How real estate can change your retirement math


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Why don’t more people dream of retiring young?


It could speak to how many people love their jobs, except that’s not true: 85% of people dislike their jobs. More likely, most people just don’t think they can retire young.


Fortunately, anyone earning the median U.S. income can retire young if they want. But it requires discipline — not many people want to forgo things like driving the fanciest car possible or living in the best house they can afford.


Glad you asked. Let’s take a look at safe withdrawal rates, and how rental income changes the math on how much you need to retire early.

Safe Withdrawal Rates

In traditional retirement planning, you start by deciding how much income you want each year in retirement. Note that your target retirement income doesn’t have any connection to your current annual salary. You can and should live on far less than your current income, maintaining a high savings rate to reach your financial goals faster.


Once you know how much income you want in retirement, decide on a withdrawal rate: the percentage of your nest egg that you pull out every year to live on.


The classic safe withdrawal rate is 4% — so classic, in fact, that the “4% Rule” remains the rule of thumb for retirement planning. If you want $40,000 in annual retirement income, you would therefore need a retirement nest egg of $1 million (4% of $1 million is $40,000).


You can expect your money to last for at least 30 years, with a 4% withdrawal rate. If you want to retire young, use a 3.5% withdrawal rate, which should preserve your nest egg indefinitely. If you only need your retirement savings to last 20 years, you can potentially pull out 5% or more each year.


How Rental Properties Change the Math for Early Retirement

Say Heidi invested $50,000 apiece into four rental properties ($200,000 total investment). They rent for $1,000 apiece, and after subtracting out property taxes, landlord insurance, vacancy rates, maintenance and CapEx, Heidi is left with $500 apiece in monthly income. That’s $2,000/month total from the three properties, or $24,000/year in income from her rental properties.

Wait a second — Heidi just made over half her annual budget, but it cost her a fraction of what she would need if she invested in stocks. She invested $200,000 in rental properties, and it covers $24,000 of her $40,000 annual budget! The math just changed dramatically.


The rest of her nest egg (in her stock portfolio) only needs to provide the $14,000 difference. According to the 4% Rule for retirement, to safely withdraw $14,000/year she needs a stock portfolio of $350,000. But since she’s retiring young, she opts for a 3.5% safe withdrawal rate, which means she’ll need $400,000 in stocks to produce $14,000/year.


That puts her at $200,000 in rental properties and $400,000 in stocks, for a total of $600,000 invested to produce $40,000/year in income. Not a trivial amount of money, but because she invested in rental properties, she dropped her required nest egg from $1,142,857 to $600,000.


That’s nearly half as much as she’d have needed in stocks alone. Hot diggity dog! (Heidi can use 1940s expressions because she’s now a proud retiree.)


But she could actually reach financial independence with even less money, if she uses real estate leverage.

Leverage Changes the Math Even More

Heidi doesn’t want to pay cash for her properties. She buys them with rental property loans, at 80% LTV financing (in other words, with a 20% down payment).


Instead of buying four rental properties for $200,000 in cash, she buys four $250,000 properties by taking out loans. She makes a $50,000 down payment on each property.


Each property generates $1,250/month in net revenue, minus $630 for the mortgage, for a net monthly cash flow of $620/property. For all four properties that comes to around $2,500/month, or around $30,000 a year.


Heidi cut her cash investment in half, and now generates three-quarters of her annual revenue from rentals!


That leaves only $10,000/year of income that she needs from her stocks. Following a 3.5% withdrawal rate, that comes to $286,000 in stocks.


Wait a second Brian! It’s hard to find deals that cash flow that well!


Yes it is. But even if your rental property cash flow isn’t as strong as Heidi’s, you can still find rental properties that generate ongoing income better than stocks do. Try these tactics to find good deals on rental properties even in hot markets, coupled with these real estate negotiation techniques.

The BRRRR Method: Recycle the Same Down Payment

To accelerate your rental portfolio even faster, use the BRRRR method of real estate investing. The acronym stands for buy, renovate, rent, refinance, repeat; think of it as flipping homes, except instead of selling after renovating, you refinance and keep the property as a rental.


The beauty of the BRRRR method is that you can pull your original rental property down payment back out when you refinance. Thus, you end up financing 100% of your real estate investing costs.


You can then proceed to recycle the same funds over and over again, adding to your portfolio and passive income with each property. It’s the fastest and lowest-cash strategy I know to retire with real estate; it doesn’t just bend the 4% Rule, it throws it out entirely, because your income in retirement suddenly has no connection whatsoever to how much cash you started with.

