy in a city with significant and sustained population growth, resulting in rapid appreciation. Assuming an average appreciation rate of 7% and each property costing $400,000 due to higher demand, you can use a cash-out refinance strategy.

With a 25% down payment on the first property ($400,000 x 25% = $100,000), you can take advantage of the property’s rapid appreciation to obtain a cash-out refinance for the down payment on your next property. For example, assuming a 75% cash-out refinance and a current mortgage payoff of $300,000, you can calculate how many years it will take to have net proceeds of $100,000.

After year 1: $400,000 x (1 + 7%)^1 x 75% – $300,000 = $21,000

After year 2: $400,000 x (1 + 7%)^2 x 75% – $300,000 = $43,470

After year 3: $400,000 x (1 + 7%)^3 x 75% – $300,000 = $67,513

After year 4: $400,000 x (1 + 7%)^4 x 75% – $300,000 = $93,239

After year 5: $400,000 x (1 + 7%)^5 x 75% – $300,000 = $120,766

As you can see, after about five years, the net proceeds from the cash-out refinance will be enough for the down payment on the next property. This strategy allows you to grow your portfolio using a cash-out refinance, significantly reducing the amount you need to pull from your savings.

In conclusion, buying in a city with slow rent growth and appreciation may result in lower property costs, but your inflation-adjusted income will continuously decline over time. On the other hand, buying in a city with rapid rent growth and appreciation may lead to higher property costs, but increasing rents will offset the effects of inflation, allowing you to maintain your standard of living. Additionally, using cash-out refinancing can help you acquire more properties with less capital from your savings.

Keep in mind that these are opinions and strategies discussed in this article. It’s essential to do thorough research and consult with professionals before making any investment decisions.