Nomad™ by Proxy

Love the idea of Nomad™ but don't want to move every year?

Learn how to have someone else move on your behalf with this special 1 hour 37 minute class on Nomad™ by Proxy taught by James:

This class was taught on December 2, 2020 via webinar.

What is Nomad™ by Proxy?

Nomad™ by Proxy is having someone else move on your behalf when Nomading™.

Instead of you having to move every year, you have someone else move and owner-occupy the property.

Typical Examples of Nomad™ by Proxy

Here are three of what I consider to be the most common examples of Nomading™ by Proxy.

  1. Parents with kids as proxy
    • Example: kids going away to college and doing a kiddie condo loan.
  2. Kids with parents as proxy
    • Example: parents moving to live near grandkids in retirement. Kids co-sign on loan to help parents qualify.
  3. Least common and most difficult: friends or other family members
    • Example: rich uncle co-signing loan with you.

How Might Nomad™ by Proxy Compare to Traditional Nomading™

I wanted to show how a few examples of Nomad™ by Proxy might compare to some other options including traditional Nomading™.

Here are my base assumptions for the comparisons.

IMPORTANT NOTE: If you don't like my assumptions, just copy the  Scenario into your Real Estate Financial Planner™ account to change any of the assumptions to better match your situation.

Assumptions

I used the following assumptions for my models in this class. If you are planning to implement this strategy, you should model your own situation with a variety of market conditions.

  • You are 50 years old right now.
  • I will compare no kids, 1 kid, 2 kids and 3 kids going to college and Nomading™ by Proxy
  • You started having kids around age 32. First one is entering college this year.
  • You have saved up $300K. This could be a combination of equity in your property or properties, investments, cash, retirement accounts, etc.
  • Any cash you have is earning 8% per year fixed return.
  • You choose NOT to save any more money each year.
  • Earning $60K per year as a family ($5K per month).
  • Want to replace $60K per year in retirement.
  • Using 4% safe withdrawal rate.

Skip Nomad™ by Proxy and Just Invest in Stocks

If you decide to completely forgo Nomad™ by Proxy or any type of real estate investing it could take you 30 years and 10 months to achieve financial independence.

No Nomad™ by Proxy - Stocks Only
No Nomad™ by Proxy – Stocks Only

You do buy a home to live in with 5% down payment in this model.

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Stocks with 2  Accounts, 1 Property, 2 Rules,
Or, read the detailed, computer-generated, narrated  Blueprint.

Traditional Nomad™

If you decided you were willing to move 5 times, this is what traditional Nomad™ might look like.

This assumes you buy 5 properties over 5 years. For each you get a 5% down payment loan. 4 of them become rentals. One you continue to live in one.

Traditional Nomad™ - Number of Properties Owned By Month
Traditional Nomad™ – Number of Properties Owned By Month

You end up achieving your goal of replacing your $5K per month in income (100% of your goal) faster.

Traditional Nomad™ - Percent of Financial Independence Goal Achieved
Traditional Nomad™ – Percent of Financial Independence Goal Achieved

This shows you how many months it takes for you to first achieve your goal of financial independence.

Traditional Nomad™ - Months Until Financial Independence
Traditional Nomad™ – Months Until Financial Independence

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Traditional Nomad™ with 2  Accounts, 1 Property, 2 Rules,
Or, read the detailed, computer-generated, narrated  Blueprint.

This looks similar to you Nomading™ 5 times yourself. You still have 5 properties (4 rentals) at the end, but you do it one year faster (2 in the first year).

Nomad™ by Proxy – 1 Person × 4 Years

You buy a home to live in yourself. You put 5% down.

Simultaneously you have a proxy start buying a home every year for 4 years. This simulates 1 kid in college for 4 years.

I've assumed you are “funding” $700 per month (inflation adjusted) for rent for the first 4 years while they are living in the property.

Nomad™ by Proxy - 1 Person x 4 Years - Number of Properties Owned
Nomad™ by Proxy – 1 Person x 4 Years – Number of Properties Owned

Your road to financial independence looks similar to traditional Nomad™ with this strategy.

