In this second Scenario, we will go over Buying a Single 5% Down Payment Owner-Occupant Property To Live In and Investing 60% in Stocks and 40% in Bonds. Here is a video where I explain both the setup of the Scenario and also go through the Charts of the output and compare it to the previous Scenario.
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Transcript of Video
Well good morning, this is James Orr and I am back continuing with the presentation of the simplified analysis of the financial independence, retire early, a kind of book that we're working on. So uh, if you remember in the last session for the blog posts, I actually covered renting a Property with 60 percent invested in stocks and 40 percent invested in bonds. And in this session I'd actually would like to cover and expand into the next one in our list, which is buying a Property with five percent down, living in the Property and then investing the rest of our savings, a 60 percent in stocks and 40 percent bonds. So if you think about it, yesterday we basically did 60 percent stocks, 40 percent bonds. Today we're doing 60 percent stocks, 40 percent bonds. The only difference is that we are a, we were renting a Property yesterday and today we are actually doing five percent down payment and owner occupying your Property.
So all the assumptions that we had yesterday were the same, you know, the same income. I think we're using $66,000 a year, which is a $5,500 per month. We are saving 20 percent of our income, which was about $1,100 a month. And so we are able to kind of do the exact same stuff. Our target Goal in retirement is the same, uh, you know, we're trying to hit a $4,400 per month target income Goal in retirement and that's this number right here. Um, and so all this stuff is basically identical to what we did before. Same 3.25 percent safe withdrawal rate. Let's see how some of this differs. So, uh, what I'm gonna do is I'm going to go over some of the details that we had with the Property. So, um, we've covered a lot of this already. I'm going to kind of skip over some of this stuff we've already covered, but I will go and talk about the Properties themselves.
So this is the Property and Property we're buying. It's what we consider to be a pretty typical family home. Five percent down payment is what we're using the buy it. We're saying that the average price, the price of the Property that we're buying is $200,000, which is very close to what the national average is. In your city, it may be a little bit higher, maybe a little bit lower, and of course you can go copy the Scenario into your own account and be able to, uh, um, you know, kind of model this on your own, change the value of the Property, change your assumptions about the interest rate, the term of the mortgage, whatever it is that you want to do, you can go ahead and model that in your own portfolio. For this case though, we've used 200,000 and actually a little note. If, um, if, uh, Holly can remind me, uh, we should put a link to the previous one we did yesterday where we can copy a copy of the Scenario into someone's The Real Estate Financial Planner™.com.
So I'll just remind me to do that. Holly, if you could, and we'll go ahead and get that added for you because I don't think I did it yesterday and I may forget to do it after the recording here. So, so the mortgage interest rate um five percent, we're using that right now in our current market. This is where I'm recording this in November of 2018, the interest rate for an owner occupant Property, is probably a little bit lower than five, but we're going to go ahead and use five now. I mean if you want to, if you're kind of doing this, listening to this recording later on, you can go ahead and change this number to be whatever the current interest rate is for a five percent down payment loan. And as a side note, because we're putting five percent down, in almost all cases, we're going to have private mortgage insurance, PMI, and so your interest rate, you could choose to take the PMI as a hit to interest rate and have a little bit higher interest rate.
And so go ahead and adjust that if it is that way. Or you can decide to pay it monthly, in which case you may actually have a slightly higher monthly payment, but that will go away once your equity reaches, usually about 20 to 25 percent of the, um, uh, you know, on your Property. So basically once the value of the Property rises up and your loan and pays down enough such that you have 20 or 25 percent equity, a lot of times somewhere in there and a lot of times it's 78 percent, for some reason the lender will actually remove PMI for you. And so that will go away. So you decide to take it for the duration and the interest rate. Or you can decide just to pay PMI for a period of time until your, your debt to income that, not debt to income, your loan to value actually gets in line with that, you know, 75 to 80 percent you can talk to your mortgage broker if you want more information about that.
So the mortgage term here, we're saying it's a 30-year loan, 360 months, we're putting five percent down. Uh, the loan amount then will be $190,000 we'll have to put $10,000 down. The monthly mortgage payment will be $1,019.96. That's just principal and interest closing costs. We're saying that's going to be one percent of the loan amount. Um, uh, so actually one percent of the purchase price. That's interesting. I wonder if we should change that. So right now it says we're using purchase price and it may actually be better to do closing costs as a function of loan amount. But we can talk about that in the future. Rent ready costs, we're doing zero because basically we're not renting it. We're living in this Property. We're getting no seller concessions on this, uh land percent, so when we calculate depreciation benefit, if you have a rental Property, which in this case we're not renting it, um so this is kind of irrelevant, but if you were actually going to rent this Property out, your depreciation is based on the value of the Property itself, the house, the structure, and not the land.
