Retirement planning is a process that takes a lot of time, patience, and hard work. The very basic idea of working and saving a portion of your income (after spending the rest to live on) so that you don’t have to work for another part of your life sounds like quite the challenge. As many of my readers know, I love challenges. That is why I am going against the grain and saving like a madman to prepare for retirement, even though I am only in my mid-20s.

One of the most basic retirement rules that you should learn is diversification. Every investment portfolio should be properly diversified to protect yourself from losing it all. As I continue to fine-tune my retirement plan, I continue to obsess over the power of real estate investing. While I would never be stupid enough to limit my retirement income with just one source of revenue, I thought it would be fun to figure out how one could retire with just rental properties – and to do so with realistic numbers.

Is it Possible to Retire with Just Real Estate Income?

Before we get into the details, let’s make some basic ground rules that I will use to determine how realistic it is for someone to retire on rental properties alone – and if it is, what it would take.

Pre-Retirement after-tax Income (age 25-60): $80,000
Pre-Retirement annual expenses (age 25-60): $50,000
Money available for Real Estate Investing (age 25-60): $30,000

Based on these assumptions, let’s go through a person’s life and see what they would be able to accomplish with just real estate investments. I know, I know – It’s likely that a person’s day-job income is going to increase over time, but for simplicity, I am keeping it constant. As long as a person (or married couple) is able to create this type of revenue by the age of 25, they should be well ahead of the proposed curve.

Age 25 – 27

For the first three years, I’m going to say that this young adult is going to save her extra cash for a down payment on the first rental property and an emergency fund. This person wants to play it safe and not jeopardize her financial security by being owing more than the property is worth. In order to do that, she is able to save up $90,000 to put towards a down-payment and then have some left over for financial security.

Age 28

At age 28, she is able to buy her first rental property. Considering that a great downpayment is 20%, I’m going to assume she buys a property worth somewhere around $200,000. She puts $40,000 down and takes out a loan for the rest, owing $160,000. With an estimated 5% interest rate, her mortgage would be about $900 per month, and after insurance and taxes, her total monthly cost is approximately $1250. She is able to find a tenant within 1 month, meaning she only has to pay 1 mortgage payment by herself. The good part is that she is now able to rent out the home for $1800 per month (less than 1% of the value of the home; anytime you can get 1-2% in monthly rent of the home value, it is considered a good rental property).

This means that before any additional maintenance and hiring a property manager, she receives $550 per month in profit. For purposes of being conservative, I’m going to assume that she pays $350 between hiring a property manager (which is optional) and maintenance, leaving her with $200 per month in net profit.

Total money out-of-pocket: $41,250.
Remaining Savings: $48,750 (90,000-41,250)

Real Estate Revenue: $2,400 annually

Age 30

After a year of owning her first rental property, the new landlord is anxious to build her portfolio, but wants to build up her savings again. She waits until the end of this year, when she has an additional $64,800 to invest before making the leap. Now that she is more experienced, it is likely that she finds a better deal, but for simplicity purposes, let’s assume the same price as the last one. She find a similar property (invest in what you know) for $200,000 despite the market increasing in which she can also rent out at $1,800 per month.

Total money out-of-pocket for this property: $41,250
Remaining Savings: $72,300 (48,750+60,000-41,250+4800)

Real Estate Annual Revenue: $4,800

Ages 31-32

She continues to save her day-job income and real estate net income for two more years, before making another leap into real estate. For the past two years, she has saved up an additional $69,600 with which she decides to buy two more properties. As you can see below, this lowers her savings significantly, but she now has a significantly larger real estate income to pay for any unexpected expenses (as well as some more equity in the first two properties) to allow her enough security to sleep at night.

Total money out-of-pocket for 2 new properties: $82,500
Remaining Savings: $59,400 (72,300+69,600-82,500)

Real Estate Annual Revenue: $9,600

Potential Retirement Income

If Mrs. Real Estate investor in this scenario were to be satisfied with the four properties that she owns and is tired of looking for new properties, she could stop investing in new properties. Assuming she does not choose to pay down the mortgages any faster than scheduled, she would see the following increases in annual revenue at the following ages:

Age 58 – Extra $10,800 in revenue after Property #1 is paid off, making total revenue: $20,400
Age 60 – Extra $10,800 in revenue after Property #2 is paid off, making total revenue: $31,200
Age 62 – Extra $21,600 in revenue after properties #3 & 4 are paid off, making total revenue $52,800.

Considering that the expenses are higher than her pre-retirement expenses, I’d say it’s safe to assume that someone can retire off of rental properties alone.

Not Convinced?

If you are not convinced that this shows someone can retire on rental properties, please consider the following:

• In this scenario, I did not include the potential savings that Mrs. Investor could have used on real estate or otherwise from ages 32 – 58. That’s 26 years of savings that were not put to work to produce retirement income!
• I also did not factor in the likely annual increase in rent that she would be eligible to cash in on, thereby increasing her annual revenue from her four properties.
• I also assumed that she hired a property manager for all four properties.
• I was conservative in the ratio of property value to rent income. This could be closer to 2%, thereby almost doubling her income.
• I also assumed that she only had $30,000 to invest each year. It’s definitely possible with a middle-class income to save more than that each year. Not for everyone, but for many.