Makes saving for retirement a bit easier, eh?


As powerful as it is, just be careful that your properties still cash flow well after refinancing to pull your money back out. Use extremely conservative numbers when you run the numbers in a rental income calculator.

Real Estate vs. Stocks for Retirement Income

So wait, why doesn’t Heidi buy nothing but rental investments for her retirement income then?


Diversity, for one reason. Do you really want all your financial eggs in one basket, when the entire income for the rest of your life is on the line?


And if we’re being honest, rental properties are not 100% passive income — they require some work, even with the best landlord software available (cough).


Diversifying your assets also gives you multiple options for withdrawing funds. When Heidi’s stock portfolio has a bad year, she can avoid selling stocks by drawing more money from her rentals. She can postpone repairs, and offer incentives to retain tenants who are thinking about moving to reduce turnovers.


Like stocks, Heidi’s rental investments may have a bad year, perhaps caused by vacancies or high repair costs. Or they may have had a great year with no repairs or vacancies. The important thing is that she’s properly calculated her average costs.


With her diverse investment strategy, Heidi can simply draw more money from her stock portfolio. In good years, she can even invest more money in her stocks!


Heidi can also invest in bonds, to add stability to her portfolio, but keep in mind that bonds suffer from inflation losses. If the inflation rate runs hot at 4%, and her Treasury bonds pay only 3%, she actually loses 1% each year. Rental properties don’t have that problem, since rents rise alongside inflation (more on hedging against inflation here). It’s why I replace bonds with real estate in my own portfolio, which says nothing of the higher annual returns you can earn on real estate.


For a better grip on how real estate and stocks counterbalance each other well, read this breakdown of real estate vs. stocks for retirement income.

Staying Flexible with Retirement “Lifeboat Strategies”

When you retire young, you have a long retirement ahead, and anything could happen.


You may find that you spend more money than you expected in retirement. With so much free time, you may want to travel more, or spend more on entertainment. And then there’s healthcare in retirement, which can be expensive without employer-sponsored health insurance plans.


Young retirees should look for ways to keep both their spending and their incomes flexible. Why not work part-time doing something fun? Or, for that matter, work full-time at a job you find fulfilling and meaningful?


You could do freelance work, offer coaching and mentoring, or consult for growing companies. Or start a business! In addition to my rental income and having launched SparkRental with Deni, I do some freelance writing for fun and to invest more. My mother tutors for extra income for investing and travel.


Many of these flexible jobs allow you to live anywhere, too. You could earn money flexibly even as you save money on alternative housing and travel the world!


For that matter, you can also reduce your spending through house hacking. But if you want to reach financial independence and retire young, be prepared to get creative in reducing your spending and maximizing your income and investments.

How Much Money Do You Need to Retire: 2022 Sample Numbers

Imagine you want to retire on $5,000 per month, or a $60,000 annual income. Here’s how you might go about combining several sources of income:

  • Rental Properties: $2,500 (you could recycle the same $50,000 down payment in a series of BRRRR strategy deals to build this up)
  • Real Estate Crowdfunding: $1,000 (requires $150,000 invested, if you averaged an 8% return)
  • Stock Dividends: $500 (requires $133,333 invested for a 4.5% dividend yield)
  • Withdrawal of Growth Stocks: $500 (requires $171,429 invested at a 3.5% withdrawal rate)
  • Municipal & Corporate Bonds: $500 (requires $120,000 invested at a 5% rate of return)

That comes to a total of $624,429 invested. More, if you leave cash tied up in each rental property. But the point is that it doesn’t take millions of dollars to reach financial independence or early retirement.


Once you reach classic “retirement age” in your 60s, you can add Social Security income as another stream. Your individual retirement account (IRA) or employer-sponsored retirement plan can help too, once you reach 59 ½. But neither helps you retire early.


You can use an HSA as another tax-sheltered retirement account as well, with no age limits on withdrawals. But it comes with lower annual contribution limits than traditional retirement accounts, and you can only use withdrawals to cover medical expenses.


Try out our free financial independence and early retirement calculator to run the numbers combining several income sources, at different investment returns.

Final Thoughts

Real estate helps you break the 4% rule in retirement planning. You only have to worry about safe withdrawal rates for your paper assets like stocks and bonds — not your real estate assets that generate ongoing income.


Of course, real estate comes with its own risks. Before counting on real estate income in retirement, make sure you know how to mitigate risk as a landlord or investor. But by investing with real estate leverage, you can easily reach financial freedom young, and perhaps even retire by 40!