And so land value percentage. In this case we're saying it's 15 percent. That way you can figure out how much the value of the Property is and calculate what your depreciation benefit is. Since we're not renting the Property, we do not get any depreciation benefit at all. If we were renting it, we would get that. Uh, so Accounts, in this case we're depositing a, we're using the, we're pulling the down payment from the $30,000 that we started with in our stock investment Account, which is earning eight percent. And so that's where the money is coming now for the down payment and other purchase expenses. And then the income and expenses like the rent and the mortgage payments. We are saying that is going to be withdrawn or deposited, in this case, it's only withdrawn because there's no income from the Property and that's going to be done to the same stock Account.
We could change this if we wanted to and have it come from a different Account, but we're going to actually use the same one. So the appreciation rate, we're assuming that the Property is going up in value at three percent a year and that's based on a very long term appreciation rate that we've been seeing because we're going to be modeling this thing over 60 years, 720 months. Uh, we want to have the appreciation rate, the rate at which the Property goes up in value be three percent, which is the long term average we've seen nationwide. If you think yours is different, you can go out and play with this number, but I think leaving it at three percent is probably a good place to start. If you want to make it a little bit more conservative, you can bump it down a little bit. Uh, we're gonna start rent after zero months.
We're not going to rent this Property at all, but if we were going to rent it, rent would be $1,539.90, and we may show you that later when we go ahead and buy this Property and we, um, we eventually convert to a rental, not in this Scenario, but in other Scenarios, one of the 12 different Scenarios we're going to cover, we will show you how to buy this Property, live there for a year and then convert it to a rental. And if we did convert it to a rental, then the rent would be $1,539.90. And I think the reason we use that number is because cash flow on a Property with that rent will be zero. So we're gonna assume that we have break even cash flow when we do this, which I think is a pretty conservative assumption as well.
Rent is going up at three percent. Again, that's also keeping pace with inflation. So, uh, if we were gonna rent this out, which we're not in this particular Scenario, rent will be doing three percent, uh, other monthly income. If you have, you know, you're collecting money on a apartment building for coin operated laundry or you're charging your tenants for WiFi or something like that. You have other monthly income, you put it here. We don't, in this case a what rate the other monthly income is going up, you know, if you were going to raise that by three percent a year, whatever it is, you'd actually put that in here. We don't have anything for that. So here's the monthly gross potential income, which is the monthly rent plus the monthly other income, uh, so $1,539.90 plus zero is $1539.90 so that's the total amount you'd get if we were renting it, which we're not.
Vacancy, if we were renting it, we'd have a vacancy allowance which would be $46.20 per month. And that shows you your monthly gross operating income right here is a $1493.70. Again, we're not using that because we're not renting it, in this case, Property taxes, which we are paying a as estimated at $1300 a year or $108.33 per month. And the interesting thing is, because we're using a percentage of the then current Property value Property taxes go up as the value of the Property increases. So if you think about it, you know, Property taxes are about $1,300 a year right now, if the Property value goes up another 10 percent over the next three years or so, then your Property taxes would also have increased by about 10 percent. So we don't have a separate appreciation rate for Property taxes. It's kind of an important note there.
A similar thing happens with Property insurance. We're saying, hey, cost you about $800 per year, uh, to insure this Property, if you think that's low for your area, go ahead and adjust this number. Um, but basically we're saying it costs you about $800 per year or $66.67 per month. And that is based on 0.4 percent of the Property value. So the more expensive the Property you have, the more expensive Property insurance will be. So as your Property value increases, it will presumably cost more to replace it and to insure it. And so that's how we do that. If you happen to be an area that has higher insurance, you like having really low deductibles or you like having a much more comprehensive insurance policies, you can go ahead and bump that up. This is for a plain bread and butter, basic introductory Property insurance for someone with good credit and probably a reasonable, uh, constructed house.
There's so much stuff that goes into Property insurance. Um, you know, you talk to your insurance agent, you could say there's so many variables that happen. You know, your credit score, how close you are to fire department, uh, how close you are to fire hydrants, uh, the construction of the building, the material on the roof, you know, what it will cost to rebuild. Um, you know, what your deductible is, are you covering for tornadoes, for hail, for hurricanes, you know, what are you, what is included in your coverage? So insurance is a really hard one to estimate unless you call your insurance agent to get those numbers. So, uh, so yearly, a HOA Homeowner's Association, in this case, we're assuming that there is no HOA. So that's at zero and we're assuming that the HOA appreciation rate, doesn't matter what we have because it's a, it's an appreciation on zero, but we're saying it's three percent.
That's just kind of the default. If you're paying any monthly utilities, we've included this as part of your monthly expenses elsewhere. If you are renting a Property and you are responsible for part of the utilities, for example, let's say you were renting a fourplex and there was a common area, hallway or light or something like that, and you had to pay those utilities or you had to do some type of maintenance on the Property that was included as, as kind of a utility. You could go ahead and add this here. Since we're owner occupying the Property, the utilities, you pay your water, your gas, your sewer, all those things are included in your personal expenses. Not here on this analysis, uh, for this, uh, utilities appreciation rate, they're going up at three percent. Again, it's zero, so it doesn't matter other monthly expenses. In this case, we don't have other monthly expenses one or the appreciation for that or other monthly expense to where the appreciation rate for that.
