Real estate investments and rental properties can be a reliable means of generating income throughout your retirement. Investors get immediate cash flow, but also create wealth that lasts beyond their lifetime.

There’s no magic formula for how many rental properties investors need to retire. The ideal number of rental properties depends on factors like retirement expenses, investment portfolio, and how much wealth individuals are able to invest.

Why Should You Retire With Rental Income?

Between stocks, bonds, and other kinds of investments, why should investors opt for rental properties to fund their retirement? Most professionals recommend diversifying the risk of portfolio assets, but to transition to lower risk assets as individuals approach retirement.

At that point, people are looking to preserve their capital to maintain and enjoy their retirement lifestyle. Rental properties may not offer the same return as stocks, but provide reliable income to comfortably cover retirement expenses.

How Much Income Do You Need To Retire?

The first step to knowing how many rental properties someone might need is determining retirement expenses. Investors should look at current monthly expenses and identify any factors that might increase or decrease expenses in the future, such as lifestyle changes or inflation.

Retirees often face increased expenses as they indulge in travel or experience unforeseen medical costs. They should account for the extra time they'll have for post-retirement activities when estimating monthly and annual expenses.

Which Rental Properties Should You Buy?

Investors use cash-on-cash return calculations to determine the pre-tax cash income earned on the wealth invested in a property. Most generally won’t be able to exceed 10%, but should aim for at least 6%.

Factors such as the type of property, location, price, and rental income will affect return potential. Investors should also consider any property management fees or other rental property cost, then use that research to determine how much average cash flow each rental property will generate.

Calculating Investment Needed

Once investors know what to expect for expenses and rental property return, they can use that information to determine how much they'll need to invest.

The first step in this math is to divide expenses by cash-on-cash return. For instance, if an individual requires $100,000 annually for retirement and expects a 10% cash-on-cash return, they'll need to invest about $1,250,000.

Put It All Together

Once the amount needed to invest is determined, the math is pretty straightforward. If properties in the market sell for about $250,000, the investor needs five rental properties. If properties sell for $150,000, they'll need about eight properties.

This simplistic approach won’t be a perfect prediction for rental property investment, but these calculations give a solid strategy framework. However, factors like market conditions or expense changes might require investors to re-evaluate their investment strategy.