Real Estate FIRE: How to Count Rental Income in Your Number

To include rentals in your FIRE number, subtract your reliable net rental cash flow (after vacancy, repairs, reserves, management, taxes, insurance and mortgage payments) from your annual spending, then multiply the remaining gap by 25 to find the portfolio you still need. If you plan to live entirely on rentals, your target becomes a net cash-flow figure, which you can hit with fewer properties by paying off their mortgages. The most common mistake is using rent minus mortgage as “income.” It overstates what you’ll actually have to spend, often several times over.

Here’s how to calculate true cash flow, the two ways to build it into a FIRE plan, and the risks that deserve a margin.

Step 1: Calculate true net cash flow #

A property that rents for $2,000 with a $1,000 mortgage payment doesn’t produce $1,000 a month. Here’s a more realistic monthly budget:

A few notes on those lines:

• Capital expenditures are the big, irregular costs: roofs, HVAC, water heaters, appliances. They don’t show up every month, but they will show up. A reserve spreads them out.
• Budget for management even if you self-manage. At some point you’ll want to travel, or stop taking tenant calls. If the numbers only work while you do everything yourself, you’ve built a job, not a retirement income.
• Vacancy depends on your market and property. Use your local experience, not a national average.

Your real percentages will differ. The point is to use your actual numbers after every cost, not a hopeful estimate.

Step 2: Choose how rentals fit your plan #

Method A: The offset (stocks plus rentals) #

Most people hold index funds and a few rentals. The rentals cover part of your spending, and the portfolio covers the rest.

1. Annual spending in retirement: $80,000
2. Reliable net rental cash flow: three properties at a combined $1,500 a month = $18,000
3. Gap the portfolio must cover: $80,000 − $18,000 = $62,000
4. Portfolio FIRE number: $62,000 × 25 = $1,550,000

Without the rentals, you’d need $2,000,000. The rentals lower your portfolio target by $450,000. That’s the same logic as counting a pension or Social Security. Our guide to a FIRE number with a pension uses the identical approach.

Only count cash flow you’re confident will continue. If a property is marginal, count part of it, or none.

Method B: Pure rental income #

If you plan to live only on rentals and not sell stocks at all, your target is a cash-flow number.

1. Spending with a safety margin: $80,000 plus 15% = $92,000
2. Net cash flow per property (with a mortgage): say $4,000 a year
3. Properties needed: $92,000 ÷ $4,000 = 23

That’s a lot of properties to own and manage. Paying off mortgages changes the math. If a paid-off property nets $12,000 a year, you need $92,000 ÷ $12,000 = about 8 free-and-clear properties. Many real-estate-focused early retirees aim for a smaller number of paid-off properties for exactly this reason.

Step 3: Understand the tax side #

Rental income is taxed differently from wages or 401(k) withdrawals, which affects how much you really keep. In the U.S.:

• Depreciation. You can deduct the cost of a residential rental building (not the land) over 27.5 years. This often shelters much of your cash flow from income tax while you own the property.
• Depreciation recapture. When you sell, the depreciation you took (or could have taken) is taxed, up to 25%. The tax is postponed, not avoided.
• Passive loss limits. Rental losses are generally passive. Many landlords can deduct up to $25,000 of losses against other income, but that allowance phases out between $100,000 and $150,000 of modified AGI.
• Health insurance subsidies. Net rental income after depreciation counts toward ACA marketplace income, which matters if you’re buying your own coverage before 65. See health insurance in early retirement.

Rules are detailed and change, so check IRS Publication 527 or ask a tax professional before relying on any of this.

Step 4: Don’t count what you can’t spend #

Two things look good on a net worth statement but won’t pay for groceries:

• Principal paydown. Your tenants pay down the mortgage each month, which builds equity. Good for net worth, but you can’t spend it without selling or refinancing.
• Appreciation. Property value growth is real, but it’s only spending money when you sell or borrow against it.

Count equity in your FIRE plan only if you actually plan to sell a property and invest the proceeds. Otherwise, count the income.

Risks to build a margin for #

• Concentration. With three properties, one bad tenant or one big repair can wipe out a third of your rental income for a year. Keep a separate cash reserve. Some landlords hold several months of expenses per property.
• Liability. Landlord insurance and an umbrella policy are part of the cost of doing business, not optional extras.
• Rising costs. Rents tend to rise over time, but property taxes, insurance and repair labor rise too, and insurance has been especially volatile in some states. Assume costs grow at least as fast as rent.
• Interest rate risk. A fixed-rate mortgage payment stays flat as rents rise, which is a real advantage. Adjustable-rate or balloon loans don’t offer that.
• Your time. Even with a manager, owning rentals involves decisions, paperwork and occasional emergencies.

A diversified index portfolio has none of these specific risks, though it has others. Many people use both for that reason. If you’re weighing rentals against an income-focused stock portfolio, compare the numbers in how much dividend income you need to retire early.

Putting the numbers into a plan #

Once you know your gap, the rest works like any other FIRE plan. Retire Goals doesn’t track properties or rental cash flow, but it handles the portfolio side well. Enter your spending minus your reliable rental income into the FIRE Number calculator to get the portfolio target, then set that as a FIRE goal and log contributions to see a projected date and the odds of reaching it. If you’re saving for another property, a separate custom goal keeps the down payment from blurring your retirement projection.

For the base formula and variations, see how to calculate your FIRE number.

Frequently asked questions #

Should I pay off rental mortgages before I retire? #

It lowers risk and raises cash flow, so you need fewer properties to cover your spending. Keeping a low-rate, fixed mortgage lets borrowed money keep working for you and may earn more over time. Many landlords pay off some properties for a stable base and keep modest debt on others.

Does rental property equity count toward my FIRE number? #

Only if you plan to sell and invest the proceeds. Otherwise, count the property’s net cash flow in the offset calculation instead. Equity in your own home doesn’t count either, unless you plan to downsize or sell.

Is the 1% rule good enough for FIRE planning? #

No. The 1% rule (monthly rent at least 1% of purchase price) is a quick screen for deals. For retirement planning, use your actual expenses, vacancy, reserves and financing to calculate true net cash flow.

Does rental income keep up with inflation? #

Often, over long periods, but not reliably year to year, and costs like taxes, insurance and repairs tend to rise too. A fixed-rate mortgage helps, because that payment doesn’t grow. Build in a margin rather than assuming rents will always outpace costs.