Ep 16: Norm and Norma Buy 10 Nomad™ by Proxy Properties

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Welcome to the Real Estate Financial Planner™ Podcast. I am your host, James Orr. This is Episode 16.

Today we’re going to continue with Norm and Norma’s story.

When we last left Norm and Norma, Norm had woken up from a nightmare in a cold sweat and an achy back with the mere thought of moving 10 times to utilize the Nomad™ real estate investing strategy.

Surely, there must be a way to get the benefits of Nomading™ like the zero of small down payment or the significantly better owner-occupant interest rate without having to move into each property and live there for a year.

Well, there is sort a way. In order to get the better owner-occupant financing someone does need to be the owner-occupant, but it technically does not need to be you.

For example, if Norm and Norma had college-aged kids, they could buy a property for each kid to live in each year as they go to college. A kid going to college for 4 years, could mean they could buy 4 properties… one per year for each year. If they have two kids, they could acquire 8 properties total. Kids getting advanced degrees… they can get even more properties.

When someone else is moving in on your behalf when Nomading™ we call this Nomad™ by Proxy.

So, if that were a possibility for Norm and Norma… which it isn’t since they’re just out of college themselves with no college-aged kids of their own… they could avoid moving into the property themselves.

But, there are other variations of Nomad by Proxy™ that might be a possibility for them. For example, Norma’s parents who are divorced would be willing to move into properties.

Now, Norm, Norma and her parents would need to connect with their lender and work out how to structure these… it usually requires that Norm, Norma and the parent moving into the property all be on the title to the property. And, they’d also want to figure out who is responsible for down payment, how is ownership defined, what happens when one or more of them dies… basically, everything you’d need to negotiate in any partnership.

For the sake of Norm and Norma considering this strategy in this episode, we’re going to assume they provide all the down payment and that they need to qualify for the loan with just their income and debt-to-income calculations. We also assume that because they paid all the down payment and qualified, they end up working out with Norma’s parents that they will ultimately own 100% of the property.

Remember, Norm and Norma aren’t moving into the properties themselves… Norma’s parents are. They’re divorced. So each one could move into 5 properties over however long it takes for them to qualify to buy the 10 properties. They could alternate which one Nomads™ next.

And, since there is two of them, technically they can buy two in one year provided they have the down payment, closing costs, income and debt-to-income to be able to qualify to buy two.

If you really step back and think about it, with enough other people to move into properties for you, Nomad™ by Proxy can look like they’re investing in rental properties with putting just 5% down. They even get to “rent” the properties out in the first year to whoever is living in the property. In this case, Norma’s parents are paying what looks like rent to help cover the costs to own the property.

The reality of implementing it is much messier though: they’ll need to negotiate the terms of the partnership aspect of having someone co-purchase properties with them. Which, we cover in more detail in the Nomad™ by Proxy class.

Financial Independence

So, how does Norm and Norma doing Nomad™ by Proxy impact their ability to achieve financial independence?

It turns out that by having Norma’s parents move instead of Norm and Norma, they achieve financial independence a little less 2.5 years faster. Instead of it taking 26.50 years to do traditional Nomad™ where they move in themselves, by having Norma’s parents move in they’re able to be financially independent in 24.08 years instead.

Properties Purchased

Part of what allows them to be financially independent faster is that they buy properties a little faster. They end up buying each property after the first one consistently a little faster.

Ep 16 - Number of Properties Owned — Ep 16 – Number of Properties Owned

One of the reasons they’re able to buy the properties a little faster is that they’re continuing to rent themselves. That means they’re saving a little bit more money each month when Nomading™ by Proxy.

Additionally, living in a rental with a slightly lower rent than what they’d be paying on a mortgage if they bought a property to live in also means their debt-to-income is a little better.

Net Worth

Buying properties faster also gives them a higher overall net worth. Of course, if they had to pay their proxy a fee or reduced rent or some other benefit, some of this additional net worth would disappear.

Ep 16 - Net Worth - Month 720 — Ep 16 – Net Worth – Month 720

However, since it is Norma’s parents and their OK to do it without compensation to them in this unusually simplified example, they end up with over $80 million in net worth by year 60 compared to about $67.5 million as a traditional Nomad™.

That’s in inflated future dollars.

Ep 16 - Net Worth - Month 720 - IA — Ep 16 – Net Worth – Month 720 – IA

If we adjust back to today’s dollars, it is more like a difference of $2 million dollars. Still significant in my opinion. Instead of $13.6 million when they Nomad™ by Proxy they’d have a net worth of *only* $11.5 as a traditional Nomad™.

I emphasize “only” because I question when did creating a net worth of $11.5 million dollars on a combined income of $72,000 per year not become a huge victory?

Standard of Living

Ep 16 - Goal of MTMIR - Month 318 — Ep 16 – Goal of MTMIR – Month 318

How does doing Nomad™ by Proxy impact their standard of living? Well, instead of living in a home they own, they’re still renting. But, otherwise, by month 318 when they achieved financial independence with traditional Nomad™, they be able to sustain a 25% higher standard of living by doing Nomad™ by Proxy instead.