So basically there's no other monthly expenses. So if you had a rental Property and there was a monthly expense that you needed to cover on that as well, you'd put that here, a maintenance on the Property. We're saying that the maintenance is $149.37 per month. So this is to cover things like the toilet breaking or you know, needing to replace the, um, you know, kitchen sink or faucet or whatever it is. Okay. So these are our maintenance expenses on your Property over time. Uh, Property management, uh, if you were going to rent this Property, we're saying that the Property management is 10 percent in this case, since we're not renting it, we don't have a Property management fee while we're living there, but those are the expenses to do that. So the operating expenses on the Property, it adds them up. Taxes, insurance, HOA utilities swoops, um, other expense, one other expense to maintenance and Property management and shows you what the total of the operating expenses are.
It calculates your net operating income, which is your gross operating income, minus operating expenses. We probably should make separate pages for each one of these descriptions and show you like how they're calculated and things of that nature. Um, I probably should do that as part of the system. So maybe Holly, um make a note of that too if you have been listening to this. So here's the net operating income shows you the difference between those two which is net operating income of this Property is $1,019.96 per month. Our cap rate, um net operating income divided by purchase price. So the cap rate on this particular Property is 6.12 about a six cap Property. If you're kinda used to using cap rate, most of the time I'm not using cap rate I'm using cash on cash return. But in this case, you know that's what it is, a monthly cash flow.
We're saying that net operating income minus your mortgage payment is your monthly cash flow. So in this case, the reason why we set rent at sort of this odd number is we wanted to artificially create this Property as a zero cash flow type Property at start now, zero cash flow after Property taxes, insurance maintenance, Property management. So this is like a true break even proposition once you include all of your expenses, including your mortgage payment and everything else on this particular Property. Now again, in this particular Scenario, we're living in the Property, so none of these things come into play, but this is kind of a prototypical Property as a template if you want to think of it that way, that we're going to use in future Scenarios and so I'm kind of taking some time to go through that now because we're going to reuse this.
Uh, the break even rent would be $1539.90. That's what we used for the rent there. And then if you wanted to see what rent is, if you had $25 a positive or $25 negative, you want it to go kind of plugged those in the see what it looks like. If you bought a Property, you can get $25 a month cash flow or negative. You could do all that. Of course, if you want to adjust it more than if you live in an area where you can get a much higher cashflow and your Properties, especially putting five percent down, go ahead and change your numbers. Or if you're going to see a, a, a, an area like ours where you have negative cash flow when you buy Properties, because that's what we're seeing in most of the Properties in my market. Then that's what it is.
We also set aside about $200 a month in capital expenses. You know, this is for replacing roofs and a furnaces and hot water heaters and stuff like that. So we're setting aside that and we're saying that that goes up by three percent per year. Okay. So this is what the Property looks like when we do that. Now what I'd like to do, go back to the Scenarios, and I'm just going to show you the Rule that we use in order to acquire this Property because we added that so the paycheck and personal expenses, this is a similar Rule to the one we had in the last kind of blog posts that we made here where we were discussing doing, renting and buying and investing 60 percent stocks and 40 percent in bonds. Except the numbers are slightly different. And the, I'll show you this actually first before we go into this stuff.
I'm going to drill into this. So this is a Rule. Remember Rules modify Accounts and Properties they are kind of what we used to manipulate the objects that are part of the Scenario. And the Scenario kind of is a, you can think of it as a bucket that holds Accounts and Properties and Rules together and kind of runs a what ifs Scenarios, what we call them Scenarios. A what if situation for your investing strategy. And so this Rule runs basically the entire duration from a month zero to month zero, which means it runs for the entire thing and you know, in the future we probably can clean this up and actually just have it be run for the entire thing and will pre-fill this in at zero zero. And maybe I'll go ahead and do that. But anyway, right now, zero, zero means that it runs through the whole Scenario.
Which, uh, which Scenario do we apply this Rule to? And you can select either all of them or one particular one we're doing the one that we're running there. Um, this is a shortcut to the Scenario. If you want to jump there from here or if you want to rerun the analysis after you've saved it, you can go ahead and click that as a shortcut. The Account to deposit the paycheck to. So we're taking this paycheck whatever the numbers down here and we are depositing it to the stocks at eight percent Account. And where are we withdrawing the personal expenses from the same Account stocks at 8 percent. So in this case, remember we said before, the assumptions for all these Scenarios is the same as far as paychecks. We are earning $5,500 per month in form of a paycheck. Now the personal expenses, if you remember from the last one, the personal expenses were a lot more and the reason why it's a lot more is in personal expenses we included the cost of rent.
