The Simple Math To Retire Early with Real Estate Investing (2024)

This post may contain affiliate links, which means that if you make a purchase through a link, I may receive a small commission at no extra cost to you. Earnings are used to keep this website running. Please read my disclaimer page for more information. I only ever include resources that I personally use and love.

The Simple Math To Retire Early with Real Estate Investing (1)

In this week’s Money Crunching Mondays post I’ll cover the question of whether you really can leave your 9-to-5 job and retire early, simply by investing in real estate. Better yet, we will review if this can be accomplished in as little as 5 years.

Let’s look at the simple math behind passive income through real estate investing.

To start out, we have to determine just what it means to retire early.

To retire you have to either:

Withdraw a percentage of your retirement/investment savings
Live off passive monthly income

Either of which will cover your monthly living expenses such that you no longer have to earn money by working.

For this example, we have to make a few assumptions:

Assumption #1: Your monthly expenses are $4,000
Assumption #2: Your monthly income is $5,000
Assumption #3: You have no retirement savings but you have saved $25,000 to use as a downpayment on your dream home.
Assumption #4: You have no debt

What we understand from these assumptions is that you need $4,000 in passive income in order to retire early. You also clearly dream of buying your dream home soon since you have diligently saved money every month, and you have a current net worth of $25,000.

So let’s see if you can go from $25,000 in savings to a comfortable early retirement in just 5 years, simply by harnessing the power of real estate investing.

Year 1: Invest your savings and buy Duplex #1

At the beginning of the year you find a local realtor that specializes in working with real estate investors. Together you find an inexpensive little duplex in a low-cost-of-living section of town.

You buy the duplex for $80,000, put 20% down and the rest ($9,000) goes to updating the units and some light repair. After you make the updates, the duplex appraises for $110,000.

Note: This means that the After Repair Value (ARV) is $110,000.

Since the property is now worth more than you paid for it, you go back to your lender and arrange for a “cash-out” refinance. You can set up a new mortgage for 75% of the ARV, allowing you to pull equity back out of the home.

Here’s what that looks like:

Down payment: $16,000
Total mortgage: $64,000 ($540/month)
Monthly mortgage payment (with tax & insurance): $540
Rehab: $9,000
Rent after rehab: $750/unit or $1,500 total
ARV: $110,000
Total amount invested: $25,000
After 6 months of ownership you refinance for 75% of ARV, $82,500 @ 5% interest
$18,500 cash out refinance
New mortgage payment with tax and insurance: $640/month
CapEx, vacancy, repairs and property management: $450/month
Cash flow: $400/month (rounded for simplicity)

End of year 1:

It took time to repair and rent each unit so your rental income for the year was $400/month for 10 months: $4,000
Your duplex appreciates at an average rate of 3% per year, therefore the value increases by $3,300
Total saved: $12,000 (regular monthly savings) + $4,000 (rental cash flow) + $18,500 (cash out refinance) = $34,500

The Simple Math To Retire Early with Real Estate Investing (2)

Year 2: Buy Duplex #2

You now have more money saved so you can invest in a better area of town. Your realtor helps you buy a duplex for $100,000. You put 20% down and apply the remaining amount to repair ($14,000). You add value to the duplex by adding a bedroom and a bathroom to each unit, increasing rental income and overall home value. The ARV is $160,000 after repairs.

Down payment: $20,000
Total mortgage: $80,000 ($650/month)
Monthly mortgage payment (with tax & insurance): $650
Rehab: $14,000
Rent after rehab: $1,000/unit or $2,000 total
ARV: $160,000
Total amount invested: $34,000
After 6 months of ownership you refinance for 75% of ARV, $120,000 @ 5% interest
$40,000 cash out refinance
New mortgage payment with tax and insurance: $860/month
CapEx, vacancy, repairs and property management: $550/month
Cash flow: $600/month

End of year 2:

It took time to repair and rent each unit so your rental income for the year was $600/month for 10 months: $6,000
Your duplex appreciates at an average rate of 3% per year, therefore the value increases by $4,800
Total saved: $12,000 (regular monthly savings) + $6,000 (rental cash flow) + $40,000 (cash out refinance) = $58,000
Monthly cash flow: $1,000

After 2 years you’re 25% there!