Nomad™ by Proxy - 1 Person x 4 Years - Percentage of Financial Independence Goal Achieved
Nomad™ by Proxy – 1 Person x 4 Years – Percentage of Financial Independence Goal Achieved

It takes you about the same time to first achieve your goal of financial independence as it does with traditional Nomad™.

Nomad™ by Proxy - 1 Person x 4 Years - Months to Achieve Financial Independence
Nomad™ by Proxy – 1 Person x 4 Years – Months to Achieve Financial Independence

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Nomad™ by Proxy - 1 Person x 4 Years with 2  Accounts, 2 Properties, 4 Rules,
Or, read the detailed, computer-generated, narrated  Blueprint.

Nomad™ by Proxy – 2 People × 4 Years

What if you have two kids going to college. That's what I did next. 2 people Nomading™ by Proxy for you 4 times each (one per year).

To simulate kids going to college, I've staggered the second kid to start 2 years after the first kid. With each kid you're funding $700 per month to simulate them not paying rent while living in the property.

You buy more properties (4 for each kid plus the 1 you're living in) and more quickly than you could if you were Nomading™ yourself.

Nomad™ by Proxy - 2 People x 4 Years - Number of Properties Owned
Nomad™ by Proxy – 2 People x 4 Years – Number of Properties Owned

You achieve your goal of replacing your $5K per month (financial independence) faster. Plus, your standard of living in retirement is higher because you own more properties. This ultimtely means more cash flow.

Nomad™ by Proxy - 2 People x 4 Years - Percentage of Financial Independence Goal Achieved
Nomad™ by Proxy – 2 People x 4 Years – Percentage of Financial Independence Goal Achieved

This shows how much faster you first achieve financial independence having 2 kids Nomad™ by Proxy for you.

Nomad™ by Proxy - 2 People x 4 Years - Months to Achieve Financial Independence
Nomad™ by Proxy – 2 People x 4 Years – Months to Achieve Financial Independence

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Nomad™ by Proxy - 2 People x 4 Years Each (Staggered By 2 Years) with 2  Accounts, 2 Properties, 6 Rules,
Or, read the detailed, computer-generated, narrated  Blueprint.

Stagged By 1 Year Instead of 2

What if your kids were only 1 year apart entering college?

Nomad™ by Proxy - 2 People x 4 Years - Months to Achieve Financial Independence - 1 Year Versus 2 Years Apart
Nomad™ by Proxy – 2 People x 4 Years – Months to Achieve Financial Independence – 1 Year Versus 2 Years Apart

Not a significant difference, so I will continue to use 2 years apart.

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Nomad™ by Proxy - 2 People x 4 Years Each (Staggered By 1 Year) with 2  Accounts, 2 Properties, 6 Rules,
Or, read the detailed, computer-generated, narrated  Blueprint.

Nomad™ by Proxy – 3 People × 4 Years

What if you have 3 kids going to college? Each one Nomads™ 4 times while in college.

Nomad by Proxy - Property Timelines
Nomad by Proxy – Property Timelines

You can see that you buy more properties by having 3 of your kids buying properties while in college. It is also fast.

Nomad™ by Proxy - 3 People x 4 Years - Number of Properties Owned
Nomad™ by Proxy – 3 People x 4 Years – Number of Properties Owned

You achieve your goal of financial independence ($5K per month) faster.

Nomad™ by Proxy - 3 People x 4 Years - Percentage of Financial Independence Goal Achieved
Nomad™ by Proxy – 3 People x 4 Years – Percentage of Financial Independence Goal Achieved

You also have a much higher standard of living in retirement because cash flow increases on a larger number of properties.

Nomad™ by Proxy - 3 People x 4 Years - Percentage of Financial Independence Goal Achieved
Nomad™ by Proxy – 3 People x 4 Years – Percentage of Financial Independence Goal Achieved

You first achieve financial independence much faster.