When you're buying a house, we do not include the cost of the mortgage payment, taxes, insurance, all that other stuff because that gets calculated separately. So the Property itself is going to take those additional expenses. So our personal expenses, which now does not need to include rent because we already have a Property we're living in is going to be much lower. And again like the last time we are adjusting for inflation for both the paycheck and the personal expenses. And we are saying we're at 18.54 percent tax rate for the paycheck, which I think I talk about as well. So that's what this Rule looks like. The one thing I did want to point out though is that personal expenses are going to be lower. Alright, so let's go ahead back to this Scenario, and we already talked about the Property.
Talked about the paycheck and personal expenses Rules. Let's talk about this. Buy a Property when the Account has a down payment. So this is the Rule for buying a Property. So here's how it works. Basically we're saying run this for start date to end date, which is the whole Scenario. Although as soon as it buys the Property, it's going to stop. I'll show you where that happens later, but we're gonna apply it to this one Scenario. This again is shortcut, back to the Scenario or to run the analysis. You have to save it before you click on this. By the way, if you don't do that, it'll loosen the changes you did. Buy which Property, so it's, it has a select which Property we're doing and we're doing the five percent down payment. Typical family home, which is the one we kind of talked about before. And then where do we want to get the down payment from?
So we want to look for a down payment in the stocks Account that has eight percent and then what minimum Account balance do we have before we trigger this Rule. So this Rule basically says buy a Property when an Account has a down payment. So you set this really say which house do I want to buy? Which Scenario we want this to be part of, which has to, I want to buy which Account do I want to look at? And when that Account has a certain amount of money, you could say zero or you could say when it has $50,000 plus enough for the down payment, then go ahead and buy a Property using this Rule. And so right here it says, how much does the Account need to have before this Rule gets triggered? In this case we've used zero because we want to buy it month one every single time.
If we wanted to say, hey, I only want to buy this Property. If I have at least $30,000 in reserves plus enough for the down payment and closing costs, then you'd put $30,000 here for your amount and if you want to say, Hey, I want $30,000, but I want $30,000 in today's dollars, inflation adjusted dollars, I don't want to have $30,000 40 years from now, which isn't the same as $30,000 today. Then you can click off this inflation adjusted thing or not. So right now though we're using the zero because we want it to trigger immediately and we want to say we only want to buy one of these Properties. You can say, Hey, I want to buy three of these with the Rule or I want to buy 10 of them or to buy 100 of them, whatever you want to do, but in this case we only want to buy one Property.
So once this Rule is triggered and we own one of these Properties, then we actually will not buy anymore. Now an important thing to point out about this Rule, this is the maximum number of this Property to buy. Not The maximum number of times this Rule will run, so if you already happened to own, let's say you had two of these Rules and you had already happened to buy four or five Properties of the same exact Property before using a different Rule than this Property would also count those as well in the cap and it says it right here. This counts, these Dynamic Properties from all Rules, not just this Rule. So I'm trying to point out to you that it's not just by one with this Rule, it's by this many of this total Property. Okay? Okay, so that's what it does. Check this Account balance.
If it has enough for a down payment, which we're starting with $30,000, so we need about, I don't know, $12,000 or so in order to buy this Property, we're going to have enough in month one and only buy one of these Properties. And then here's some advanced features which we're not going to use. Do you want to be able to do a cash out refi in order to be able to trigger this Rule so you can either allow cash out, refinance if you own a bunch of other Properties, can you do a cash out refinance, use that money in order to say, do the cash out refi, put it in the bank Account, then use the money from the bank Account in order to buy the next Property. You can do that, but we're not gonna do that here. In this case we're basically saying do not consider cash out refinances and then it says some additional specs about the cash out refinances, the maximum cash out refi loan to value.
Seventy five percent is pretty common and then the cost and points of the cash out refi. What does it actually cost you in a says saying one percent of the new loan amount in order to do that. So we're not using these features but they are there for you for other Scenarios. Okay. Back to the Scenario itself. We talked about this Rule and the last Rule we have on here is the re-balance real, which is the same as we use last time and basically this re-balance Rule says every month for this particular Scenario, every month of the year, every year you just do January or December,
whatever it is we're doing every month, every year, go ahead and set the Account balances so that 40 percent of it is in the bonds Account and 60 percent of it is in the stocks Account. So basically once a month we look at the balances of all these. We readjust them such that there's no deficit in the, in the cash Account. The cash Account has zero, bonds are at three stocks are at a. I'm sorry, bonds are at 40 percent and stocks are at 60 percent and so we set those numbers up and then that runs every, every month based on this Rule. Okay, so then the Goals are the same. Again, we're trying to see when we will be able to hit ah retirement where the amount of money we have invested is less than that $4,400 that we need in order to maintain the same standard of living.
All right, so if we go back here and I'm going to pull up the Charts. Now we're just gonna run through a couple of Charts together. So when you pull up the Charts, um, and I just clicked on the Chart link. I don't know if you saw that I went really fast. So if you go over here and you click on the Chart icon, um, that takes you to Charts and it defaults to the net worth page. So this shows you the net worth that we have for running this particular Scenario. We start off with a net worth of about $30,000 in month one. Um, you know, we have a little bit in savings and stuff like that. So basically that shows you what the amount was when we started, and then over time it grows such that by the time you get to month 720, we have about $19.8 million dollars in, in future dollars.
