Do I need to buy houses at a discount with Nomad?
No, you do not need to buy houses at a discount to make the Nomad model work… but it can help in some situations.
First, I should remind you that one of the reasons we really started to investigate the Nomad model was because our local real estate market was incredibly hot that properties were receiving multiple offers and selling for above asking price. So, Nomad was first modeled for extremely strong real estate markets and you do NOT need to buy homes at a discount to make the plain vanilla version of Nomad work.
With that being said, I will say that if you can in your real estate market buy homes at a discount without having to come out of pocket additional money to do fix up on the property, I encourage you to buy at a discount.
However, if buying at a discount requires that you put money into the property in addition to your down payment… I’d encourage you to really evaluate the return on investment including that extra money that you put into purchase.
One of the advantages of Nomad is that you can do it with very little or nothing down. Having to put money into repairs to capture additional equity often does not make sense.
If you do plan to use the lease option exit variation of Nomad, then buying at a discount will definitely help because you’re capturing extra equity that you’ll get back out in a reasonable amount of time when the lease option tenant buyer purchases the property from you.
Buying at a discount also will improve cash flow a little bit as well. The general rule of thumb with interest rates in the 4% range is that for every $10,000 it is worth about $50 monthly.
However… if you plan to buy the property and just pay it off over 30 years in the plain vanilla Nomad. Capturing an extra $10,000 in equity buying a property at a discount when you’re talking about a $600,000 property isn’t significant. Saying that another way… if you buy ten properties at a $10,000 discount… a total of $100,000 extra equity and then pay them off… by buying at a $10,000 discount ten times you may have increase your equity from $8 million to $8.1 million by the time you’ve paid off the last property.
Often, the limited selection you get from buying at a discount isn’t worth it in the plain vanilla model.
Should I buy fixer uppers?
The plain vanilla Nomad model does not encourage you to buy fixer upper properties. It just isn’t required to make the model work.
In fact, I usually encourage people to buy properties that are going to be great rental properties that don’t require a lot of work… especially work that will require additional capital invested.
One of the benefits of Nomad over is your option of being able to minimize your down payment and investment in the property. This allows you to get amplified returns because the amount you’ve invested is much smaller.
Fixer uppers tend to require additional capital investment and will have an impact on your over return on investment.
There are ways to buy fixer upper properties at deep discounts such that you could do the work and refinance out so that you have nothing invested after the refinance. But, that is not a strategy we typically teach for Nomads.
You could also buy a property with a fixer upper loan like the FHA 203K loan program that allows you to buy a property that needs fix up, have the money escrowed at closing for those repairs and when the contractor has finished the work, that money is released and paid to them.
However… while you buy a fixer upper to do Nomad… I would strongly advise you not to wait to find a perfect fixer upper. I’d rather see you buy a property and implement the Nomad model. If you happen to find a fixer upper and you really want to do it, that’s OK.
Should I buy foreclosures?
For the Nomad model, you can buy a foreclosure property, but it is in no way required. You’re presumably looking to buy a foreclosure because you believe you believe you’re getting a deal and buying the property at a discount. This may be true for you.
While I did not invent the idea of buying a home as an owner occupant and then converting it to a rental, we did name the process Nomad, did some fancy mathematical modeling of it and created a comprehensive series of classes and resources for Nomads looking to implement the model. In our market in Northern Colorado when we first started about Nomads riding their mammoths from cave to cave acquiring rental properties as they went… foreclosures were extremely scarce and the ones that were for sale, were often not deals at all. So, the Nomad model does not, in any way, require you to be buying foreclosures.
Nomad works even if you buy a property for full retail price. So, it is not required that you limit your property selection to just foreclosures or that you buy foreclosures at all.
Now… if you happen to be in a market where foreclosures are plentiful and there is one that looks like it would be a great Nomad property for you… I approve of you buying a foreclosure in those circumstances.
Should I buy homes creatively?
So, you’re thinking to yourself… should I buy homes creatively to do Nomad? Maybe you should try to to find a property that you can buy on a lease option or get a little more creative and find a seller that is willing to allow you to take over payments on their loan and you can buy it subject to the existing financing. Not so fast.
The Nomad model does not, in any way, require that you even consider buying properties creatively. It is by the very nature of it having you get owner occupant loans, a traditional financing approach to real estate investing.
