There are plenty of reasons that people invest in the Detroit real estate market, but building wealth for the future is always one of the most prominent. The ability to build wealth for retirement, especially in something like real estate that continues to generate income, is an appealing option. With that in mind, many new investors want to know how many properties they need to own in order to fund their retirement. While there isn’t a single “one size fits all” answer to a question like that, there are plenty of stats out there that can give you a better idea about how many properties you need to add to your portfolio in order to retire with confidence.
Laying the Foundation Before Investments
Before you start investing in properties, it’s important that you assess how much money you have and how much you think you’ll need to retire. Based on recent studies, the average American needs $1.8 million to retire comfortably when they’re 64 years old. If that number seems alarming, take a moment and consider some other factors.
For instance, do you plan on retiring at 64? There are plenty of people who enjoy their jobs and want to work as long as they’re physically able to do so. There’s certainly no rule that says you have to stop working at 64, and if you plan on working beyond that point, you won’t need that amount. Additionally, take the time to consider your current health. While there’s no way to guarantee your long-term health, you should certainly consider it.
Some retirement experts say that you should have between 80% and 90% of your annual income before quitting work. This typically comes to around 12 times the amount that you used to make each year.
With these numbers in place as a foundation, you can better determine how many properties you need to invest in before retiring. If you’re in a position to retire with $1.5 million in a retirement account, you may not need to invest in as many properties as someone who is looking toward retirement with $500,000.
The Rental Property Retirement Formula
Detroit real estate investors who want to use their investments to fund retirement can use some specialized formulas to determine the right strategy for them. For instance, when deciding how many properties you need to invest in, use the following formula:
The monthly amount you need to retire / monthly cash flow per property = the number of properties you need.
For instance, if you need $5,000 to retire and you generate $1,000 per month from each rental property, you would need five rental properties to retire comfortably. This formula does not take any existing retirement funds into account.
Now, with that formula in mind, you need to know what cash flow is in the formula. Cash flow is the amount of rent that you charge per month minus the monthly mortgage costs of the property and any operating expenses.
Let’s look at another example to understand this. In the previous example, we assumed that you were generating $1,000 per month on each property. This number probably won’t apply to the current Detroit rental market, but for the sake of clarity, let’s use some round numbers that are easy to work with.
In order to generate $1,000 per month on each property, you need to be sure that you charge enough rent to leave you with that amount of profit. Additionally, you’ll need to add any of the ongoing maintenance costs associated with the property to the rent. If your monthly mortgage is $800 per month and you designate $200 a month for maintenance and other fees, that’s another $1,000 that you’ll need to add to the monthly rent to generate $1,000 in cash flow.
Based on the numbers that we’ve looked at here, you would need to rent five properties at $2,000 per month to make $5,000 per month in profit.
How Does the 1% Rule Apply to the Detroit Rental Market?
The formula that we already looked at is one proven method of determining how many Detroit rental properties you should invest in to retire, but this isn’t the only formula to consider. While the 1% rule doesn’t really focus on how many properties you should buy, it does give you a good idea about which properties you should consider adding to your portfolio, and which properties you should avoid altogether.
The 1% rule states that a property should generate at least 1% of its purchase price in monthly rent. For instance, if you buy a property for $150,000, the 1% rule states that this property should generate at least $1,500 per month in rent. Properties that generate more than 1% are certainly valuable assets, but they’re hard to find. Conversely, properties that generate less than 1% of their purchase price each month take longer to pay off and cut into your long-term profitability.
What is the 50% Rule in Real Estate Investing?
The 1% rule isn’t the only thing to consider. The 50% rule says that a Detroit real estate investor should assume that 50% of the money generated by an investment property is going to go toward expenses such as property taxes, maintenance, repairs, vacancies, landlord’s insurance, and more. Unfortunately, Michigan has some of the highest property taxes in the United States, and as the owner of a rental property in Detroit, you’ll be responsible for paying those taxes.
Funding Your Retirement Through Real Estate is Possible
You can certainly set yourself up for a comfortable, prosperous retirement by investing in the Detroit real estate market. However, it’s important that you do so with a strategy in place that sets you up for success.
That’s why it’s so important to work with a team of industry professionals who not only know Detroit real estate but also know how to help you build your retirement account. The team at Upside Investments not only knows Detroit real estate, but we’ve helped countless people fund their retirement. Contact us today to find out how we can help you.