Uh, if you want to adjust back to inflation, you click the inflation adjusted button and it shows you that you have about $3.3 million dollars in inflation adjusted dollars.
Okay? Turn it off. Inflation again. Now what I'd like to do is just kind of walk through some of these different Charts and show you what's happening with those so you can see them and kind of get an idea of what is happening with each one. So let's start at the top, uh, effective income tax rate. This is the effective tax rate you entered on the Scenarios page. And we're not using it in this particular case because we've set the Rule up to have a different tax rate. So you can disregard this in this particular case, but there are some things that would use this effective income tax rate. For example, the cash flow from depreciation uses this effective income tax rate.
So when you're, uh, when you're figuring out what that is, when your rental Properties, this will come into play. In this particular example, this Scenario, we're not using it at all. How much are we getting in gross paychecks. Know what I might do. I'm actually going to turn on the previous Scenario we did so that we can compare these two side by side and I'm going to show you how to do that first. And then I'll get back to gross paychecks. So right in here it shows you Scenarios to include on Chart and it shows you that we're including the five percent down payment owner occupant with 60/40 split in stocks and bonds. Okay. That's the Scenario that we're doing a Chart for. However you can go right down here and if you have more than one Scenario in your Account, you basically can select the other Scenario that you want to Chart at the same time.
And so they'll, they'll actually both appear. So in this case, this is the one we did previously for the blog posts. So renting with 60 percent, 40 percent stocks and bonds, I'm going to click on that and now it's going to show both of these on here so you can see one of them, you could see the other one and if you want to see kind of them as lines. Right now it's showing you kind of block. It happens to be the exact same line in this case because the paycheck, we're earning $5,500 a month for a paycheck and it increases.
So the paycheck is exactly the same for both of them. So this Chart is identical for both. Okay? We're earning the same paycheck no matter if we're doing this Scenario or the previous Scenario, which is what we said we said that were basically the paychecks are going to be same.
What's an inflated dollar worth? Well, a dollar today is not worth a dollar 40 years from now. And so this shows you what a dollar in the future is worth in today's dollars. So if you go out here in month 530 as an example, a dollar is worth $3.68 in today's dollars, or I'm sorry, $3.68 is worth a dollar in today's dollars is a better way of saying that. So basically it shows you what the inflated dollars worth and we use this to adjust money back into today's dollars, like when we're dealing with what our net worth is in the future, we can go ahead and divide by this 588 in the year a 60 in order to find out what the money is worth in today's dollars. So you could see both this Scenario and the previous one had the same inflated dollar. We're using the same three percent inflation rate, which is the next Chart.
So inflation rate for both of these Scenarios is three percent. And that's what we're using for month one all the way through to month 720. There are other Scenarios, more complex ones where we do different modeling where we might say, Hey, what does this look like if we have a period of hyperinflation? Um, you know, what happens if inflation rates go to three, four, five, six, seven, eight, nine, 10, whatever the number is that we want to send it to you. Well, what if inflation is variable? You know, some months we have negative inflation, some months we have positive ones, we can model that later using different things, different Rules to modify inflation rate, and the inflation rate will then Chart here to show what it is at any given time in this case. So we're using three percent static for the entire thing, minimum gross monthly, monthly income, retired income required.
So right here it tells you, you know, when you're renting this, this by the way, tells you the amount of money you need to have in order to qualify for the loans. And it's using I think a 45 percent debt to income ratio. So basically it calculates how much debt you have and it tells you how much income you need to have in order to have max out a debt to income ratio. So and then tells you what your minimum gross monthly income required is in order to be able to support that level of debt and get that mortgage so when we're renting doesn't apply. However, when we're buying a house it now shows us, hey listen, you would need to have earned $2,655 a month and not have any other auto auto debt or student loan debt or anything else in order to be able to qualify and buy this house.
And then it just shows you over time what that threshold will be when you finally do pay off the house here. Basically it significantly reduces your obligations for the debt and the gross as a taxes and insurance grow over time here. So just shows you those different numbers as to what it would be. When we start buying more and more rental Properties, this becomes much more important because we need to be able to support those rental Properties. Um, you know, taking into Account their income and the expenses for the mortgage payments and the rents and stuff. So it just shows you what that is. So you can see the two different lines there in that. Mortgage interest rate.
Again, this is the Scenario wide one and we're not really using it because we set one up for the individual Property, but in this case it would have been 4.875 for both, but we're not using it so it doesn't matter.
Net worth, this shows you the differences in the net worth. So I'll just quickly go over this now. When we're renting, by the time we get to year 60, a renter will have 13.2 million and a homeowner will have 19.8 million. Again, this is saving the exact same amount.
