Whitney from Phoenix asks.

How many apartment units do you think I would need to retire comfortably if I’m just relying on the monthly cash flow. I’m finding it hard to project the cash flow into the future and properly model for inflation. Any thoughts on how I can analyze and plan would be helpful.


Well Whitney, this is a great question. I’m not sure how many years you have until retirement. But let’s talk about the process of investing through the entire lifecycle of a property portfolio. When you’re starting out, chances are good that you’re going to be relying on other people’s money to help you buy the property. That’s true if you’re going to be using bank money and even more true if you’re going to be bringing equity investors along for the ride.

Let’s start with a simple example just to make the numbers really clear. Let’s say that your goal is to generate $10,000 a month in cash flow from real estate. If you are borrowing funds from the bank at something approaching 80% loan to value, you’re going to be producing only a small amount of cash flow each month. This might be no more than $100-$200 per month. If you’re like most people, the loan is going to be amortized over 25 years. So you’re going to be facing very low cash flow per unit for the next 25 years. That’s a long time to wait for the property to be paid off.

Let’s say the property is generating $100 a month in cash flow. You would need at least 100 units to generate that cash flow. In the real world, with reserves for long term maintenance, your actual cash flow can end up being even lower. You could need even 200 units to generate that amount of cash flow. If you have equity investors and you are sharing the ownership with partners, you then only own a fraction of the portfolio. If you own 50% of the portfolio then you would need 400 units to achieve that $100,000 a year in income. If you own 25%, that’s 800 units. I know what you’re thinking, that’s a lot of units and it’s going to take me a long time to amass that many units.

You could wait the 25 years, at the end of which you own the 200 units free and clear.

The fact is, properties that carry no debt generate a tremendous amount of cash flow. If you owned those 200 units free and clear, you could easily expect about $800 a month in positive cash flow per unit. That’s 160,000 a month in cash flow. But you’ve got to wait 25 years to get that cash flow. In the meantime, you’re barely squeezing by. Not only that, you’ve got to build a huge portfolio and manage it for 25 years in order to achieve an incredible monthly cash flow.

What if you don’t want to wait 25 years. What if you’re in your early 50’s and you only have 15 years until retirement. You’re worried that you’re running out of time. Well, there is a shortcut that can help you dramatically.

If you’re facing a 25 year amortization, you will pay off 30% of that loan balance in the first 10 year.

Let’s say that you buy one property of 50 units each year for 4 years. At the end of 4 years you own those 200 units. Let’s say that you hold them for 10 years and at the end of 10 years you decide to sell 75% of the portfolio. You’re now left with 50 units. You may have some capital gains, and you decide you will pay the capital gains tax on the properties you sold. So you may have some additional equity apart from the principal pay down on your loan. Remember, the principal pay down over those 10 years was paid out of after-tax income, so the equity you accumulated in principal pay down is already in after-tax dollars.

So after 10 years you decide to take the cash proceeds from the sale of the 150 units and fully pay off the remaining loan on the 50 units that you are still holding. Now you have 50 units that you hold free and clear.

Those 50 units will generate 40,000 a month in positive cash flow. That’s more than enough to meet your retirement objectives.