As you set your own retirement goals, check out this case study of a woman who retired at 30, this woman who quit her day job in her 20s, or this man who quit his job within 18 months of starting to invest in land.

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Can real estate help you retire early?


While people have been retiring early since there was work to shirk, the “FIRE movement” went mainstream in the early 2010s, popularized by Mr. Money Mustache and a few other bloggers.


But does financial independence necessarily mean retiring early? How do you achieve financial freedom? And what hidden pros and cons of FIRE are you probably overlooking?


Here’s your 30,000-foot view of financial independence and early retirement, plus a formula to achieve it.


FIRE is an acronym for financial independence/retire early, or alternately financial independence/early retirement.


But those actually represent two distinct concepts. Early retirement refers to quitting your career job, never to return to the workforce. Or at least not to a high-stress, high-income career.


Increasingly, some retirees blur the line and continue working a fun job either full- or part-time. But more on that later.


Deposit Photos


Financial independence, sometimes called financial freedom, means being able to cover your living expenses with passive income from investments. In other words, your day job becomes optional, and you no longer need to trade time for money.

For example, say you live on $4,000 per month.


You buy a rental property that generates you $500/month in rental cash flow. You like seeing that extra $500/month come in, so you buy another property, and then another. When you have $4,000 of rental cash flow coming in each month, you can live on the rents alone. You could quit your job in a blaze of glory if you liked.


Note that the term “financial independence” has two different meanings, depending on the context. Aside from the financial freedom definition, it sometimes also means the ability to pay your own bills as an independent adult. Thus, a stoner 24-year-old who spends his days playing video games in his parents’ basement and barely working is not financially independent in either sense.


Julia_Sudnitskaya / istockphoto


You get the gist: with enough passive income, you can pay your bills and stop working if you want.


But what should you invest in to reach financial independence and retire early? How much of a nest egg do you need?


Honestly, these are the easy parts of financial independence and early retirement. Easy enough that I can explain them in a few paragraphs.


The hard part is maintaining low living expenses and a high savings rate, month in and month out.


As outlined above, you can invest in rental properties to generate passive income. And in doing so, you can bend, if not break entirely, the 4% Rule (more on that momentarily).


But as much as we love rental income around here at SparkRental, it’s far from the only type of passive income. You can earn passive streams of income from stock dividends, bonds, real estate crowdfunding investments, and countless other sources.

Rather than trying to pile all your money into one asset class, and earning all your passive income in one way, aim to create many passive streams of income.


For example, I earn money from rents, but also from stock dividends, real estate crowdfunding investments, private notes I’ve lent, and from businesses I own. No one source of my income would blow your mind, but they add up.


If you’re new to investing, I recommend starting with stock investing through a robo-advisor like Acorns or SoFi Invest. It requires no skill on your part, you can automate it, and you can start building an investment portfolio with $10.


When you’re ready for the next step of diversification, add a real estate crowdfunding platform like Fundrise or Groundfloor. It’s equally easy and passive, no expertise or work required.


Only consider buying your first rental property when you’re ready to pick up a new set of skills, and to devote lots of hours to it outside of your day job.


1989_s/ istockphoto


As outlined above, financial independence requires covering your living expenses with passive income. It doesn’t require an exact net worth.


Still, traditional financial planners tell you to save up 25 times your annual spending (not your annual income!). That’s because financial planners consider 4% a safe withdrawal rate: if you pull 4% out of your retirement portfolio in the year you retire, then adjust that upward each year for inflation, your net egg should last you at least 30 years. Financial advisors refer to this as the 4% Rule.


But if you retire at 40, you need your nest egg to last you 40-60 years, not 30. In that case, a 3.5% withdrawal rate should let your nest egg keep growing forever (see this explanation from CFP Michael Kitces for the math). Rather than multiplying your annual expenses by 25, multiply it by 28.6 to reach your target nest egg for early retirement.


Note that withdrawal rates only apply to your stocks and bonds, not your real estate investments. Your real estate generates ongoing income, with no need to sell off assets.


Most people who reach financial independence don’t actually stop working. Oh, they may quit their high-octane career job. But there are only so many days in a row you can sip margaritas on a beach before you get bored and fat.


Rather, most people simply switch to a new career that fulfills them. It may not pay well, but that doesn’t matter when you reach financial freedom. Some people start blogs or online businesses, such as travel blogs documenting their adventures. Others work for nonprofits, changing the world for the better. Some focus on writing novels, or painting, or other artistic endeavors.


