Buy Owner-Occupant or Rent When Buying 25% Down Rentals
Since we're comparing multiple
Gross Paychecks and Expenses both increase with inflation over time.
With income varying, the amount able to be saved varies too. When you earn less with the same expenses, that means you save less. When you earn more with the same expenses, you save more.
The chart below also includes unrented properties (that's the one you're living in) as part of your expenses. Your mortgage payment (principle and interest) remain fixed (unless you refinance, pay it off or move to a different property), but taxes and insurance do change over time.
Once you achieve financial independence and you stop working your job, your savings from your job goes to zero (actually it goes negative since your income is zero and your expenses are subtracted from zero).
Achieving Goal of Financial Independence
What is the first month you've achieve financial independence? We define financial independence as the sum of the following exceeds your Minimum Target Monthly Income in Retirement (MTMIR):
- Cash flow from rental properties and
- Passive income (like social security, pensions, annuities) and
- Your Safe Withdrawal Rate times your total Account Balances
How quickly do you achieve your goal of replacing your Minimum Target Monthly Income in Retirement from your cash flow, passive income, and your safe withdrawal rate times your account balances? This chart shows what percent of your goal you've achieved over time. The dotted black line is when you've achieved 100% of your goal and you've achieved financial independence.
A major factor in calculating Debt-To-Income is income. The Real Estate Financial Planner™ software does check your Debt-To-Income before it allows you to purchase your next property.
Minimum Gross Monthly Income Required
What's the minimum gross monthly income required to execute the strategy?
Number of Properties Owned
Your income impacts how quickly you can save down payments and qualify to buy your next property. The following chart shows how many properties you own over time for the 3
The impact on your overall Net Worth?
First $100K Is The Hardest
Charlie Munger says that saving up your first $100K is the hardest. So, how quickly does each of these strategies save up their first $100K?
Let's then look at how long it takes, in months, to build a Net Worth of a million dollars in $100K increments.
Same data showing how long it takes to achieve each $100K but presented as connected lines instead of as columns.
The following shows what happens if we zoom in and just look at how quickly these achieve a net worth of one million dollars.
We've limited the $100K charts above to just show up to the first $1MM (ten $100Ks).
The chart below shows how long it takes, in months, to acheive groups of one million dollars.
To get additional information on the models we're comparing, you can check out the narrative Blueprint describing in extreme detail what is going on or link to copy the Scenario and see a shorter summary below.
- Blueprint™ or 04 1 5% Down Primary Then 9 25% Down Rental Properties
- Blueprint™ or 33 10 25% Down Rental Properties (no Owner-Occupant)
More Model Comparisons for San Francisco, CA
- Earning More/Less When Nomading™ - What if you earn 10% more or 10% less than the baseline when Nomading™? How will that impact your ability to achieve financial independence?
- Nomad™ vs 20% or 25% Down Rentals - What if instead of buying properties as a Nomad™ you bought a single property to live in and then put either 20% down or 25% down to buy rentals directly?
- Self-Managed vs Professional Property Management While Nomading™ - In the baseline Nomad™ scenario you're self-managing your properties. What if you hired a property manager and paid them 10% of gross rents collected?
- Buying at a Discount or Paying a Premium When Nomading™ - In hot seller's real estate markets, you may be asked to pay a premium above current Fair Market Value. In softer buyer's real estate markets, you may be able to more easily buy properties at a discount from the current Fair Market Value. What difference does that make on your journey toward financial independence? Does being able to get a 5% discount or 10% discount really have a signficiant impact? What is the cost of paying a 5% premium or 10% premium to get your offer accepted and buy properties in hot markets?
- Having a Real Estate License While Nomading™ - What if you got your real estate license while Nomading™? You could get a discount equal to your commission or choose to earn the commission when you buy effectively reducing the amount you need for your down payment by the commission amount.
- Better or Worse Rents When Nomading™ - What if you were able to get slightly better or slightly worse rents? What impact does that have? You could get 10% lower rents or maybe just 5% lower rents. Or, perhaps you could do a little better marketing, find slightly more desirable properties and get get 5% higher rents or totally crush it and manage to get 10% higher rents.
- Nomad™ to Short-Term Rental - What if you decide to focus on short-term rentals after you Nomad™? Sure your expenses to run the property would go up, but could you get 25% higher rents, 50% higher rents, or even 75% higher rents?
- Better/Worse Interest Rates When Nomading™ - What if you're able to get a slightly better (or worse) mortgage interest rate when Nomading™? Getting a .5 lower mortgage interest rate or even a modest .25 lower mortgage interest rate could impact your cash flow and ability to achieve financial independence. Getting a .25 higher mortgage interest rate or a .5 higher mortgage interest rate could slow down your journey to financial independence.
- Sell Properties to Achieve Financial Independence When Nomading™ - What if... while Nomading™... you have enough equity such that if you sold off all the properties and invested that money in stocks and bonds you'd be able to live at or below your safe withdrawal rate? Or, what if... while Nomading™... you have enough equity such that if you sold off some of your properties you'd be able to pay off the remaining rental properties and be financially independent? Selling properties if that means being financially independent or even selling some properties to pay off the remaining rentals could help you achieve financial independence faster.
- Buy Rentals All Cash - What if... you buy an owner-occupant property with 5% down but then save up your money until you have enough to buy a rental without a mortgage at all? Then, buy up to 9 total rentals... each time with cash (no mortgage)? Or, what if... you remain a renter yourself and save up your money to buy a rental property for all cash (without a mortgage)? Then, bought up to 10 total rental properties... all without getting any mortgages at all. Owner-occupant with 5% down then up to 9 rentals all cash or even remaining a renter yourself and buying up to 10 rentals for all cash without any mortgages could be a better strategy than you might think (depending on the real estate market).
- Nomading™ When Starting with Money or None - What if you start with no money? How does that compare to Nomading™ when you do start with enough for your first down payment?
- Nomading™ vs No Real Estate, Only Stocks - What if instead of Nomading™ or investing in any real estate at all you just rented yourself and invested in stocks?
- Paying Off Mortgages Early When Nomading™ - What if while you were Nomading™ you opted to pay off mortgages early? You could pay them off with any excess cash each month or only pay them off if you can pay off the entire mortgage balance in full.
- Paying Off Owner-Occupant Mortgage Early When Nomading™ If Achieves Financial Independence - What if by paying off your owner-occupant mortgage when Nomading™ that would reduce your living expenses low enough that you'd achieve financial independence?
- Buy Owner-Occupant or Rent When Buying 20% Down Rentals - If you're planning to buy 20% down payment rental properties, is it better to first buy a 5% down payment owner-occupant property or to remain a renter the entire time?