Modeling Your Real Estate Investments – Rules Overview

This class was taught live by James Orr on November 23, 2022.

In this class James covers how to model your own real estate investing strategy using all the different  Rules.

Scenarios

 Scenarios are buckets for grouping  Accounts,  Properties and  Rules together to model your entire real estate investing strategy.

Model Your Own Plan

As we go through these  Rules, think about how you might use them to model your own unique situation.

If you haven’t already done so, create a free Real Estate Financial Planner™ account.

Basic Steps

The basic steps for modeling your own plan is:

1. First, create the  Scenario.
2. Second, create  Accounts.
3. Third, create your  Properties.
4. Fourth, create your  Rules.

Create A New Rule

When you create a new  Rule, you will see a list of all the  Rules grouped together (as shown above).

In this class, we will go over each of the  Rules, what it does and when you might want to use it.

Rules: Grouped by Function

The  Rules are grouped together by their general function.

Here are the groups:

• Buy  Properties – Use these  Rules to buy Dynamic  Property (templates of  Properties).
• You don’t need to buy properties you Already Own. Just make sure they’re included in the  Scenario.
• And, you can’t buy more than one or buy an Already Owned property again later in the  Scenario.
• Sell  Properties – Use these  Rules to sell  Propertiesin a variety of ways.
• Impact Mortgages – Use these  Rules to pay off mortgages, recast mortgages or refinance mortgages.
• Adjust  Scenarios,  Accounts and  Properties – Use these  Rules to change values on  Scenarios,  Accounts, and/or  Properties over the course of the  Scenario.
• Do Other Things – Miscellaneous  Rules that do things like move money between  Accounts, create a variety of income and expense situations, rebalance your portfolio and simulate market corrections.

Rules to Buy Properties

The following are  Rules you can use to buy  Properties within a  Scenario.

Buy Property On Specific Month Yearly

Use this Rule to buy a property every year on a specific month.

Imagine you have a million dollars invested in an Account that you is invested in stocks and you want to buy a new property every February.

Buy Property When Account Has Down Payment

Allows you to buy a property as soon as you have enough for the down payment, closing costs, and reserves.

When you might want to use this  Rule:

• You want to see how quickly you’ll be able to acquire your ideal portfolio of rental properties.
• You want to see what the impact of changing how much you keep in reserves has on the speed you can acquire properties.
• See the impact of doing cash out refinances to buy new properties.
• See the impact of getting a real estate license or acquiring properties creatively.

Rules to Sell Properties

The following are  Rules you can use to sell  Properties within a  Scenario.

Sell Properties and Pay Off Mortgages To Retire

If by selling some properties—and paying all the associated closing costs—you can pay off the remaining properties and those would give you enough cash flow and SWR to be financially independent, then do it.

You want to see if buying more properties than you need and then selling some to pay off others would be a faster, less risky strategy.

Sell Rental Properties After Owning Them For Specific Period of Time

Allows you to sell all RENTAL properties after owning them for a specified period of time.

If you’re using a lease-option model where you buy properties creatively and then sell them after a certain number of months.

Sell Owner-Occupant Properties After Owning Them For Specific Period of Time

Allows you to sell all OWNER-OCCUPANT properties after owning them for a specified period of time.

If you’re doing slow flips where you live in the property for at least 2 out of the last 5 years.

Sell Rental Properties After Renting Them For Specific Period of Time

Similar to our Rule for selling properties after you’ve owned them for a period of time, this allows you to sell RENTAL properties after you’ve rented them for a specific period of time.

Often used when you’re doing Nomad™ with a lease-option exit since you might own the property for a year or more before you convert it to a lease-option.

Sell Rental Properties Based on Return On Equity

Sells properties when their overall Return on Equity calculation drops below a threshold you define.

To sell properties and keep your Return on Equity high and keep leveraging your portfolio up.

Sell Rental Properties Based on Account Balance

If a certain Account you specific drops below a certain value, sell a rental property to replenish that account.

If you’re modeling a situation where you are stopping working before your cash flow is enough to support your lifestyle and you might need to sell rentals from time to time to provide living expenses.

Or, use it to use the equity in properties to occasionally fund the purchase of new properties by selling them.

Similar to the Cash Out Refi Based On Account Balance Rule we will cover later.

Sell Rental Properties If Safe Withdrawal Rate Allows You To Retire

If by selling RENTAL properties—and paying all the costs of sale—you could invest that money in an Account and—using your defined Safe Withdrawal Rate—be financially independent… then sell the properties.

To see if you could use equity growth from appreciation and debt paydown with real estate to achieve financial independence then invest in something else.

Sell Already Owned Property On Specific Date

Sells a specific property you already owned on a specific date.

Use this when you know you plan to sell a property you already own on a specific date in the future.

Rules That Impact Mortgages

The following are  Rules you can use that impact mortgages on  Properties within a  Scenario.

Pay Down Loans with Cash Flow

Takes any excess cash over a threshold you set each month and uses that extra money to pay off mortgages on properties.

If you want to do a debt snowball or debt avalanche to payoff mortgages.

Or, test to see how much better it would be to pay off the highest interest rate mortgages or the lowest balances first.

Pay Off Mortgage In Full

Keeps your money invested in your account until there is enough to completely pay off a mortgage then payoff the mortgage in full.

