Savin' his pennies for someday
Mama Leone left a note on the door
She said, Sonny, move out to the country
Workin' too hard can give you
A heart attack (ack)
You oughta know by now (oughta know)
Who needs a house out in Hackensack
Is that what you get with your money”
— Billy Joel's Movin' Out (Anthony's Song)
Anthony, the manager of a grocery store, and his wife, Martha, a school teacher decide to utilize the Nomad™ real estate investing strategy to achieve financial independence.
The happily married couple live in Hackensack, New Jersey with their 6 year-old-son and must deal with very high property taxes and what would likely be negative cash flow if they were to buy traditional rental properties with 20% as an investor.
Despite the song stating that Anthony is “savin' his pennies for someday”, Anthony and Martha are actually both savers and have managed to accumulate a nest egg of about $100,000.
They dream of financial independence, eventually quitting their jobs as manager of the local grocery store and elementary school teacher (Anthony and Martha respectively). They have about 12 more years before their son's… fully embracing the song pun… “movin' out” likely to attend college (if the song has anything to say about it… in the country).
The challenge that Anthony and Martha face is that the properties they're likely to find in Hackensack would likely have negative cash flow. In fact, looking at the Cash Flow Power Meter™ for the property, even with 20% down payment, are they likely to be worth buying even including cash flow, Cash Flow from Depreciation™ (the tax benefits of owning rental properties) and debt paydown at the beginning?
Let's look at the Cash Flow Power Meter™ below of the property self-managed with 20% down payment to find out.
As you can see in the Cash Flow Power Meter™ above, the property does get you into the debt paydown area meaning that the cash flow you get from it isn't positive with property management, isn't positive with you managing it yourself, isn't positive even taking into account the tax benefits of depreciation, and is positive taking into account the debt paydown portion or if you got an interest only loan. Not really an amazing cash flowing real estate market.
So, is it worth Anthony and Martha doing the Nomad™ strategy, would would look even worse when they put 5% down payment (instead of the 20% down payment in the Cash Flow Power Meter™ above)?
This is what the Cash Flow Power Meter™ would look like with just 5% down (but a slightly better interest rate for owner-occupant financing) if they could rent it out right away (which they can't because they're agreeing to owner-occupy it for a year when they get the loan). But, if they could rent it, this is what it might look like.
When you factor in ALL 4 areas of return from the Return on Investment Quadrant™, the returns are likely to be higher than the returns they're likely to earn in the stock market.
The challenge is that returns from appreciation and debt paydown are not able to be utilized toward financial independence and possible early retirement unless they sell or refinance the properties.
Earning Power, Savings Rate and Target Income for Financial Independence
Combined, they earn $156,000 per year. And they're currently saving a little more than 10% or about $20,000 per year of their income. That means, they're living a standard of living of about $156,000 – $20,000 or about $136,000 per year.
Dream of Financial Independence
Will they be able to replace the income they're living on, $136K per year and achieve financial independence?
Starting at age 30, how long will it take them to be able to quit their jobs? They're afraid that if they just invest the $20K per year in stocks… even if they were able to get a steady 8% per year return on their stock market portfolio… it would take them until age 67 to get to the point where they could use a 4% safe withdrawal rate to replace the $136K per year they've been accustomed to living on.
Can they do better with Nomad™? Even, with cash flow being so negative?
Find out what happens to Anthony and Martha in this Real Estate Investor Story.
- Will they be able to achieve financial independence faster than investing in stocks?
- How will their standard of living be in retirement? Can they spend more than the $136K (inflation-adjusted of course) they're currently living on now?
Drill into the
Or, copy the
Anthony Savin His Pennies for Financial Independence Someday via Nomad™ with 2 Accounts, 1 Property, 4 Rules, 1 Goal
About My Modeling Of Their Situation
- I opted to use a conservative FIXED appreciation and rent appreciation rate that matched the inflation rate of 2%. If property values and rents increase faster than inflation, it would be better… some might even argue much better than the results we're currently modeling.
- I opted to simplify the income tax modeling in this
Scenarioby including taxes as part of their personal expenses instead of calculating it separately.
- I opted to model Anthony and Martha investing money in the stock market until they have enough saved (plus some in reserves) to pay off a loan on a property in full. Then, they pay off that mortgage. They continue to save, investing in the stock market until they can pay off the next property. They repeat this process until all properties are paid off.
- It is possible, they could have stopped working earlier than shown in the
Blueprint™and “coasted into retirement”. We could run this again later.
- I opted to have them buy 10 properties then stop acquiring more.
- I have assumed they are self-managing their own properties. At some point, I suspect they'll tire of managing their properties and will opt to either liquidate properties and convert them into cash invested in stocks and live off a safe withdrawal rate from their stock holdings and/or bring in a professional property manager to manage the properties for them so they can truly retire.
- I opted to model them utilizing the Nomad™ strategy because it allows them to buy all 10 properties faster than saving up for 20% down payments to buy the properties. However, in a future update or alternate version of their story, I should run them not Nomading™ and saving up for 20% down payment properties instead.