This is doing the exact same distribution of 60 percent stocks, 40 percent bonds, stocks earning eight percent bonds, bonds are earning three percent. The only difference here is the house. In one Scenario you buy a house, you owner occupy a house, and the other Scenario you rent and I assume that the mortgage payment and all the taxes, insurance and everything is equal to what rent is at the very start. But over time those actually diverge. We'll show you that here in a Chart. Okay, so you can go look at that if you want to zoom in and see what month 480 looks like.
You can click on that and it shows you the difference. Um, so this is month 480, not the very end, but month 480 is kind of our, our 40 year time period. And it shows you that you have a three point $3,500,000 net worth. There or $5.2. If you want to adjust for inflation, you do month 480 IA, which stands for inflation adjusted and the about a million dollars if you're renting, you have about $1,600,000. If you are a homeowner in that case, we'll go back to raw for now. Okay. So number of Properties owned in the renting Scenario is zero in the five percent down you own one Property. I know some of this seems really simple, but when you have really complex Scenarios later on where you're buying multiple Properties and you're selling Properties and all sorts of other stuff, you know the number of Properties you own when you own them becomes important.
And so this is kind of shows you some simple stuff where you're going to be able to add on this later, how much are we earning from our paycheck after tax?
So remember, we are earning $5,500 a month, but after tax we're bringing home about $4,480. And then from that we're saving about $1,100. So that's how we're figuring this out. And it's the same for both Scenarios in case I didn't point that out. So here's your personal expenses excluding real estate.
And again, renting, it includes your rent so your personal expenses are much higher, uh, when you're, when you're a homeowner a basically your personal expenses are lower, but this does not. It excludes the real estate. So it does not include the house that we bought. And so you could see the difference between these two. The difference is probably partly rent is what part of it is here, especially in the beginning. Let's take a look at it. When we include real estate though, and you'll see that in the very beginning, the expenses in month two are identical.
So why isn't it in month one? This has to do with when you buy a house, your mortgage payment is not due until you've lived in the house for a month. So if you go buy a house in January first, you basically move in January first a mortgage payment is not due because they need a month of you accumulating interest for you to be able to make an interest payment. Basically you borrow $190,000 to buy this house. The interest that is due on $190,000 that you owe doesn't actually become due until you've had a month to accumulate that interest. And so the first payment that is due February first is actually for interest that you accumulated during January when you live there for the first time.
Okay? So the first one though, the rental one, you rent the Property, you pay that rent right up front. So basically you're paying for rent in advance. When you had this one though, basically you have a really low expense for the first month and then the next month it catches up to you and you have your regular consistent mortgage payment from then on out, and so if you look at both those together, and I'm going to zoom in just looking at month one through 12 and you can see that the payments for month two are identical for whether you're renting or you're living in a house. Now after that, after month one and everything changes because your expenses, including your rent is going up three percent, your mortgage payment, your taxes and insurance are going up, but your principal and interest part of your mortgage mortgage payment are actually staying the same.
You have a fixed mortgage payment for 30 years, so your principal and interest part of your payment are identical for the next 360 payments. Okay? So over time your expenses for renting are actually increasing faster than your expenses. Um, as a, as a owner occupant homeowner, and you can see that here in this graph. Now here's the interesting thing. What's happening here? What's happening when this red line drops off, anyone know it's when we pay off the mortgage, so our expenses are really high until month 360 and then once you get past 360 months, the mortgage pays off because it's a 30 year mortgage and we no longer have a mortgage payment. We're just paying taxes and insurance and maintenance and everything else and the Property and so our expenses as a homeowner go way down as a renter. You never see that your expenses just keep going up and up and up because you never actually pay off your mortgage and so this is sort of that payoff period so you could see this difference between what your expenses are as a renter and what your expenses are.
Homeowner, that's extra money that we have invested in that stock market and bonds, 60, 40 split, so over time you're investing more as a homeowner as well. It's not just the difference between owning a home, although that's part of it. It's also that you are able to invest more because as a homeowner your cost of living is fixed and so therefore it actually is lower over a long period of time. Okay. And this does take into Account your maintenance on your Property. So this is like, you know, people that argue. Yeah, but you have to maintain a Property when you are, you know, a, a homeowner. You don't have to do that as a renter. Your landlord is go take into. Yeah, I, we get that as investors, as people that are going to be buying rental Property, we already take that into Account to the rent.
So you're paying for it, you know, you're, you're paying for these expenses on the Property, the maintenance on the Property. That's why when we calculate our stuff as a, as a landlord, we've taken into Account maintenance on the Property. We're saying, hey listen, we need to set aside money for maintenance. We know things are going to break. We know things are going to need to be replaced, we get it. Okay? So basically you can see those differences in those Charts there. And this is the one personal expenses including real estate, that's what we just covered, a target monthly income in retirement. We talked about this, we want to see it at $4,400. And again, if you don't remember, we basically said we're earning $5,500 and we're saving $1100 or 20 percent of our income. So the amount we're really living on is $4,400. And so that's how much we want to target to hit our monthly income Goal in retirement.