Instead of living on about $5,000 per month, they could be living on about $6,250 per month in today’s dollars.

Rent Resiliency™

But what about measuring risk like Rent Resiliency™? In other words, how much can rent drop before they have negative cash flow?

Well, at first it is slightly riskier to do Nomad by Proxy™, but that’s because with traditional Nomad™ they live in the property for at least a year before it gets converted to a rental. So, they have at least a year to let rents creep up and that means that they’re slightly less likely to have negative cash flow.

Ep 16 - Rent Resiliency™ — Ep 16 – Rent Resiliency™

However, because they acquire rentals a little faster, eventually they have more rentals and more positive cash flow sooner and that slightly improves their Rent Resiliency™ with Nomad™ by Proxy in terms of dollars.

Ep 16 - Rent Resiliency™ Percent — Ep 16 – Rent Resiliency™ Percent

In terms of what percent rents can decline before they have negative cash flow… what we call Rent Resiliency™ Percent, traditional Nomad™ is typically less risky.

Negative Cash Flow

By renting properties the first year to Norma’s parents means they have more negative cash flow.

Compare that to living in the property for the first year with traditional Nomading™ where they get to wait at least a year for rents to improve slightly before they convert an owner-occupant property to a rental. That helps to eliminate some of the negative cash flow.

Ep 16 - Total Cumulative Negative Cash Flow - Month 720 — Ep 16 – Total Cumulative Negative Cash Flow – Month 720

And the difference in negative cash flow adds up… they end up having almost $117,000 in negative cash flow when doing Nomad™ by Proxy compared to just over $10,000 with traditional Nomad™.

Now, I do need to point out that with Nomad™ by Proxy we’re talking about 10 rentals versus just 9 rentals with traditional Nomad™. That’s because with traditional Nomad™ for this particular set of modeling assumptions, they continue to live in the 10th property they bought. Of course, if Norm and Norma really wanted to do 10 rentals when doing the traditional Nomad™ strategy, we could change the modeling to have them buy 11 properties… 10 rentals and one to live in. We just didn’t do it that way a couple episodes ago.

Total Cumulative Negative True Cash Flow™

If that negative $116,000 in negative cash flow scares you, realize that’s ignoring the tax benefits of depreciation.

If we take into account the Cash Flow from Depreciation™ as well when we calculate cash flow, we call that True Cash Flow™.

The total cumulative negative True Cash Flow™ for all rental properties is less than $12,000 when doing Nomad™ by Proxy. And, there is zero negative True Cash Flow™ for traditional Nomad™.

Total Invested in Rentals Including Negative Cash Flow

For Nomad by Proxy™, Norm and Norma invested a total of just under $530K including $116K in negative cash flow. Compare that to just under $365K total invested including any negative cash flow if they did traditional Nomad™.

Debt to Net Worth

If we look at a couple other of my favorite ways to measure risk, you can see that Nomad™ by Proxy is ever-so slightly less risky than traditional Nomad™.

Ep 16 - Total Debt to Account Balances — Ep 16 – Total Debt to Account Balances

The risk is reduced even more when we measure debt to liquid net worth… what we call debt to account balances.

Reserves

But what about reserves?

They need to have more in reserve when they own more properties sooner.

Ep 16 - Months of Reserves — Ep 16 – Months of Reserves

But, they end up having more months of reserves when Nomading by Proxy™ than when doing traditional Nomad™ in our modeling.

Conclusion

In conclusion, if Norm and Norma can convince Norma’s parents to separately move into a property while they provide the down payment and qualify for the loan and pay rent to Norm and Norma while they live there and agree to turn 100% ownership of the property over to them then that works out in their favor.

They can achieve financial independence faster than traditional Nomad™ where Norm and Norma moved into the property for at least a year themselves.

Nomad by Proxy™ does produce more negative cash flow. However, if you also consider Cash Flow from Depreciation™ it is a reasonable amount… less than $12,000 total for all 10 rental properties.

Nomad by Proxy™ seems to be more susceptible to declines in rent but otherwise appears to be overall less risky in a couple key measures of risk.

Next Episode

Norm and Norma review some of the previous real estate strategies they considered to this point and realize that doing short-term rentals was a pretty good strategy. They wonder what the impact of combining Nomad™ with short-term rentals might be.

Could they do Nomad™ to acquire properties with very attractive owner-occupant financing with great rates and low down payments and once they’ve fulfilled their occupancy requirements after at least a year, they could convert the properties to short-term rentals instead of converting them to long-term rentals.

They wonder how that might impact their ability to achieve financial independence. We’ll find out in the next episode.

Also, be sure to check out the Advanced Real Estate Financial Planner™ Podcast to see how having variable property appreciation rates and rent appreciation rates, variable mortgage interest rates, variable inflation rate and variable stock market rates of return impacts Norm and Norma as they Nomad™ by Proxy.

I hope you have enjoyed this episode about Norm and Norma utilizing Norma’s parents to Nomad™ by Proxy with them. This has been James Orr with the Real Estate Financial Planner™ Podcast. Bye bye for now.

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