Despite what some investing gurus tell you, you don’t need to create a real estate empire. Simply investing some of your nest egg in rental properties for retirement income can complement your Social Security/IRAs enough to make real estate investing worthwhile.

If you’re looking to learn what role real estate – an asset class that’s uncorrelated to the volatile stock market – could play in your retirement planning, or how to boost your retirement income with rentals, read on.

First, it’s essential to understand the economics of a single-family rental property, as this kind of bread-and-butter investment property type will be the basic building block for your real estate portfolio.

In the example (Figure 1), you’ll see two scenarios for a $200k investment property: one is purchased with financing, and the other is all-cash.

As shown in the first pro forma, the financing option would require a $40K down payment (20% down) and some closing costs for an all-in investment of $50K. Below that, we see the monthly income statement, with rent of $1,600 and total expenses of $1,449 netting $151 of monthly cash flow, or $1,816 per year.

Your first-year return-on-investment (or cash-on-cash return) is $1,816 divided by your $50K investment, or 3.6%. As rents increase over time, your returns will increase accordingly.

Under the all-cash option in the second pro forma, the initial investment is the total purchase price of $200,000. Closing costs are lower because you wouldn’t be paying points and other fees for financing. There’s no mortgage, so your cash flow would be higher at $1,157 per month, or $13,888 per year, for a return of 6.8% on your initial investment.

With $200K to invest, you could buy one house all-cash or four houses with financing. Which is better?

As shown in Figure 1, your cash-on-cash return is higher under the all-cash scenario because interest rates are relatively high, so your mortgage payment is high. Four houses with financing would get you $604 per month vs. $1,157 per month for one house purchased all-cash. If your retirement is imminent, buying all-cash might be the way to go.

However, if your retirement is 10 or more years away, you’d be better off buying four houses with leverage. With time on your side, four homes appreciating will grow your net worth faster than one home appreciating, so using leverage will build your portfolio faster and accelerate your results.

The leveraged cash flow of $151 per month isn’t a life-changing number for retirement rental income, and it is not going to get you rich. However, its purpose is to keep you solvent over those 10 years so that the rental property can pay for itself while it’s appreciating. All you have to do is plant the seed by investing the down payment and then letting it grow.

Your wealth will come from investing in a $200K rental property that will grow your equity by $100K over 10 years, and even more so if you buy four of them. Let’s see how that works.

At a modest annual appreciation rate of 4.0%, the property appreciates by almost $85K over ten years. Your tenants will pay down the mortgage for you, adding another $24K of principal paydown to your returns for a total of $109,021.

While real estate offers cash flow, appreciation, principal paydown, and tax benefits, most of your long-term returns will come from the appreciation and principal paydown. The example of a single home in Figure 2 shows how powerful this is.

If you buy four such rental properties for retirement in this scenario, your net worth will have grown by $436K in just 10 years!

We started this discussion by assuming you had $200,000 to invest and had to decide whether to buy one house all-cash vs four houses with leverage. But suppose you don’t have $200,000 right now? In that case, you can follow this same strategy, only you’d have to space out your purchases over time.

You could buy one house per year for four years, or one house every two years. The economics are the same; it’s just that your equity growth will be spread over a longer period. Instead of increasing your net worth by $436K in 10 years, it might take you 12. But you’ll still be better off for having done it.

Do you remember where you were in 2015? It seems like yesterday, doesn’t it? If you had bought four properties then, you’d have $400K (plus or minus) of additional net worth today, a significant addition to your retirement nest egg.

Similarly, ten years from now, in the year 2035, you’ll look back and be glad you purchased four rental properties back in 2025.

To find out what a real estate portfolio would look like for you, join RealWealth to view sample property pro formas and schedule a one-on-one strategy session with an experienced investment counselor, like me. There is never any pressure to buy. It’s all about giving you the resources, connections, and confidence you need to invest smartly. Membership is 100% free!