Nomad™ by Proxy - 3 People x 4 Years - Months to Achieve Financial Independence
Nomad™ by Proxy – 3 People x 4 Years – Months to Achieve Financial Independence

You ultimately have more cash in your account with this strategy than others we've covered.

Nomad™ by Proxy - 3 People x 4 Years - Total Account Balances Through Year 20
Nomad™ by Proxy – 3 People x 4 Years – Total Account Balances Through Year 20

And here's the comparison in year 20.

Nomad™ by Proxy - 3 People x 4 Years - Total Account Balances at Year 20
Nomad™ by Proxy – 3 People x 4 Years – Total Account Balances at Year 20

With more properties, you also have more equity should you decide to sell with an agent.

Nomad™ by Proxy - 3 People x 4 Years - Total Accessible Sell with Agent Equity
Nomad™ by Proxy – 3 People x 4 Years – Total Accessible Sell with Agent Equity

But, it is riskier (when looking at Debt to Net Worth) to buy more, highly leveraged properties quickly.

Nomad™ by Proxy - 3 People x 4 Years - Total Debt to Net Worth Through Year 20
Nomad™ by Proxy – 3 People x 4 Years – Total Debt to Net Worth Through Year 20

Your Total True Cash Flow™ is better.

Nomad™ by Proxy - 3 People x 4 Years - Total True Cash Flow Through Year 20
Nomad™ by Proxy – 3 People x 4 Years – Total True Cash Flow Through Year 20

And, as you'd expect, your Total Cash Flow is also better.

Nomad™ by Proxy - 3 People x 4 Years - Total Cash Flow Through Year 20
Nomad™ by Proxy – 3 People x 4 Years – Total Cash Flow Through Year 20

IMPORTANT NOTE: Structuring 13 loans like this will be challenging. You will want to plan this with your lender well in advance and likely split loans between you and your spouse.

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Nomad™ by Proxy - 3 People x 4 Years Each (Staggered By 2 Years) with 2  Accounts, 2 Properties, 8 Rules,
Or, read the detailed, computer-generated, narrated  Blueprint.

Did Not Get Fancy or Creative

When modeling these examples, I did NOT get fancy or do creative stuff.

  • No additional saving (beyond the benefit of owning a home)
  • No paying off properties early
  • No selling properties to pay off others
  • No refinancing (cash out or otherwise)
  • No “coasting into retirement” by stopping working before you’re fully at Financial Independence
  • No house hacking – although your kids have roommates while at college in the properties
  • Self managing properties – you'll likely want to change this
  • No market randomness (static assumptions) – you will likely want to stress test this strategy to see how it performs in a variety of market conditions

Qualifying Your Proxy With The Lender

You can use your income to qualify for the purchase. Think of this as you're co-signing for the loan.

However, your proxy (the kids in many of our examples), will need a credit score and some credit history. This is probably NOT a good solution if they don't have credit at all or if they have bad credit.

If you plan to use this strategy, watch the The Ultimate Guide to Credit Repair for Real Estate Investors class but get good advice from a professional and start early.

Pros and Cons of Nomad™ by Proxy

No real estate investing strategy is perfect. Each has its own pros and cons.

Pros of Nomad™ by Proxy:

  • All benefits of Nomad™ – low/no down payment, better interest rates
  • You don’t have to move in
  • Maybe lower moving costs moving a child than you/your spouse
  • Can speed up Nomad™ significantly (running in parallel)

Cons of Nomad™ by Proxy:

  • Requires finding a proxy
  • Counts as loan spots
  • Often sharing in the profitability with proxy
  • Requires thought of how to unravel it

Compensating Proxy

If you're going to have someone move in on your behalf, what do they get out of it? Figuring out how to compensate a proxy is negotiated just like any other real estate partnership (that's what this is).

Watch the other real estate partnerships classes since all the discussions about partnerships apply here as well.

However, here are some really basic ideas on how you might compensate someone who moves into a property as an owner-occupant on your behalf:

  • Could be part of the deal – percentage of equity, cash flow, both
  • For kids: maybe they live there rent free for the year in exchange for assisting managing the property with their roommates. We modeled $700/mo in extra expense as reduced rent in these examples.
  • For parents: maybe it is a reduced rent for the year in exchange for living there for a year (without roommates)

Do you ultimately leave the proxy on the loan and as owner of the property once they move out? Before we do that, we should discuss title and deeds and how those work.

