I am sure eventually you will ask yourself this question and you’ll probably come up with a gigantic number like $10 million or $20 million. Being dejected by the sheer magnitude of the thought, you’ll throw in the towel and quit before you even begin trying to achieve financial independence. But if you first figure out what your current monthly expenditures are, and then work backwards from that number you will end up with a sum that is MUCH, MUCH smaller. If you are like the average middle class American family, your household income is $56,5161. This figure comes from the latest Federal Reserve numbers that we have on record.
I will assume that you are comfortable with your lifestyle and that you and your family fall near the median household income $56,516. This would mean that the monthly income needed to live a middle class life is $56,516/12 = $4,709.67 a month. This means in order for you to ride off into the sunset and give the world the middle finger, you will need to generate $4,709.67 without physically working for the money. So how much money do you need in order to generate that amount monthly? Hint: not $20 million dollars!
What would be some of the ways that you could go about generating $4,709.67 a month with little to no physical requirements on your behalf. I think that the first, and most realistic, strategy would be to acquire income producing real estate that pays you on a monthly basis. The rental income is generally talked about on a per door basis. A single family home is considered one door, a duplex two doors, and so on. Most real estate investors will tell you that they are looking for pure profit of about $250-$275 per door, per month. Using this example one could say that a quadruplex (4 units) would give us $1,000 to $1,100 in profits per month. What this means is that you would need approximately 17-18 units of rental real estate to never work again. Or put differently (4) quadruplexes and (1) duplex.
You might be saying, “Yeah but I will be plunging the toilets, painting bedrooms, and having to evict tenants! That doesn’t sound like retirement to me”. No you won’t. People who own massive amounts of rental units use what are called real estate management companies. They act as the buffer between you and your tenants. If a toilet breaks at 2 am, they call the plumber for you. If a tenant doesn’t pay up, they serve them with the eviction notice. Take everything annoying you can think of that is associated with being a landlord, and they handle it. The fee they charge for this service is 8-10% of the gross rental amount. So if the unit rents for $1200, $120 a month comes off the top and goes to the rental agent.
So how does one acquire the 18 units? If you have the cash…just buy them. But I doubt anybody reading this would actually have the funds lying around to buy the properties outright. Most likely you will need to mortgage the properties. In order to get a mortgage for investment real estate you will need 20-25% down. A quick check online will show that you can find quadruplexes in most non-urban parts of the country for $300,000 or less. Following this logic that means each door will cost around $75,000. You need 18 doors, so 18 * 75000 = $1,350,000. So the total price for all the units $1.35 million, but we don’t need that much we only need 25% of that which is 1350000 * .25 = $337,500.
Yep, you just need to come up with $337,500 and you could live off the cashflow of the rental units and never work again. That is way less than the amount most people think of when they start to dream of retirement. Actually you can find deals in Florida, which is where I live, on quadruplexes for $170,000 or $42,500 a unit. Plug this into the formula from above and you would only need (18*42500)*.25 = $191,250.00 in down payments. Yes, $191,250.00 and you’ll never have to clock in at a job you hate again. I am assuming that you are a little skeptical so let me break down an example deal for you.
Here is an example property that cost $169,0002 and has stated gross income of $24,300 a year. That’s about $2,025 a month in rental income. Our cost of financing will look something like this: $42,250 down, with a 5.5% interest rate on a 30 year mortgage of $126,750. Our monthly mortgage payment will be $720. The insurance would be about $83 a month. The taxes are about $115 a month. And let us not forget the rental agents cut, which is $202.50 a month. So if this property is fully occupied it would net $2,025 – (720+83+115+202.50) = $904.50 per month. Not too bad! Now there are other things to consider like occupancy rates and what-not, but you get the gist. I literally just pick what looked like a decent deal off loopnet, did a little math and found a property that will cash flow $226.12 a unit.
I did this as a thought exercise to break people out of the mindframe that they will be working until the day they drop. You can do this, there is nothing standing in your way. If you have bad credit read my blog post how I boosted my score 200 points in less than 2 years. If you can’t save money, read my blog post about how you can save 3 grand a year by just changing your breakfast and lunch habits. I really hope you enjoyed reading this as much as I enjoyed writing it for you. If you have any questions or comments feel free to contact me via the email address provided.
Household income in the United States:
Quadruplex used in example