Investing in rental properties is one way of funding your retirement. According to Brook Walsh, Rental properties assure you of a predictable income stream. However, before you consider growing a property business, you need to estimate how many properties you will need to buy before your retirement.
In Denver, you can have a good range of options for rental properties. By having a definite number of properties you need, you’ll be able to develop the right strategy for your retirement goals. This article teaches you the math behind real estate in the city of Denver and how you can use it to estimate your purchases. The basic retirement rental property formula utilizes three variables which are:
- Expenses in retirement, or E
- Amount of wealth invested in the property, or W
- The income generated from the investment, or r
The formula is as follows:
E= W x r
Or W = E/r
For instance, if you estimate your retirement expenses as $35,000 per year, assuming that you find a property with a 10% investment return, the amount of wealth you need to invest in rental properties is:
How Many Properties Should You Have To Retire?
The above calculation indicates that you don’t need a retirement calculator to estimate the ideal number of properties you should invest in. You can start growing a property business using a leveraged rental retirement portfolio or through a free and clear portfolio. The leveraged portfolio involves the use of borrowed money or loans as a principal for your investment. The free and clear portfolio refers to a rental investment funded solely by the investor. Each of these options has its benefits, and investors can use both at the same time.
Whichever method of investment you choose, there are five standard steps you must follow to calculate the number of rental properties ideal for your retirement. These are:
Calculate Your Current Expenses
Your current expenses play a significant role in estimating the amount of money you should set aside for your investment. The figure helps you make the necessary adjustments and assists you to start spending less than your earnings as you save some cash for the future. You can estimate your current expenses using spreadsheets, free online data tools, or financial software apps.
Estimate Future Expenses
Estimate the number of expenses you will be making in retirement. The number can be higher or lower than your current costs depending on factors such as rental income tax and the free time available. On average, Denver imposes a rental income tax that’s around 20% of less. However, if your property is in an area that has the Medicare surtax, you’ll have to fork in an additional 3.8% tax.
List Other Potential Sources of Income
Do you plan to have other sources of income by retirement? Such sources may include dividends, bonds, interest from loans, and pensions. Feel free to add additional income streams to your retirement plan, even if real estate is the core of it.
Create A Profile of Your Retirement Property
Define the essential characteristics associated with your retirement rental property such as the property type, location, cost, debt structure, and net ROI. Liaise with real estate agents within your location to estimate these figures. Be sure to make realistic estimates that will leave you with less competition from other investors.
Calculate the Number of Properties
Step 1 to 4 above give you E, and r variables mentioned at the beginning of the article. You can now use these variables to estimate the amount of wealth you need to invest in your property business. These calculations will help you set the right milestones towards achieving your retirement goals. With this information, you can develop a solid framework for growing your property business as you focus on making your retirement years more fulfilling.