To test to see if it is better to keep your money invested in something else… like maybe the stock market… until you have enough to completely payoff a mortgage which is likely at a lower rate than the other investment.

Recast Mortgages

Takes a lump sum of money and pays off a mortgage AND ask the lender to recast the loan to lower your monthly payment (recast the loan) instead of shortening the loan period.

To see if it makes sense to recast a loan instead of just shortening the loan term.

Cash Out Refi Based On Account Balance

Similar to the Sell Rental Properties Based on Account Balance Rule.

If a certain Account you specific drops below a certain value, cash out refinance a property to replenish that account.

If you’re modeling a situation where you are stopping working before your cash flow is enough to support your lifestyle and you might need to cash out refi properties from time to time to provide living expenses.

Or, use it to use the equity in properties to occasionally fund the purchase of new properties by refinancing them.

Pay Off Owner-Occupant Mortgage If Financially Independent (FI)

If you have enough in your Account and paying off your owner-occupant property would reduce your expenses enough that you’d qualify as financially independent, then pay off the owner-occupant property.

To see if paying off your mortgage will allow you achieve financial independence and when that would happen.

Rules That Adjust Scenarios, Accounts and Properties

The following are  Rules you can use to make adjustments to values in  Scenarios,  Accounts, and  Properties.

Set Value On Scenarios

Allows you to change any values you defined for the Scenario at different points in the Scenario.

When you might want to use this Rule:

• What if you want to change the refinance mortgage interest rate you defined for the Scenario after a certain number of months?
• Or, you want to change what your Minimum Target Monthly Income in Retirement (MTMIR) would be in the future?
• Or, your Safe Withdrawal Rate?

That’s what this  Rule allows you to do.

Set Value On Accounts

Allows you to change any values you defined for an Account at different points in the Scenario.

Use it change the rate of return you’re earning on an Account. Use it if you think you might be able to get a higher or lower return on an Account later in a Scenario.

Or, use it to model a random return within a certain range of values like the stock market or bonds.

Set Value On Properties

Allows you to change any values you defined for a Property at different points in the Scenario.

When you might want to use this  Rule:

• Use it change any of the assumptions for a Property later in a Scenario.
• For example, you think property appreciation or rent appreciation will slow down or speed up later in the Scenario.
• Or, you decide to hire or fire a professional Property Manger later.
• Or, you maintenance on a property will be more expensive as it gets older.

Reset Original Value On Accounts

Returns the Account value to the original value at the start of the Scenario.

If you were making a value in the Account change or making it variable and you want to return it back to what you had it at originally, use this Rule.

Reset Original Value On Properties

Returns the Property value to the original value at the start of the Scenario.

If you were making a value in the Property change or making it variable and you want to return it back to what you had it at originally, use this Rule.

Rules That Do Other Things

The following are  Rules do a variety of things not covered elsewhere.

Add to or Subtract from Account Balance

Allows you to add or subtract a specific amount of money to an Account for a single month/date, all months or a range of months.

When you might want to use this  Rule:

• Let’s say you know you’re going to get a lump sum on a certain date? Use this Rule to add that lump sum.
• Or, let’s say you know you’re going to have a series of expenses like college tuition for your kids?
• Or, let’s say you’re going to be paid out a certain amount on an installment sale of a business or from lottery winnings or whatever.

Transfer Money Between Accounts

Allows you to transfer money from one Account to another.

When you might want to use this  Rule:

• You have money in a retirement Account and want to move that into a traditional Account for investing in stocks or buying properties.
• Or, you have money in your rental property Account and want to use that to invest in your tax-deferred retirement Account.
• Or, you want to pull money out of one Account when a certain Account drops below a certain threshold.

Market Correction

Allows you to model what could happen if you have market corrections (in your Account and Properties).

To model how your portfolio would perform if things don’t go your way and the market drops by X%.

Use it to model RANDOM market corrections… happening at random times and/or for random drops.

Paycheck and Personal Expenses

Allows you to model receiving a paycheck (or other regular income) and personal living expenses.

When you might want to use this  Rule:

• Use this Rule to model each of your paychecks and which ones go away once you achieve financial independence and stop working.
• Also, use it to model your personal expenses.
• Also, use it to model social security if you don’t want it to count toward your income to qualify for being financially independent.

Passive Income

Allows you to model passive income from things like social security, pensions, and annuities.

When you might want to use this  Rule:

• When you want to model social security and have it count toward you being financially independent.
• Or, when you have a pension from work.
• Or, when you have annuity income.

Lumpy Income

Allows you to model lumpy income that doesn’t happen every month.

When might you want to use this  ,strong>Rule:

• If you’ve got a fix and flip business and get lumps of income every X months.
• Or, if you get irregular bonuses every X months.
• Or, maybe you want to simplify modeling a lease-option business where you make a certain amount every X months.

Rebalance

Rebalances money between Accounts so you can maintain specific percentages in each Account.

If you want to keep X% in stocks, Y% in bonds and Z% in cash or whatever you decide. This will allow you to relance your Accounts by moving money between them either every month or on a specific month each year.

Required Minimum Distribution

Calculates Required Minimum Distributions from a specific Account and moves that money from that Account to another Account you specify.

If you a retirement Account with Required Minimum Distributions use this to move money each year based on your required distributions.