When it comes to saving for retirement, most people have a magic number in their head. It represents the amount of money they need to have saved in order to retire, feel wealthy, change jobs, etc.
But there’s a problem with this way of thinking. Let’s suppose you are 50 years old and looking to retire early. You figure you need $100,000 per year to support your desired lifestyle in retirement.
So you check the actuarial tables and see that statistically you are likely to live another 30 years. So what’s your number? Well, 30 years times $100K is $3M. But now you need to adjust for inflation. A 2% inflation rate means you’ll need to save nearly a million dollars more. So now your number is $4M.
Okay. Easy enough. Now we just need to save $4M. Let’s say you make $100K per year today. You save 20% per year. You just need to save for 200 years and you’re there. Awesome. 200 years! I think the problem with this model is obvious.
Money stuffed under the mattress, returning zero and being eaten up by inflation, will never allow you to retire early.
Now let’s run the same scenario using investment property as our vehicle.
I need $100K per year. So if I can buy a property for $100K by putting 20% down. And it cash flows $300 per month, now I’m making $3600 per year. So I need to buy 28 properties to generate $100K per year in cash flow. That’s 28 times $20,000. So I need to save $560,000 to retire vs $4M in the previous scenario.
Now if I can owner occupy a few of these properties for a year to reduce my down payment to 3.5%. And buy a few using homepath investor financing at 10%, I could probably get my blended down payment cost reduced to 8%. And if I reinvest the cash flows and use those to buy additional properties, what would it look like.
Buy 10 properties at a blended down payment of 8%. That’s $80,000 invested. Then let those 10 generate the cash flow to buy the others. 10 properties cash flowing $3600 per year is $36,000 per year. If each property takes 8% down or $8,000, I can buy 4.5 properties per year (more as we grow) just using the cash flow from the first 10.
With this plan, I’ve now retired in 4 years (the time it takes to acquire the additional 18 properties using the cash flows from the first 10) with $80,000 invested vs. 200 years with $4M in the previous scenario.
And what about inflation, you say? Historically, rental rates have risen faster than inflation. So as your rents rise, your cash flows increase, thus shielding your income from inflation.