Title

WARNING: Talk to an attorney before acting on this information!

If you were buying the property by yourself (or as an LLC), you might take title to the property in Severalty.

If you and your spouse were taking title to a property you might choose Joint Tenants. If one of you dies, the ownership of the property automatically goes to the surviving person.

If you and a business partner were taking title to the property you might choose Tenants In Common. If one of you dies, that person’s ownership of the property goes to the partner’s heirs.

How you take title is determined at the time of purchase and shown on the deed. An example deed is shown to the right.

So, how might this work with Nomad™ by Proxy?

Let's look at an example if me, my wife (Tammy) and my son decide to do Nomad™ by Proxy.

Joint Tenants

  • All 3 on title as Joint Tenants
  • If James dies, James’ 1/3 share goes to each Tammy and son.
  • They become 50/50 owners.
  • If Tammy then dies, their son becomes 100% owner.
  • Ignores heirs.

Tenants in Common

  • All 3 on title as Tenants in Common
  • If James dies, James’ 1/3 share goes to his heirs.
  • Tammy, JC, Tim, Mom, Dad, Bro, Sis, Jassen, Brian, Royce, Mistresses, etc.
  • Tammy, son and heirs then own property 1/3 each.
  • What happens if our son dies before us?
  • What happens if he gets married while an owner and dies?

Unraveling Agreement

Will your proxy agree to be removed from title and the loan? Will they agree to sell? Will they agree to move out?

If you remove them from the loan, this looks similar to buying properties “Subject To” the existing financing and you may want to review all our classes on creative real estate financing.

To remove them from the loan you will need to either sell the property or refinance the property.

If you have less than 20% equity, you’re not likely going to be able to refinance them off without brining money to get to that equity.

Refinancing will also change from owner-occupant financing (when you first bought the property) to non-owner-occupant financing (usually with a higher interest rate).

Written Partnership Agreement

Might want to have a written partnership agreement that discusses exactly how the partnership will work with you and your proxy.

All the discussions we’ve had during the partnership classes still apply so definitely review those.

However, this is not an off-the-shelf agreement and it should be prepared by an attorney, reviewed by you to make sure it says what you think it should and reworked by the attorney to fix what wasn’t right (repeat until it is right).

My belief is that a written partnership agreement is just as important with family as it is to do with a non-family member… perhaps even more important. The time to do it is at the beginning when everyone is excited and friendly. Don't wait until things start looking shaky to create and document your agreement with the help of an attorney.

Tax Discussion for Structuring Partnerships

If you provide the down payment and your proxy now owns half the property, they may have a tax liability for half the down payment.

We run into this same problem when structuring partnerships. It requires you to discuss and coordinate between your tax professional and attorney when drafting the partnership agreement.

Proxy Qualifying For Future Loans

If you proxy wants to buy a property later (presumably without you), they need to overcome the loan they are on with you. You may need to provide documentation showing that you have been the one paying the mortgage and/or there is more than enough rent such that 75% of it covers all expenses.

Their lender (at the direction of their underwriter) should be able to tell you what documentation you need to provide to help them qualify.

Alternatively, you may opt to remove them from the deed AND refinance the loan into a non-owner-occupant loan once you get to 80% LTV (or better). Non-owner-occupant interest rates are likely higher than owner-occupant interest rates. So, if you do refinance, you're likely to have worse cash flow.

Also, rates may be higher when you go to refi than they are now. This will also make your cash flow worse.

If you start this strategy in a higher initial interest rate environment, you may end up with lower rates when you refi and improved cash flow but as I write this we are seeing all-time-low interest rates and that means you're likely to see higher interest rates later.

Other Real Estate Investing Classes

Also, check out our entire library of classes on the Nomad™ investing strategy.

Or, check out the list of real estate investing classes grouped by topic.

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