The Real Estate Financial Planner Blueprint™
Ep 20 Norm and Norma - The Ultimate Real Estate Agent Retirement Plan™ - 10 Properties - Discount

Final Month Summary

By the time we get to the very end of this Scenario, our net worth over time is shown below. Net worth takes into account all the Account balances as well as the equity in all the Properties.

After the final month, Month 720, the total net worth is $85,257,926.54.

Realize though that we've had 60 years of inflation. A dollar in month 720 is worth approximately $5.88 in today's dollars. So, your net worth in Month 720 is more like having the spending power of $14,506,780.94 in today's dollars. The following is an inflation adjusted chart of net worth over time.

Number of Properties

In the final month of this Scenario, you end up with 10 Properties total. The chart below shows you how many you owned and what month you acquired them.

Rents

The following chart shows the total amount of monthly rent you are receiving for all the rented Properties combined. In Month 720 you were collecting $135,589.26 in rent each month which in inflation adjusted dollars is like collecting $23,070.74 in today's dollars.

The next two charts show the monthly rent that we are collecting on each of the 10 Properties (except the one we are living in). For the first chart, it shows the monthly rents stacked on top of each other, so you can see the total sum of the rents (that we just previously showed you) for each month in the Scenario.

In the chart below, however, we are just looking at the last month, Month 720. The chart below shows the rent for each Property in that last month. Again, if we adjust for inflation so we can think about them in today's dollars, they'd be much lower.

Cash Flow

We've looked at rent, but what about cash flow? The following chart shows how our True Cash Flow™ has grown over time. In the final month, our True Cash Flow™ is $99,777.42. If we adjust for inflation, then in today's dollars that is like getting $16,977.30 per month in cash flow.

Your True Cash Flow™ of $99,777.42 per month exceeds the $0 per month that you're collecting from your gross paychecks. So, in effect, you've been able to replace your income from your paychecks with rental income.

When summing the total cash flow™ of the Properties for the chart above we are specifically excluding the Property that you are living in. The Property that you live in would, of course, have negative cash flow.

Depreciation

If you recall, depreciation is a tax benefit you receive from rental Properties. We do not get depreciation from Properties that we are living in (unless we are renting out part of the Property... but that's a discussion for you and your accountant).

With residential Properties, we can depreciate the value of the building (not the land) over 27.5 years. With commercial Properties such as multi-family Properties with 5 units or more, you can depreciate the value of the building (again, not the land) over 39 years. So, if we acquire Properties early in the Scenario, we may not be able to depreciate them for the entire duration of the Scenario.

The chart below shows the depreciation we were able to take, per month, on each rental Property.

Another way to look at this is to see how much depreciation we have combined for each Property we are able to depreciate. The following chart shows that by stacking each Property's depreciation for that month.

By the very end, Month 720, the following shows just how much depreciation we are still collecting from each rental Property.

Equity

Let's look at your equity now.

If you recall, there are really three ways to measure equity: total equity as the difference between the value of the property and the balance of any loans, total equity available via a cash out refinance and, finally, the equity available if you were to sell the property with a real estate agent (after your expenses). First, let's look at the total equity as the difference between the Property value minus any loan balances you have remaining on the Property.

In Month 720, you have $22,093,511.64 in total equity. If we adjust for inflation, that looks like you have $3,759,248.51 in total equity in today's dollars.

What about equity we could access via cash out refinances? Well, if we assume that you can only borrow 75% of the property value, then you have $16,570,133.73 in Month 720. That is like having $2,819,436.38 in cash out refinance equity in today's dollars after we adjust for inflation. If ever you needed a cash infusion to do something or pay for something, you could do a cash out refinance and access some or all of that money. It would reduce your cash flow (since you'd have an increase in monthly payment for the cash out refinance).

Then there is the third way to think about equity: the equity you'd have if you sold the Property with your favorite real estate agent. If your real estate agent charges 3% for their brokerage service and they agree to pay the real estate agent that brings the buyer an additional 3% then you're agreeing to 6% in total real estate commission. If we also assume that your share of the closing costs is an additional 1%, then there is a total cost of sale of 7% of the sale price of the Property. We can look at the amount of equity you have by taking 93% of the sale price minus your current loan balance to determine what your equity is if you were to sell your Properties with a real estate agent. In Month 720, you'd have $20,546,965.83 in total equity from all Properties. That is about $3,496,101.12 in today's dollars if we adjust for inflation.

When summarizing so far, we've shown you just your total when looking at all Properties. Below is a chart showing you the equity that each Property contributes. Each Property gets stacked on top of the previous one so you can visually see the additive effect of each Property.

The following chart breaks out each property in Month 720 so you can see the raw equity for that month for each individual Property easily.

Below is the same chart for Month 720 breaking out each Property for cash out refinance equity.

And finally, the following chart shows each individual Property's sell-with-agent equity in Month 720.