Once we have enough assets were using are safe withdrawal rate or rental cash flow from rental Property, we could hit that 4,400. Then we're going to say we've, we've hit functional retirement, we can decide to retire or not retire depending on what we'd like to do. And so our target for that is $4,400 for this whole time and this will will actually do inflation adjusted later to show that we want to have a lifestyle here. But really the Goal is $4,400 in today's dollars. Alright. A total cash out refi equity when we're renting, we don't have any Properties. So we have no equity in the Property that we could actually do a cash out refinance. However, when we buy a Property, if we decided we wanted to do a cashout refinance, which we're saying is 75 percent of the Property value minus the mortgage balance and it includes rentals and owner occupied Properties.
This tells us how much equity we have that if we wanted to do a cash out refinance, if we needed money for something, we could tap into it. And you could see here when we do the owner occupant Property, we don't get to the point where we have a positive balance until about month on what this is a probably about month a month 62 is when we actually go positive and we actually have some money that we could tap into. So it takes us until month 62 to have 25 percent in equity. So it takes about five years in order to have equity. We're only putting five percent down to begin with. So it takes that long in order to build up 25 percent equity Property value going up. But then overtime here we actually see that we can tap into this and by the time we get to month 60, I'm sorry, year 60 months, 720, we have almost $881,000 in equity that we could tap into into this Property.
Okay? So that's part of what's contributing to our net worth is this equity we're building up. That's “Cash Out Refi Equity”. Now equity, you can look at it three ways. You can look at just equity defined as the difference between what the value of the Property is and what I owe. That's one way to look at equity. Another way to look at equity is, Hey, what's 75 of the value of the Property minus what I owe. And that's what you could get at if you did a cash out refinance. And then we have “Sell with a Real Estate Agent”. If I were to go sell with a real estate agent, how much equity would I have? Minus the transaction costs. So let's look a look at that one. So again, renter has none. The homeowner has some, basically once they get past year, uh, actually it's not that far in.
Once they have past month seven, they will have small positive equity if they were to sell it with a real estate agent and we're defining that as 93 percent of the Property value because in most cases, and this is completely negotiable, but most cases the real estate agents are going to charge about six percent, three percent to the buyer's agent, three percent to the seller's agent. So six percent total. And we're assuming it's pure assumption that about one percent of your sale price is going to be in transaction costs. You know, your share of the title insurance, your share of the closing costs of those things might be a little bit less, maybe a little bit more depending on where you are. We're saying, Hey, about 93 percent of the Property value minus your mortgage balance and includes rentals and owner occupants is, shows you what your equity is if you were to sell with a real estate agent a at that, at that time.
Okay. And so you can see the difference between renter and homeowner is an added benefit of owning the Property. And by the way, you don't get both of these, it's one or the other, right? You can either cash out or you could sell. And so it shows you that total accessible cash out refi equity. This basically eliminates the ones where it's zero, so we no longer shows zero numbers there. Basically will show up as zero because you wouldn't do a cash out refi if it was negative. So you can go ahead and see that that's just as a similar Chart. This is the total accessible Sell with an agent so it doesn't show it to you until it gets above zero. So you can kind of see that again, a total Account balances. This sums up the, um, stock market Account, the bond Account, the cash Account, all the Accounts that shows you what your balance is there.
And you'll see that early on, you actually have more money in your Accounts when you're renting because we use some money, you know, about 10,000, $12,000 or so, whatever it was in order to put the down payment on the house and buy that. And so you could see the blue line, I'll just do months one through 12. The blue line is greater than the red because you have more money invested in stocks and bonds because you didn't buy a house. However, over time, let's do a little 306 or three, 36 months. Um, this looks like the blue line's still ahead there. Let's see where it kind of switched it over. Let's do all and red lines above there. See, it looks like it switches over somewhere in here, which is month. I don't know 109, 110. So it takes almost 10 years for you to catch up. Nine years or so for you to catch up before you actually have more money in your stocks and your bonds Accounts, uh, after buying a house.
But there are other benefits of buying the house, which we kind of pointed out some before. You have equity in the house, you have a fixed monthly expenses on that mortgage payment. The principal, it's just part of it. And so there's other benefits, but it shows you Account balances. Total cash flow with depreciation. Again, we're not renting any Property, so at zero for both. Total cumulative cash flow. In this case, there's none. A cumulative cash flow. Again, there's none. Cumulative cash flow after capital expenses, again, none. Cumulative cash flow with depreciation, none. Total cumulative Property management fees, again, none. We're not paying Property management. Total cumulative true cash flow. Again, none. Total equity though, this is kind of important one. This shows you your equity, the raw equity, just Property value minus the mortgage balance, not taking off anything for selling it, not taking 25 percent hit for doing a cash out refi.
And just so people are clear, because I know most people know this, but there may be a few people that didn't realize this, but I'm not saying it's a 25 percent cost. I'm saying that when you do your cash out refinance, in order to pull equity out of your Property, the lender will not allow you to go over 75 percent, so you always have at least 25 percent equity Property sound like that's, that's, um, you're spending 25 percent and it's going away. You still have that in your Property. It's just you can't access it. It's hard to get at unless you sell the Property. All right, so total equity though. It shows you your total equity in the Property here. And this is just the Property value difference. So you can see that. Total monthly rents, no rents on the Property, so we're not renting it out.