Year 3: Do nothing but save

$12,000 from regular savings
$12,000 from rental income
Equity build: $3,500 from duplex #1, $5,000 from duplex #2 or $8,500 total
Total annual savings: $24,000
Total overall savings: $82,000

Year 4: Buy 4-Plex #1

After searching for a few months you see a 4-plex in a nice area of town. It is in disrepair so you contact the owner. As it turns out, the owner would like to retire and would love to make an easy sale so that he no longer has to manage the units. You arrange to purchase the 4-plex for $375,000 with a 10% down payment. You agree to owner financing at 7% interest with no early payoff penalty.

Down payment: $37,500
Monthly mortgage payment: $2,250
Rehab: $40,000
Rent after rehab: $4,400
ARV: $440,000
Amount invested: $77,500
After 6 months of ownership you refinance for $330,000 @ 6% interest
$110,000 cash out refinance
New mortgage payment with tax and insurance is $2000/month
CapEx, vacancy, repairs and property management: $930/month
Cash flow: $1470/month

End of year 4:

You currently have:

$4,500 in savings after purchasing and rehabing the 4-plex
$110,000 back from the refinance
Total of $114,500 ready to invest
Total monthly cash flow: $2,470

You are now a little over halfway to early retirement!

In the next year, you repeat the process and secure another similar 4-plex. For simplicity, I’ll keep everything the same.

Year 5: Buy 4-Plex #2

Down payment: $37,500
Monthly mortgage payment: $2,250
Rehab: $40,000
Rent after rehab: $4,400
ARV: $440,000
Amount invested: $77,500
After 6 months of ownership you refinance for $330,000 @ 6% interest
$110,000 cash out refinance
New mortgage payment with tax and insurance is $2000/month
CapEx, vacancy, repairs and property management: $930/month
Cash flow: $1470/month

By the end of year 5:

Your savings is now:

$37,000 in savings after purchasing and rehabing 4-plex #2
$110,000 back from the refinance
Total of $147,000 ready to invest
Total cash flow: $3,94

Since you still have 25% equity in each property, and they appreciate an average of 3% per year, your net worth is now significantly improved.

Duplex #1:

Value at year 1: $113,300
Value at year 2: $116,699
Value at year 3: $120,200
Value at year 4: $123,806
Value at year 5: $127,520

4-Plex #1:

Value at the end of year 4: $453,200
Value at year 5: $466,800

Duplex #2:

Value at year 2: $164,800
Value at year 3: $169,744
Value at year 4: $174,836
Value at year 5: $180,081

4 Plex #2:

Value at the end of year 5: $453,200

Total property portfolio value: $1,227,600

Total equity: $307,000

Since 75% is mortgaged, that leaves $307,000 towards your net worth. Add to that your savings and you are now at $453,900 with cash flow close to $4,000 per month. With a little additional adjustment to your monthly expenses you are able to leave your full time job and either retire early or continue to build your real estate portfolio for a more relaxed retirement.

So, can you retire early with real estate investing?

In this example, starting from a nest egg of $25,000, it took a full 5 years. If you start from zero, it will take a couple years of saving $1,000/month in order to build up the initial down payment and rehab fund.

One of the many benefits to real estate investing is that with some creativity, you can get into a home for little or no money down. With creative financing or private money loans, you can get started with very little money. You also don’ t have to wait a full year between investments. For these reasons, your path to early retirement could be even quicker.

Action Step: for more info on how to purchase rental properties for no or low money down, read The Book on Investing in Real Estate with No (and Low) Money Down: Real Life Strategies for Investing in Real Estate Using Other People’s Money.

Also, remember that the amount of passive income required to retire will be very different depending on your lifestyle, family size and cost of living. Those that live in a higher cost-of-living city will likely experience higher expenses overall.

But as you can see, it is entirely possible to retire in just a few short years by taking advantage of real estate investing.