But because you won’t actually stop working, you probably won’t stop earning money. You’ll just earn less than you do today — which means you don’t need to cover all of your living expenses with passive income. You just need enough to bridge the gap between what you spend and how much your dream job pays.


For example, imagine you spend $70,000 per year while working a soul-sucking job. You dream of becoming a travel writer, but that only pays $55,000. You don’t need $70,000 in passive income to quit your 9-5 job — you just need $15,000 per year, to supplement the income from your dream job.


You may not technically be financially independent, but who cares? You still get to live the same post-FIRE lifestyle without having to meet the full definition of financial freedom.




To reach financial independence and early retirement fast, cut your living expenses as low as you can. Not only does that boost your savings rate, allowing you to funnel more money into investments, it also lowers your target passive income and nest egg. Remember, for every dollar you spend in retirement, you need $25 invested (or $28.60 if you plan to retire young)!


For maximum savings in a single move, try house hacking to score free housing.

Automate your savings with a robo-advisor, or by setting up automatic recurring transfers.


When you’re ready to expand into rental properties, read up on down payment hacks to buy a rental property with no money down. But beware of using too much leverage in real estate investing, it can leave you with negative cash flow.


You’ll be surprised how quickly your investments take on a life of their own and start generating passive income. Avoid lifestyle creep as your income rises, and keep funneling your returns and passive income back into new investments.


Honestly that’s where the challenge of financial independence and early retirement lies: not in the math or investment strategies, but in the discipline of keeping your living expenses low and your savings rate high.


designer491/ iStock


The FIRE lifestyle of low living expenses and high savings comes with some surprising perks.


To begin with, recessions are less scary. As you earn more passive income, you rely less on your 9-5 job to cover your bills. If your job disappears to a recession, you can cover many of your bills with rental income, dividends, and other passive income sources.


That same lower dependence on your day job puts you in a better position to negotiate a higher salary or benefits. You can push hard because you’re less daunted by the idea of aggravating your boss. Your world wouldn’t end if you lost your job.


Those negotiated benefits could include working remotely, allowing you to move somewhere with lower cost of living. I live in Brazil for example, allowing me to live a luxurious lifestyle on relatively few US dollars each month.


You may not need life insurance or long-term disability insurance. Low living expenses and a high savings rate means your family could probably survive on one income, if one partner shuffled off this mortal coil.


While many young adults complain that student loans prevent them from investing, living a frugal lifestyle while paying them off makes it easy to keep that “extreme savings” going. You can just start funneling that money into passive income streams and retirement savings rather than student debt.


Read up on other hidden benefits of the FIRE lifestyle here.


Haters gonna hate — and the FIRE movement has plenty of haters.


Some say it involves too much sacrifice, that people pursuing FIRE save for the future at the expense of the present. As someone who saves 65% of his household income and spends months out of the year vacationing abroad, I can tell you firsthand that’s a bogus criticism.


The woke crowd might retort:


“Yeah but you’re a 40-year-old white male who owns an online business, you probably earn a boatload of money.”


I can assure you I do not. It took years for SparkRental to turn a profit, and even today we reinvest most of our profits back into the business. You know, doing evil things like hiring people and creating jobs.


To this day, my family lives almost entirely on my wife’s modest teacher salary.

Some whine that only married couples can achieve financial independence and early retirement. Others claim only single people can do it, citing marital disputes over money. They can’t both be right, but they can both be wrong.


Others worry about health insurance without employer coverage. Good thing you have so many health insurance options for early retirees.


Everyone has an excuse why they can’t build passive income and retire early. Most of them just don’t want to cut spending for a more frugal lifestyle — and there’s nothing wrong with that. By all means, live the normal suburban life keeping up with the Joneses. Just don’t tell me it’s impossible for middle-class people to retire at 40, because you’re wrong. Look no further than the Thompsons, who retired at 30.


Read the full list of FIRE movement criticisms, and the counterarguments from people actually living the FIRE lifestyle.



Love it or hate it, the FIRE movement proves that not everyone has to work the standard 40-year career. Some work for 10-20 years, invest a high percentage of their income, then reach financial independence and early retirement.


I plan to work forever — doing things I love. That includes writing, building lifestyle businesses, and perhaps working in the wine industry.


And the more passive income I earn, the less I worry about how much I earn from active income.


This article originally appeared on and was syndicated by


Featured Image Credit: PeopleImages.