While some people are natural workaholics, most people look forward to retiring early. According to a 2019 survey by American Advisors Group, as much as 59% of Americans aim to exit the workforce before turning 65 in hopes of getting the opportunity to travel or start a new business venture.
However, the reality is that many people today simply do not have enough savings to retire early. Whether due to life emergencies or the lack of financial knowledge, about 64% of Americans are to retire without enough savings to live comfortably in their golden years.
Rental Properties—The Answer to Retirement
Therefore, while you still can, you should start thinking about supplementing your savings with passive income to fund your retirement. One good way to do this is by getting into rental properties.
Generally, it’s a good idea to have both savings and passive income in your retirement. Since retirement is supposed to be the time to take it easy, it’s not a good idea to accrue debt while buying properties.
This article will show you how many rental properties you will need to generate income that you need to fund your retirement in these three easy steps.
- Calculate your estimated expenses in retirement. By now, you should be well aware that knowing your living expenses—and keeping it down—is one of the best ways to develop financial responsibility. As much as possible, you should keep a faithful record of all your expenses, no matter how big or small, to keep you on top of your spending. This holds true well into retirement. This is because you need to know how much you really need to earn in passive income to keep living comfortably in the long run. Truth be told, your living expenses are likely to go lower in retirement. Your kids will also be all grown up and making their own money. Aside from that, you’ll also be paying less in taxes and will get to save up on gas money now that you won’t have to drive to and from work every day. Vacations may even be cheaper now that you’re no longer confined to just two weeks of free time. Getting the true numbers will take some work but should be doable in a few hours. Once you have the figure, move on to the next step.
- Estimate the cost, debt structure, and cash-on-cash return. This is where things get a little bit more complicated. If you’re not particularly comfortable with numbers, it’s best to consult a mortgage broker in your area who knows the current rental market and can give you correct numbers and assumptions. Your cost of acquiring the property will be dependent on a lot of factors, such as property type, and location, among other things. The more important factors to consider for this exercise are the debt structure and the cash-on-cash returns. The debt structure refers to how you mean to acquire your properties. It’s generally not a good idea to accrue debt at this late stage, so it’s better to purchase properties in full. Meanwhile, the cash-on-cash return is your assumption of how much cash income you can earn annually. Cash-on-cash return is measured in percentages and is derived by dividing the amount that you wish to charge for rent annually by the amount you spent in acquiring the property.
- Calculate Rental Properties Needed to Retire To know how many properties, you’ll need to supply your retirement in rents, you first need to know how much wealth you have to invest in real estate. The basic formula is to calculate how much you need to invest in real estate is as follows: E ÷ r – W.For this, W is wealth invested, r is your desired cash-on-cash return, and E is your total living expenses. If you want to earn $80,000 annually to supplement your living expenses, for example, and you think you can earn 10% annually in cash-on-cash returns, then you will need to invest $800,000.00 in real estate properties. 80,000 ÷ 10% = 800,000.00. If you can find a property in your area that will cost $150,000 (assuming that you are paying in full, no debt), you will need four properties to retire. 800,000 ÷ 200,000 = 4. Bear in mind that these numbers are very much dependent on the property rental market in your area. The calculation is also not accounting for other sources of income you may have, such as social security pensions, stock dividends, and other investments. To get accurate numbers, you will need to spend time with your mortgage brokers and real estate agents, as well as calculate your true cost of living in retirement!
Phoenix Home Loans with Desert Springs Mortgage
Sure, being a landlord is still work, and doing building maintenance in your advanced age does not sound appealing. But this way, you get to ensure a continued source of income that you can use to fund your planned vacations and other dream ventures. If you’re serious about using rental income to supplement your retirement funds, it’s best to get in touch with your mortgage broker.
Desert Springs Mortgage is a mortgage company in Phoenix, Arizona. They offer assistance to first-time home buyers and those looking to refinance their mortgages. Connect with them today by calling (623) 432-1309 and get a free mortgage rate quote!