Total mortgage payments of rentals, we don't have any rentals, so it's not showing you that. Total Property manager fees, we don't have any Property management fees. Total amount saved. This shows you the amount you're able to save and you could see what we talked about before that month one, we have a lot that we're able to save because we didn't have a mortgage payment. We didn't have any housing costs for that first month that we bought a Property because it takes you a month in order to be able to to have interest that's due to be able to make the payment as opposed to when you're a renter. You saved less because you have that more. You have the rental payment that's due, so the first month you get a little bump with the owner occupant Property, but then in month two they're exactly the same. It's $1102.71 is where you're able to save each month.
Actually just month two and then over time they slowly get further and further apart because your expenses for the rental Property are increasing more than your expenses are. Your expenses as a renter are increasing more than your expenses as a homeowner are increasing because that principal and interest, that big part of your monthly expenses is fixed and so you're able to save more. The red line is the, uh, is the one where you're owning the Property. You're able to save more each month. That's not significant. You know, a couple of years, three years in almost the difference is about $80 a month, but over time it definitely adds up such that right here, you know, the difference between the two of them looks like, I don't know, $1,400 right before you pay off that mortgage, it's about 1400 and then after you pay off the mortgage, you know, it's like a, what is that?
That's $2500 difference. And then it gets bigger and bigger, bigger as you go. So the amount you're able to save as a homeowner is pretty substantial. All right? Total saved from paychecks. It shows you the amount you're saving from your paychecks shows you that over time. This is just the difference in the paycheck amounts between your personal expenses, especially right here. What does the calculation is a total true cash flow. We don't have any cash for a lot of Properties. We have no rentals, a total true cashflow versus Property as fees. We all have either and then the yearly safe withdrawal rate. This is the rate we're saying we're pulling out of our investment Accounts to be able to live on in retirement and we're saying that if you were able to pull out 3.25 percent of your overall asset balance per year, and we're doing this on a monthly basis, but if you look at that as a per year basis, that's a safe withdrawal rate so that you are likely to not run out of money if you're only doing that amount.
So that's kind of where that comes from. All right, so those are the Scenario Charts. If you want to see some Account Charts, we can look at those. Accounts Charts will only show up for one of the Scenarios. So if we look at Account balance, it's only going to show up for one of them and it happened to pick the one that was the five percent stock balance because you could have multiple lines on there already. We didn't want to have like six different lines showing you, you know, cash for this Account, cash for that one, so you can kind of see those there and you can see the balances so you can look at those and look through.
I'm not going to show you this right now except to show you yearly rate of return is the same as before stocks. Thirty percent. Bonds are at three percent and your cash Account is at zero, but we have a whole new set of Charts on here for our own Properties and since this owned Property does not have rentals, I'm not going to go through this.
I'm going to wait until we get to one where we have rental Properties and I'll go through all these. Although some of them apply. For example, the appreciation. It shows you how much appreciation per month you're getting on that one Property. Appreciation rates, all this other stuff, but there's a whole bunch of them like, um, you know, rents and stuff like that where it's not appropriate because we're not renting the Property. And so I'll wait until we get to a lot of these before I go through a lot of those Charts. I do want to cover one more thing before we end this video and that is Goals. So before we were talking about Goals of being able to hit our retirement number and I've charted both of the Scenarios on this. Again, both the one from renting from the last blog post and the one here where we are living in the Property and I want to show you how quickly we're able to hit our Goal, uh, for one of them and how much faster it is for the other one.
So the blue line is when we were doing the rental and if you look there, it takes us to about, I don't know, a month 609 or so in order to hit where we have 100 percent of our $4,400 per month adjusted for inflation coming from our investments. So it takes us, you know, almost what is that a 50 years in order to hit the ability for us to retire if we're renting and investing 60 percent stocks and 40 percent bonds. However, if we buy a house, it happens a little bit sooner. It happens at month on a 517 or 520 or so, somewhere in that ballpark to do that. So you could see that the red line owning a house allows us to hit our retirement number earlier. And if you scroll down a little bit, there's a table showing the kind of critical points. So renting month 609 or 50 years and nine months to do it.
If you're doing the down payments on an owner occupant Property, still doing the same investment strategy, 60/40 stocks to bonds, you can do it in month 518 or 43 years and two months in to be able to hit your number. So that's what, I don't know, seven years ish difference, uh, between the two of them. So just by buying a house, you could actually retire 7 years earlier. Um, one could even argue that it's even more pronounced when you own a house because your, your monthly payments on your house doesn't exist in retirement once you own the Property. So that's it. That's all I want to show you for today. I'm going to end the video here. I hope you enjoyed it. We will cover the next Scenario in the next video. I will talk to you soon.
Bye bye for now.
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