Debt Service Coverage Ratio (DSCR)

Lenders often want to look at your debt service coverage ratio to determine how much the income from your Properties covers the debt you have on your Properties. We can calculate debt service coverage ratio that by dividing your net operating income by your mortgage payment for each Property over the full term of the Scenario.

If you just look at the last month, Month 720, the following chart shows the ending debt service coverage ratio for each property. Realize that if we no longer have a mortgage payment on a property, we can no longer define the debt service coverage ratio on a particular Property since it approaches infinity.

Capitalization Rate (Cap Rate)

If we divide the net operating income by the purchase price of the Property, we can calculate capitalization rate (cap rate). The chart below shows your cap rate for each individual Property over time for the entire Scenario.

By looking just at the very last month of the Scenario, Month 720, we can see the final cap rate of each individual Property in the chart below.

Gross Rent Multiplier (GRM)

If we take the initial purchase price of the property and divide it by the annual gross rent on the Property we get gross rent multiplier. The following chart shows the gross rent multiplier for each Property over the entire Scenario.

If we want to just look at the very last month of the Scenario, Month 720, we can see the gross rent multiplier for each individual property in Month 720 in the chart below.

True Cash on Cash Return On Investment™

One of my favorite metrics for evaluating Properties is probably cash on cash return on investment. I prefer it because it takes into account the cash flow you are receiving on your Property compared to how much you had to invest in the Property to get that cash flow. Unlike cap rate which gives us the cash on cash return on investment if we owned the Property without a mortgage, cash on cash return on investment factors in the financing on the Property as well. Since financing is a reality for a large number of real estate investors and can have a huge impact on your investment, I typically prefer cash on cash to cap rate especially when comparing possible Properties to invest in.

True Cash on Cash Return On Investment™ is a special measure of cash on cash return on investment that includes cash flow from depreciation as well as capital expenses.

Below is a chart showing the True Cash on Cash Return On Investment™ for each Property for the entire duration of the Scenario.

In the chart below, we can see the True Cash on Cash Return On Investment™ for each individual property in the final month, Month 720 of the Scenario.

Remember since we calculate cash on cash return on investment as the cash flow divided by your initial investment in the Property, if you put nothing down to purchase the property (which is highly unlikely that it will really be exactly zero dollars), your cash on cash return on investment approaches infinity but is, technically, undefined. The closer you get to putting exactly zero dollars down to purchase the property, the less meaningful cash on cash return on investment becomes since it amplifies your return.

Return on Equity + Reserves

If we look at the Return on Equity + 12 Months of Reserves (ROEQ+R12™) for the last twelve months of the  Scenario, you can see how well the  Properties have performed over that period.

Property Appreciation Cash Flow Debt Paydown Cash Flow from Deprec.™ +12 Mos Reserves @ 8% ROE+R12™ Total
Typical Nomad™ Rental Property with 3% Discount 1 2.90% 6.06% 0.15% 9.11%
Typical Nomad™ Rental Property with 3% Discount 2 2.90% 6.09% 0.15% 9.15%
Typical Nomad™ Rental Property with 3% Discount 3 2.90% 5.90% 0.15% 8.95%
Typical Nomad™ Rental Property with 3% Discount 4 2.90% 6.07% 0.15% 9.13%
Typical Nomad™ Rental Property with 3% Discount 5 2.90% 6% 0.15% 9.06%
Typical Nomad™ Rental Property with 3% Discount 6 2.90% 5.90% 0.15% 8.95%
Typical Nomad™ Rental Property with 3% Discount 7 2.90% 5.90% 0.15% 8.95%
Typical Nomad™ Rental Property with 3% Discount 8 2.90% 5.93% 0.15% 8.99%
Typical Nomad™ Rental Property with 3% Discount 9 2.90% 5.90% 0.15% 8.95%
Totals: 2.90% 5.97% 0.15% 9.03%

Asset Allocation

How are assets allocated? Let's look at the final month.

And how have they looked over time up to this month?

Goals Toward Target Monthly Income in Retirement

Both Monthly Cash Flow and Total Account Balance times Safe Withdrawal Rate would contribute toward achieving these goals.

What percentage of the user Minimum Target Monthly Income in Retirement (MTMIR) goal of $5,000 per month achieved over time. This is the minimum needed to achieve financial independence.

What percentage of the Ideal Target Monthly Income in Retirement (ITMIR) goal of $10,000 per month achieved over time. This is the goal of living your ideal lifestyle in retirement.

What percentage of 2 X Ideal Target Monthly Income in Retirement (2 X ITMIR) goal of $10,000 per month achieved over time. This is the goal of having a significant margin of safety for your ideal lifestyle in retirement.

Phases of Financial Independence™

So, how did we fare with our journey toward financial independence? With a Minimum Target Monthly Income in Retirement™ of $5,000 and a Ideal Target Monthly Income in Retirement™ of $10,000 let's look at the Phases of Financial Independence™.

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