A Simplified Analysis of Financial Independence, Retire Early with Real Estate

I am preparing to put together a new book with a friend of mine of about 12 different Scenarios. During my preparation for writing this new book, I will be organizing my thoughts here and sharing some of the details about the 12 Scenarios.

Shared Assumptions for All Scenarios

Within these Scenarios, there are some commonalities. For example, in each Scenario we assume that we earn the exact same amount every month: $5,500. That works out to be $66,000 per year.

Furthermore, our initial assumption in each Scenario is that we are saving 20% of our $5,500 per month toward retirement. That means that we are living on $4,400 per month. You can think of the $4,400 in terms of our everyday standard of living.

Since we will focus on achieving financial independence and trying to retire early, we will need to define what retirement is. In this case, retirement is defined as having passive income equal to or greater than $4,400 per month. But, how do we define what constitutes passive income?

We will define passive income in two ways: a safe withdrawal rate from any stocks and bonds that we’ve invested in, and any true cash flow™ from rental Properties. Choosing a safe withdrawal rate is a tricky discussion in and of itself (which I won’t have here at this time), but we will be using 3.25% per year (withdrawn monthly as 3.25%/12 months).

Because this is a simplified analysis, we’ve used some overly-simplified returns for real estate, stocks and bonds.

  • Real estate is appreciating at 3% per year for both price and rent
  • Stocks are earning a return of 8% per year
  • Bonds are growing at 3% per year

Even though the Real Estate Financial Planner™ software can model much more complicated returns with market corrections and much more, we are deliberately opting not to include those in these 12 Scenarios.

In cases where we are maintaining a fixed percentage of assets (like 60% stocks and 40% bonds), we are re-balancing monthly. Also, we assume there is no cost to re-balance, which we realize may not be the case for you depending on how you’re actually implementing it in the real world.

We are assuming the inflation rate for all of the Scenarios is 3% per year.

Each Scenario begins with $30,000 in an Account.

Differences Between Scenarios

The 12 Scenarios will model and compare a few key concepts. These will be the differences between the Scenarios.

  • Renting versus owning a Property you live in
  • Different investment asset classes: stocks, stocks and bonds, rental properties with no stocks/bonds, rental properties with some stocks/bonds

Here are the 12 Scenarios that I will be writing about.

  1. Renting with 60% Invested in Stocks and 40% Invested in Bonds
  2. Buying a Single 5% Down Payment Owner-Occupant Property To Live In and Investing 60% in Stocks and 40% in Bonds
  3. Renting with 100% Invested in Stocks
  4. Renting with 100% Invested in Stocks Except Buy One 20% Down Payment Rental Property
  5. Buying Three 5% Down Payment Owner-Occupant Properties To Live In Over 3 Years (One Per Year Using the Nomad™ Strategy) and Investing 60% in Stocks and 40% in Bonds
  6. Buying a Single 5% Down Payment Owner-Occupant Property To Live In and Investing 100% in Stocks
  7. Buying Two 5% Down Payment Owner-Occupant Properties To Live In Over 2 Years (One Per Year Using the Nomad™ Strategy) and Investing 100% in Stocks
  8. Buying Ten 5% Down Payment Owner-Occupant Properties To Live In Over 10 Years (One Per Year Using the Nomad™ Strategy) But Not Investing Anything in Stocks or Bonds
  9. Renting with 100% Invested in Stocks Except Buy Ten 20% Down Payment Rental Properties
  10. Buying a Single 5% Down Payment Owner-Occupant Property To Live In and Investing 100% in Stocks Except Buy Ten 20% Down Payment Rental Properties
  11. Renting with 100% Invested in Stocks Except Buy Twenty 20% Down Payment Rental Properties
  12. Buying Ten 5% Down Payment Owner-Occupant Properties To Live In Over 10 Years (One Per Year Using the Nomad™ Strategy) and Investing 100% in Stocks

As I go into detail about each one of the Scenarios above I will provide links so you will be able to copy each of the Scenarios above into your own Real Estate Financial Planner™. This will allow you to modify or add to our starting assumptions and see how your suggested changes impact the modeling. That’s largely what the Real Estate Financial Planner™ software is all about: empowering you to test your own financial plans.

Let’s begin by looking at Renting with 60% Invested in Stocks and 40% Invested in Bonds.

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