Will some people that have extra time, desire and skills want to supplement or tweak the traditional Nomad model to include creative financing strategies… sure. However, hear my words: you do not need to nor would I recommend that you even seek out information on how to do these types of transactions. It is a shiny object that will distract you from the prize of just doing the Nomad model as it was designed.
And for those of you that think… he’s not recommending them because he’s like a large number of other real estate agents and does not understand these strategies and the benefits of doing them… au contraire… I’ve taught a large number of classes on all of these creative strategies to real estate agents and real estate investors.
I understand both the pros and cons of each strategy better than most. My advice to you when it comes to buying creatively and Nomad: don’t worry about it… focus on just implementing the traditional financing Nomad strategy.
Should I buy REOs?
REOs or Real Estate Owned by the bank or the lender are usually properties where the bank has foreclosed on them. So, should you consider buying these REO properties when doing the Nomad model?
My opinion is that if they would otherwise make a great Nomad property I would not rule them out. If you happen to find a great REO and you want to buy it, move in, live there for a year then convert it to a rental… that’s fine and approved by me.
However… I would strongly warn you… especially if you happen to be in a real estate market as hot as ours… that you do not wait around and focus on finding an REO to buy. The raw, very small number of REO properties available for sale will limit the number of properties you have to choose from and I’d rather see you buy a property that would be an ideal Nomad property. Do not wait for an REO specifically.
You may also want to read more about my thoughts on whether you want to focus on buying at a discount when doing Nomad. That is why I think many buyers want to look at REOs, short sales and foreclosures to begin with. I’ll give you the short version of my opinion on buying at a discount: it is not required, but can help the Nomad model in certain specific situations.
Should I buy short sales?
A short sale is where the lender is willing to accept less than what is owed on the loan to allow a sale of the property to occur. In most transactions, the loan to the lender must be paid off for the sale to occur. So, when you’re doing Nomad should you consider buying a short sale? My advice… don’t focus on them.
If while looking for a Nomad property you happen to come across one that is a short sale and it would be a good Nomad property, then I would not automatically discourage you buying it just because it is a short sale.
However, I would definitely not encourage you to specifically seek out short sales to buy.
In fact, in our local market in Northern Colorado… the number of shorts sales is currently almost non-existent. So, we do not focus on buying them at all.
I would encourage you to rely on the advice of your local real estate agent on a case-by-case basis when considering buying a short sale as a Nomad property.
One additional important note on short sales… they can take a lot longer to close than traditional transactions as you wait to get approval from the lender to accept the short sale. That can make it very difficult to put a tenant if your previous property and purchase the short sale. So, definitely take that into consideration as well.
Will it help if I buy properties at a discount?
Yes, it will help a little if you buy properties at a discount when you are using the Nomad model, but it is in no way required to be successful with the model. Let me explain.
There are two things to consider regarding cash flow when buying at a discount. First is that by buying at a discount you’ll probably have a small monthly payment than buying the equivalent property at full price. This is an advantage of buying at a discount.
The general rule of thumb while interest rates are near 4% is that for every $10,000 less you borrow, you save yourself about $50 per month in monthly payment. That’s not an exact number, but just a really rough guideline.
The second thing to consider when buying a property at a discount is that you’re usually buying properties at a discount for a reason. The most common reason you’re able to buy a property at a discount is that the property needs some work. Work often requires an additional influx of capital to get the property into good condition.
Remember I told you the rule that is that for every $10,000 you save on price, it can result in about $50 per month in savings on monthly payments. Well… if for every $10,000 discount you get, you need to do $1,200 worth of work to a property to capture that extra equity… and I just made that number up but I think that might be a little low… then you’re really saying that you had to pay $100 per month to get $50 per month discount.
I give in that the $100 per month discount is often a one-time discount to do some fix up to a property and that the $50 per month is for as long as you have that loan, so long term it is still beneficial to buy at a discount. However… one of the reasons people do Nomad is to minimize their out of pocket expenses investment on properties. Buying at a discount is working slightly against that benefit.
In conclusion… I am generally for you buying at a discount, but I don’t recommend you wait to buy a property to find one you can buy at a discount to do the Nomad model.
And a little bonus… there are a couple other things to consider in this buying at a discount discussion. First… the equity from your discount compared to your total equity in the Nomad model. Second… the smaller selection of properties you can buy at a discount compared to the much wider selection of properties you can buy if you’re willing to pay full retail.